Canadian pension funds underwent a transformation in the 1990s, writes Joel Kranc. Greater independence has bred a private investment-style mantra that is envied around the world

In many ways, the European crisis occurring today mirrors the Canadian economic and debt problems of the mid-1990s. In Canada, provincial deficits were high, the federal government was looking at austerity measures to reign in spending, downgrades of the economy were occurring and investors were uncertain where the economy might be headed.

Out of that crisis, many large institutional pension plans sought out better, more efficient ways to provide a secure retirement for their members. Their antiquated investments in non-marketable municipal bonds were not meeting the needs of these organisations and change was essential.

With that backdrop, the 1990s proved to be a fortuitous time in the creation of the Canadian pension model that exists today. The model has been instrumental in creating a world-class pension system, providing a more efficient wealth-creation system that allows for independence and the ability to navigate markets and a variety of asset classes.

The model
Many pension funds are charged with providing retirement benefits for their members but often do so with their hands tied by regulatory constraints or political influences. In Canada, the model that has evolved, includes a few key elements, that distinguish them from other pension funds in their peer groups.

First, the model allows for independent boards to oversee the pension funds in question without political interference. These boards are made up of knowledgeable members with economic and investment backgrounds. They are not considered ‘lay boards’ as is often the case.

Secondly, pension funds and managers such as the Ontario Teachers’ Pension Plan (OTPP), CPP Investment Board (CPPIB), Alberta Investment Management Corporation (AIMCo) and the Ontario Municipal Employee Retirement System (OMERS) pay their in-house investment managers in-line with managers in the private sector. This allows them to attract and retain top talent that will take the necessary but appropriate risks to generate significant returns in a variety of markets.

Keith Ambachtsheer is a leading pension scholar and sat on the working committee that helped create the CPP Investment Board. He says that many of the people working in public plans in Canada have come from the commercial private sector. “What’s different is that we were able to attract the top people from the commercial investment financial services sector, not just in Canada but from around the world, and offer them an opportunity to do high-level work at reasonable compensation for that labour market inside these organisations - that’s what’s different.”

Much of this amounts to what some feel are cultural differences between the Canadian model and the US or European style of institutional investing. Michael Nobrega, president and chief executive officer of OMERS, thinks it has everything to do with freedom and independence. “Management is given more freedom from the boards to operate than in the UK or European pension plans,” he says. “It’s a cultural issue we see as we begin to invest in these countries, raise capital and see how decisions are made. In Canada, once we’ve done a strategic plan and developed a business plan for the year, we’re given the freedom to execute it.”

Another important result related to the compensation model is linked to how the internal managers are permitted to operate once they are in place. Because of the size of many of the Canadian pension funds in question, large teams can be assembled to invest and study more esoteric asset classes than may be traditionally looked at by others outside of the Canadian model.

And, unlike many US pension funds which are set up to invest in silos and provide little or no cross-pollination between investment departments, Canadian funds are more apt to work as teams, provide analysis to one another and be able to look at asset classes that might not fit perfectly into one category or another.

Spreading their wings
The asset classes can range from traditional stocks and bonds to private equity, infrastructure, real estate and joint ventures with many funds around the world.
A case in point was the Ontario Teachers’ Pension Plan’s decision to acquire Maple Leaf Sports Entertainment (MLSE) in 2008. MLSE owns such properties as the Toronto Maple Leaf hockey team, the Toronto Raptors basketball team and a host of other sports franchises in and around Toronto. At the time, the acquisition of a sports franchise by a pension plan was heavily questioned and widely criticised but as recently as last December, the pension fund, which paid about C$180m (€137m) 17 years ago, sold its 75% stake for an estimated C$1.3bn (€990m).

Another example of a large capital pool taking advantage of its size and scope in the market is the acquisition by CPPIB, along with partners, of Skype Technologies in 2009. At the time, a 65% stake was purchased from eBay for about US$1.9bn (€1.5bn). The deal valued Skype at approximately US$2.75bn as eBay retained a 35% stake in the company.

In 2011, Microsoft struck a deal with CPPIB and its partners to acquire Skype for US$8.5bn. The investor group had been led by Silver Lake, a global private equity firm that specialises in technology. Other members, besides CPPIB, were Index Ventures and Andreessen Horowitz JP.

The deal for Skype was one of the top five private market transactions globally in 2009. During that same year, CPPIB participated in two more of the top five transactions. They included the US$5.2bn purchase of IMS Health with Texas Pacific Group and the US$2.1bn deal for Macquarie Communications Group.

Attractive partners
Size, of course, matters in getting large deals done in a global market place. But there are other factors that attract outside partners to Canadian pension funds. “Size makes it possible to build a team that is big enough to have critical mass,” says Leo de Bever, chief executive officer of AIMCo. “We invest directly or with similar partners. And the reason we are attractive partners to them is they respect, first, our capital, but, second, our ability to think along and do due diligence alongside them and respond quickly when needed.”

Best practices
Many of the Canadian pension plans have both competed for certain deals and have worked collaboratively as well. It is a healthy environment that provides opportunity for plans of all sizes and sophistication.

As a result, while there is no formal sharing of best practice, there is certainly a network of information flowing between the funds. Many are co-signers of the UN Principles for Responsible Investing, for example. Also, they work together on issues of governance, shareholder activism and, most recently, the desire to purchase the Toronto Stock Exchange (after a failed bid by the London Stock Exchange to make a deal).

And while not without its controversies - such as high compensation and a global (rather than home country-bias) perspective - Canadian pension funds have risen on the world stage as the first points of contact for large-scale deals that need capital, quick decision-making and a sound reputation in the markets.

The structure, pay-for-performance model and independent boards have allowed Canadian funds to become efficient innovators and investors. This has ultimately attracted many of the world’s large-scale funds, real estate funds and private equity investors, allowing them to de-risk their investments while at the same time ensure they have the right like-minded, long-term players need to ensure success.