Canada Pension Plan Investment Board is concerned about protectionist legislation directed at sovereign wealth funds. Gail Cook-Bennett, chair of CPP IB, outlined her vision of governance and transparency to Liam Kennedy

People debating sovereign wealth funds (SWFs) tend to offer one of two polarised views: either they are the white knights of capitalism charging westwards to shore up our financial system, or they are shady operators with sinister objectives and up to no good. The truth, prosaically, may well lie somewhere in between.

Last December Hillary Clinton said in a speech in Knoxville, Tennessee, on her presidential campaign trail that SWFs posed a risk to US economic sovereignty. She wants to get her proposed National Economic Council to think of ways to make the funds more transparent, including getting the World Bank and the IMF to draft rules on transparency.

Countering that view, Wei Benhua, a senior official at China’s currency regulator, wrote in China Business News recently that the west should not discriminate against SWFs, which he pointed out are a key source of liquidity given the current liquidity crisis.

As we all know, SWFs have been busy in recent months buying stakes in western financial institutions, particularly US banks.

But now that politicians have started to pitch in with their views on SWFs, others are getting nervous. A small and rarefied group, but one which controls over $4trn (€2.7trn), sovereign pension funds are concerned that they may get caught up in any protectionist legislation that is passed in the US or elsewhere.

“The CPP Investment Board is not a sovereign wealth fund and we should not be caught up in the fear surrounding these entities,” Gail Cook-Bennett, chair of Canada Pension Plan Investment Board (CPP IB) said in a speech to the OECD last December. And in an interview with IPE, she explained what characterises her public pension fund and why she is concerned about the threat of protectionism.

“We are very concerned because if any protectionist barriers go up and we are caught as an unintended consequence, this would really affect us because what we are trying to do is diversify by asset class and geography,” Cook-Bennett says. CPP IB invests 50% of its assets outside Canada and is an active investor in real estate, private equity and infrastructure, investing in assets such as water utilities and airports internationally.

“So to the extent that we want to further our investments in private equity and infrastructrure, many of those opportunities are abroad, and it would be very unfortunate if we got shut out. And in our view it would be an unintended consequence,” Cook-Bennett continues.

“I think that public policy makers respond to the fear side rather than the opportunity side and we want to be sure that our position is understood,” she adds. “But the debate is fairly early on all of this although general legislation rather than reactions to single transactions may yet come. Many international organisations are pushing for greater transparency, including in priorities and objectives. There may be funds that have government assets but that are able to comply to a greater degree with those two provisos and certainly Norway has done that.”

Canada Pension Plan itself was created 10 years ago by the country’s federal and provincial governments, and the Investment Board follows what Cook-Bennett describes as a ‘maximum-strength’ governance model. CPP is independent of government and the board, which sets policy, is separate from the executive management, which deals with the execution of that policy. The board sets the risk tolerances, appoints the CEO and controls compensation. The executive does the rest, although major transactions come back to the board for approval.

“We are truly autonomous and there has been no political interference in the nine years of our operation,” Cook-Bennett adds.

“The reason that we say that we are not a sovereign wealth fund is that we are not dealing with government revenues; we are dealing with the contributions of working Canadians,” Cook-Bennett continues. “But there are other features. There is no fiscal top up and there is a very clear separation in the legislation between the CPP Investment Board and all the [federal and provincial] governments. Our organisation reports to a board of directors, which is independent from government, we make the major decisions.

“We are transparent and we have an investment-only agenda. We are required by legislation to maximise returns without incurring undue risk of loss and in the legislation we are not permitted to do anything other than that. Looking at the features that are causing difficulty and fear with some SWFs, we simply do not have those characteristics.”

Recent research papers published by OECD aim to assist the debate, and support Cook-Bennett’s view for a number of clear reasons. A recent seminar on sovereign pension funds under the auspices of the OECD’s working party on private pensions also heard speeches from Sweden’s AP3, Ireland’s NPRF, France’s FRR - as well as from Cook-Bennett herself.

The papers define sovereign pension funds as vehicles with a specific purpose, namely financing public pension funds, whereas the aim of SWFs is usually to shield domestic economies from fluctuations in the oil price.

Cook-Bennett also presented the case for transparency in sovereign funds in her OECD speech: “For those pools of capital, it will be increasingly important to articulate the specific measures that clarify and codify their investment objectives. Transparency, while not easy, is rewarding. It imposes extraordinary accountability, to be sure, but it pays itself with the trust and confidence it enables an organisation to build with others.”

While SWFs might not be about to adopt the levels of transparency that Cook-Bennett advocates, the admirable levels of disclosure of CPP IB or Norway’s Government Pension Fund offer a very worthy model. And if policy makers listen care to read the OECD’s research papers carefully, or listen to Cook-Bennett, sovereign pension funds might just escape any protectionist measures.