OTTAWA – This is
pension fund investing, Canadian style: lower management costs, freedom
from political meddling and nonexistent funding shortfalls.
Such success is a goal that has eluded many public pension funds in the United States.
It is a model that has
moved the major Canadian pension plans largely out of government debt
in search of higher returns. That has sent them on a shopping spree of
sorts of global corporate buyouts, infrastructure and real estate.
Canada has several
benefits that have opened the door for pension funds to invest the way
they please. The funds are generally free of government and union
interference. They tend to look at the long term. And the salaries of
pension fund officials resemble those of bankers, rather than
bureaucrats. Perhaps most distinctive, however, is how the funds view
themselves.
“We’re not a pension
plan,” said Mark Wiseman, the president and chief executive of the 234
billion Canadian dollar, or $204 billion, Canada Pension Plan Investment
Board, which manages the holdings of the obligatory national pension
plan. “We’re an asset management business, an investment business.”
Last month, a group
led by a real estate unit of the Caisse de Dépôt et Placement du Québec,
which manages public and government worker pension funds in that
province, bought a Manhattan office tower from the Blackstone Group in a private deal reportedly worth $2.25 billion. That was on top of a $280 million deal for two Seattle office towers.
Just over a year ago,
Mr. Wiseman led a successful $6 billion bid to acquire Neiman Marcus and
Bergdorf Goodman. The Fairmont Banff Springs Hotel in Alberta is owned
by Omers, the plan for municipal workers in Ontario.
It is an approach that has delivered solid returns. The Ontario Teachers’ Pension Plan,
a fund that manages 140 billion Canadian dollars in investments and the
one that established the Canadian model, has a surplus of 5 billion
dollars. It has generated an average return of 10.2 percent over the
last 24 years.
“The teachers and the
province and the first chairman and C.E.O. of this all agreed that we
are going to run it like a business — full stop,” said Ron Mock, the
president and chief executive of Teachers’, as the Ontario plan is
known. “We were built for success.”
Mr. Mock said that
this year, Teachers’ investments will contribute 76 cents of every
dollar added to the fund, with its members and the government splitting
the remaining 24 cents. While agreement is widespread that Canada’s
direct investment, hands-off fund model has worked, introducing it
elsewhere often can be an insurmountable task. As New York mayor, Michael R. Bloomberg
was thwarted in his 2011 effort to merge five teachers’ pension funds
in the city as a step toward creating a Canadian-style system.
Keith Ambachtsheer,
who retired last year as director of the Rotman International Centre for
Pension Management at the University of Toronto, was part of a group
formed by the Ontario government in the late 1980s to reform its
teachers’ pension plans. The key to making the new system work, he said,
was an agreement that while the plan’s directors would be appointed by
the teachers’ union and the province, its members would be selected
based on their background in finance.
The practice
continues. “This is not an organization that has a lay board,” Mr. Mock,
the president, said. “We don’t have amateurs on our board.”
The other critical factor was the decision to avoid eroding the fund by outsourcing investments to firms like private equity
shops and hedge funds. As a result, Teachers’ built its own in-house
expertise. That meant that it had to be prepared to offer
multimillion-dollar compensation packages.
Ashby Monk, the executive director of the global projects center at Stanford University,
said that salaries paid by many funds outside Canada were limited by
law. Or their boards fixate on small amounts of employee compensation
“and ignore that they’ve just written a $100 million check to Wall
Street” for management services.
Mr. Wiseman estimates
that the cost of outsourcing a $10 billion infrastructure investment is
at least $200 million a year. By contrast, he said, the Canada Pension
Plan board’s in-house infrastructure group, which has offices globally,
can do the job for about $51 million.
In a country where
public sector salaries are closely scrutinized, the idea of highly paid
fund managers was initially not an easy sell. But the financial success
of the Teachers’ fund made it largely a nonissue for those that followed
its model.
To attract entry-level
employees, most of the Canadian funds will match offers from Wall
Street. That practice does not continue for the top officers. Jim Leech,
who retired last year as Teachers’ president and chief executive,
received total compensation of 8.5 million Canadian dollars. While
stratospheric by the standards of Canadian public institutions, it is a
small fraction of what senior executives on Wall Street, particularly in
private equity, can earn.
But Mr. Wiseman said
that the Canada Pension Plan Investment Board and other Canadian funds
had some other lures. Working for the fund frees top officers from
competing for capital and allows them to focus on investing. The fund’s
size and global scope are additional attractions, he said.
But what surprised him
the most, he said, was the fund’s purpose: providing pensions to
Canadians outside Quebec (Caisse provides for those in Quebec).
“They are proud that
they are investing and making money not just for some nameless, faceless
shareholder or making some rich guy richer,” he said. “For most people
who are investors, their work is really kind of hollow.”
With the exception of the Caisse, which has a mandate to develop Quebec’s economy
as well as generate returns, none of the other major Canadian funds are
used as economic engines and they make most of their investments
abroad.
“The Canadian funds are allergic to that notion,” said Mr. Monk, who has advised the Alberta Investment Management Corporation.
While that has the advantage of minimizing investments that are driven
by political demands, he contends that it sometimes blinds the Canadian
funds to lucrative opportunities at home. Funds with development
mandates in Singapore and South Africa, he said, generally outperform
their Canadian counterparts.
Like money managers
worldwide, Mr. Wiseman and Mr. Mock acknowledges that finding
investments in a world awash in money is becoming increasingly
difficult. But they also were adamant that their long time horizons
(some Canadian funds view infrastructure as a 50- to 70-year investment)
and size give them advantages over competing bidders.
“In areas like
infrastructure, yes there’s more competition for $1 billion deals,” Mr.
Wiseman said. “But we can do $3 billion deals.”
Politics and history,
Mr. Ambachtsheer said, will make it difficult for countries like Norway,
which are moving toward adopting more of a Canadian-style fund system.
For Canada, however, he said the biggest potential danger was becoming complacent because of the system’s success.
“Don’t get too smug about this,” he said. “Anything can fail.” (http://dealbook.nytimes.com)
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