Key Takeaways
- • A group of Canadian business leaders is urging the federal government to require public pension funds to invest more domestically, arguing this would address Canada's productivity problem by giving businesses greater access to capital.
- • An open letter signed by 94 current and former business executives, organized by Letko, Brosseau and Associates, called for rule changes to encourage homegrown pension funds to invest more in Canada.
- • Canadian pension funds' share of trusteed pension assets in Canada fell to just above 40 percent in Q1 2023 from more than 80 percent in 1996, while equities fell from 77 percent to 22 percent over the same period, according to Statistics Canada.
- • Critics, including the pension funds themselves, argue that domestic investment mandates would compromise fiduciary duties to deliver secure retirement income.
- • Matt Roberts of CMD Capital notes that pre-2005 rules limited pensions to 30 percent foreign investment, and their removal reduced domestic venture capital and IPO activity.
Summary
A group of Canadian business leaders is calling on the federal government to require Canadian public pension funds to invest more within the country, arguing that such a requirement could address the nation's persistent productivity problem by expanding businesses' access to capital. Detractors of the proposal, along with the pension funds themselves, contend that local investment rules would compromise pensions' mandates to provide secure retirement income for Canadians.
The proposal gained momentum through an open letter signed by 94 current and former business executives last month, organized by Montreal investment firm Letko, Brosseau and Associates. National Bank of Canada chief economist Stéfane Marion signed the letter but told BetaKit he intended it to highlight the need for private capital of any kind. In a March report, Marion wrote that Canada's productivity, measured as GDP per hour worked, has grown more slowly than that of its OECD peers since 2001, now ranking 18th among OECD countries at 72 percent of U.S. productivity. He attributed this partly to a dearth of private investment, which has led businesses to reduce spending on productivity-boosting machinery and equipment. Although labour productivity rose 1.7 percent in the fourth quarter of 2023, it has declined overall for three consecutive years.
Statistics Canada data show pension funds have become net sellers of Canadian assets since the mid-1990s. Canada's share of assets held by trusteed pension funds fell to just above 40 percent in the first quarter of 2023 from more than 80 percent in 1996, while the equity share dropped from 77 percent to 22 percent. Marion also noted that foreign investors have been "shunning" Canada: in 2023 Canadian investors acquired $53 billion in foreign securities, while foreign investors bought only $32 billion of Canadian securities, the smallest amount in 16 years, producing a net outflow of $20 billion.
The pension funds have pushed back on claims that they are insufficiently committed to Canada. Evan Siddall, CEO of Alberta Investment Management Corp. (AIMCo), called the Letko Brosseau campaign a "self-serving and amateurish" critique in a November Globe and Mail op-ed, noting AIMCo has about half its assets in Canada. OMERS, a $130-billion fund, said it has 25 percent of its portfolio domestically, and the Healthcare of Ontario Pension Plan has invested $60 billion of its $100-billion portfolio in Canada. The Caisse de dépôt et placement du Québec, which has a dual mandate to fund retirement income and contribute to the Quebec economy, has $88 billion invested in Quebec as of Dec. 31 out of its $434-billion portfolio, and said it would not be subject to any federal directive.
Industry voices are divided on the policy's merits. John Ruffolo, founder of Maverix Private Equity and former founder of OMERS Ventures, argued that pension funds are not sovereign wealth funds and that government should instead improve incentives such as the SR&ED credit. Matt Roberts of CMD Capital said rules limiting pensions to 30 percent foreign investment, removed in 2005 under the Paul Martin government, had reduced domestic venture capital and made IPOs harder to reach. Ruffolo countered that Canadian VCs "have not performed well" and that fund sizes are often too small for large pensions to participate meaningfully.
The proposal gained momentum through an open letter signed by 94 current and former business executives last month, organized by Montreal investment firm Letko, Brosseau and Associates. National Bank of Canada chief economist Stéfane Marion signed the letter but told BetaKit he intended it to highlight the need for private capital of any kind. In a March report, Marion wrote that Canada's productivity, measured as GDP per hour worked, has grown more slowly than that of its OECD peers since 2001, now ranking 18th among OECD countries at 72 percent of U.S. productivity. He attributed this partly to a dearth of private investment, which has led businesses to reduce spending on productivity-boosting machinery and equipment. Although labour productivity rose 1.7 percent in the fourth quarter of 2023, it has declined overall for three consecutive years.
Statistics Canada data show pension funds have become net sellers of Canadian assets since the mid-1990s. Canada's share of assets held by trusteed pension funds fell to just above 40 percent in the first quarter of 2023 from more than 80 percent in 1996, while the equity share dropped from 77 percent to 22 percent. Marion also noted that foreign investors have been "shunning" Canada: in 2023 Canadian investors acquired $53 billion in foreign securities, while foreign investors bought only $32 billion of Canadian securities, the smallest amount in 16 years, producing a net outflow of $20 billion.
The pension funds have pushed back on claims that they are insufficiently committed to Canada. Evan Siddall, CEO of Alberta Investment Management Corp. (AIMCo), called the Letko Brosseau campaign a "self-serving and amateurish" critique in a November Globe and Mail op-ed, noting AIMCo has about half its assets in Canada. OMERS, a $130-billion fund, said it has 25 percent of its portfolio domestically, and the Healthcare of Ontario Pension Plan has invested $60 billion of its $100-billion portfolio in Canada. The Caisse de dépôt et placement du Québec, which has a dual mandate to fund retirement income and contribute to the Quebec economy, has $88 billion invested in Quebec as of Dec. 31 out of its $434-billion portfolio, and said it would not be subject to any federal directive.
Industry voices are divided on the policy's merits. John Ruffolo, founder of Maverix Private Equity and former founder of OMERS Ventures, argued that pension funds are not sovereign wealth funds and that government should instead improve incentives such as the SR&ED credit. Matt Roberts of CMD Capital said rules limiting pensions to 30 percent foreign investment, removed in 2005 under the Paul Martin government, had reduced domestic venture capital and made IPOs harder to reach. Ruffolo countered that Canadian VCs "have not performed well" and that fund sizes are often too small for large pensions to participate meaningfully.
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