Key Takeaways
- • A new Global Risk Institute (GRI) study warns that a potential federal mandate requiring Canadian pension funds to boost domestic investment could harm plan members by undermining the risk-return trade-offs institutional investors need to meet their mandates.
- • The study says Canadian pension funds, which hold more than $3 trillion, have cut their domestic share of public equities from 33 per cent in 2013 to 18 per cent in 2022, and of fixed income from 96 per cent to 88 per cent.
- • GRI argues that the scarcity of strategic domestic assets, not investor reluctance, limits domestic allocation, because governments own assets such as Toronto Pearson International Airport, the Port of Vancouver and Hydro Québec, which are not for sale.
- • The report recommends reducing barriers to strategic asset classes such as infrastructure rather than imposing mandates, a position that aligns with former Bank of Canada governor Stephen Poloz's stated preference for "carrots, not sticks."
Summary
A new study by the Global Risk Institute (GRI) argues that a potential federal mandate for Canadian pension funds to increase domestic investment could end up harming the plan members the pension system is designed to protect. The paper examined the effect of legislation pushing for higher domestic market investment and concluded that such rules could negatively affect the complex risk-return trade-offs that institutional investors must manage to meet their mandates.
The debate follows an open letter earlier this year from more than 90 Canadian business leaders calling on Ottawa to address the decline in domestic pension investment. In its 2024 budget, the federal government created a working group led by former Bank of Canada governor Stephen Poloz to identify priority domestic opportunities for the more than $3 trillion held by Canadian pension funds, including digital and physical infrastructure, artificial intelligence, venture capital and real estate. Poloz told The Logic he would not pursue mandate reviews for investment organizations, saying, "it's about carrots, not sticks."
The GRI study recommends that government focus on reducing barriers to strategic asset classes, particularly domestic infrastructure, which it says would attract larger pools of capital from both Canadian and foreign institutional investors. According to the report, the shortage of domestic investment stems partly from the fact that the Canadian government and public authorities own most Canadian assets with high strategic value. The study cites Toronto Pearson International Airport, the Port of Vancouver and Hydro Québec as highly desirable assets that are not for sale. When comparable assets are offered abroad, Canadian pension funds bid for them, the study notes. It also suggested privatization or long-term leases of public infrastructure, though it acknowledged barriers to scale, limited public support and questionable economic viability.
The study documents a sustained shift toward global diversification. It finds that Canadian pension funds have a home bias in fixed income and real estate, but that this bias has declined over the past decade. The domestic share of public equity fell from 33 per cent in 2013 to 18 per cent in 2022, and the domestic share of fixed income dropped from 96 per cent to 88 per cent over the same period. The report attributes the current good health of Canadian pension funds to "sophisticated global investment strategies" and warns that mandating domestic allocation could impose costs on plan members.
The debate follows an open letter earlier this year from more than 90 Canadian business leaders calling on Ottawa to address the decline in domestic pension investment. In its 2024 budget, the federal government created a working group led by former Bank of Canada governor Stephen Poloz to identify priority domestic opportunities for the more than $3 trillion held by Canadian pension funds, including digital and physical infrastructure, artificial intelligence, venture capital and real estate. Poloz told The Logic he would not pursue mandate reviews for investment organizations, saying, "it's about carrots, not sticks."
The GRI study recommends that government focus on reducing barriers to strategic asset classes, particularly domestic infrastructure, which it says would attract larger pools of capital from both Canadian and foreign institutional investors. According to the report, the shortage of domestic investment stems partly from the fact that the Canadian government and public authorities own most Canadian assets with high strategic value. The study cites Toronto Pearson International Airport, the Port of Vancouver and Hydro Québec as highly desirable assets that are not for sale. When comparable assets are offered abroad, Canadian pension funds bid for them, the study notes. It also suggested privatization or long-term leases of public infrastructure, though it acknowledged barriers to scale, limited public support and questionable economic viability.
The study documents a sustained shift toward global diversification. It finds that Canadian pension funds have a home bias in fixed income and real estate, but that this bias has declined over the past decade. The domestic share of public equity fell from 33 per cent in 2013 to 18 per cent in 2022, and the domestic share of fixed income dropped from 96 per cent to 88 per cent over the same period. The report attributes the current good health of Canadian pension funds to "sophisticated global investment strategies" and warns that mandating domestic allocation could impose costs on plan members.
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