Ottawa is appointing former Bank of Canada governor Stephen Poloz to lead a new federal working group that will look at ways of encouraging Canadian pension funds to invest more in the country, especially in areas such as digital infrastructure and airports.
The working group is being created to “explore how to catalyze greater domestic investment opportunities for Canadian pension funds,” the government announced in its budget document released Tuesday, and Mr. Poloz will be supported by Finance Minister Chrystia Freeland, with participation from pension leaders.
The review will focus on priority areas that include investment in digital infrastructure, artificial intelligence, physical infrastructure, airport facilities, venture capital to back startup and early-stage companies, as well as building more new homes. There is a particular emphasis on airports – an asset that pension fund leaders have long said would interest them if governments opened them up to private investment.
And the group has been asked to consider whether Canada should lift a rule that restricts pension funds from holding more than 30 per cent of the voting shares in a company, which is considered archaic by some and is already circumvented by some large funds.
The working group is Ottawa’s answer to a debate that flared up in recent months about whether Canada’s largest pension funds, which collectively manage more than $2-trillion of assets, are investing sufficiently in their home country. Senior business leaders, including chief executive officers from some of Canada’s largest companies, have pressed Ms. Freeland and her provincial counterparts to change the rules governing pension funds, as a way of nudging them to put more of their members’ dollars into Canadian investments. But current and former pension fund leaders have strongly pushed back, arguing that the funds must keep their freedom and independence to invest as they see fit, to ensure they can pay sustainable pensions to their members into the future.
Ms. Freeland and Ontario Finance Minister Peter Bethlenfalvy have both signalled a desire to boost pension funds’ domestic investments, and the budget measures announced Tuesday echo previous pledges made in the federal government’s fall economic statement.
But by framing the working group as “working with pension plans,” and focusing on unlocking investment opportunities that align with pension funds’ duties to invest in the best interests of their members, Ottawa appears to be taking a conciliatory approach.
“It appears to us, based on what we’re seeing in the budget, that they have it right,” said Michel Leduc, global head of public affairs and communications at the Canada Pension Plan Investment Board. “If you want to bring all the right people to the table, you’ve got to demonstrate a level of openness, and I think that’s what they’re doing.”
In Mr. Poloz, the government has chosen a respected intermediary to lead the process. The economist and former central banker, who now works as a special adviser for law firm Osler, Hoskin & Harcourt LLP, commands respect from a broad swath of Canada’s business leaders. After a career spent in Ottawa’s senior ranks, he has a deep understanding of the broad forces that shape the country’s economic performance. And his experience leading the Bank of Canada – an institution that fiercely guards its independence – is likely to give some comfort to pension fund executives who are set on preserving their autonomy.
The proposed scope of the working group does not mention more drastic options, which could have included rewriting legislation to add an explicit focus on economic development to public pension funds’ mandates, or changing investment rules to treat investments in Canada differently from ones made abroad. Those types of changes, which are supported by some business leaders, could be hard for Ottawa to make. They would require buy-in from provinces in most cases.
While nearly all of Canada’s largest pension funds have mandates to focus on getting the best investment returns for pensioners while managing risks, Quebec’s Caisse de dépôt et placement du Québec – which manages a $434-billion investment portfolio – has a dual mandate that includes contributing to Quebec’s economic development. In past statements, Ms. Freeland’s office has praised the Caisse’s track record of delivering returns and adding to Quebec’s economy. The latest budget measures appear to steer away from imposing such a dual mandate on other funds.
“A key measure of success will be: Does it create new and better opportunities at scale? Does it lower various forms of risk relative to other markets? Because it’s all about risk-adjusted returns,” CPPIB’s Mr. Leduc said of the budget announcement.
To attract new investment capital to airports, including from pension funds, the budget says the Minister of Transport plans to release a policy statement this summer that highlights “existing flexibilities” in the governance of the national airports system.
The government also plans to make the breakdown of how much Canada’s pension funds invest in Canada and abroad more transparent. The budget says Ottawa will empower the country’s federal financial regulator, the Office of the Superintendent of Financial Institutions, to publicly disclose a standard set of information on large federally regulated pension plans. It would show the proportion of assets invested in each country, broken down by types of assets – for example, stocks, bonds, real estate or infrastructure – in each jurisdiction.
That could help fill gaps where plans don’t already publish that much detail, and Ottawa is pledging to work with provinces and territories to create similar disclosure rules for the large plans they regulate, which would be crucial to creating a consistent standard.
The budget document also sharpens the mandates for the Business Development Bank of Canada and Export Development Canada, two Crown agencies where the government has previously promised to review operations. Ottawa is directing the Business Development Bank of Canada to ramp up financing “for promising new and high-growth businesses,” and to redirect more of its venture capital investments to “emerging and higher-risk sectors to help attract more private capital.”
The government also says in the budget that Export Development Canada should tweak its risk management policies to allow it to take more chances, and create a special envelope of money to enable riskier investments when the agency is supporting exporters in key areas for Canada, because they are expanding into “highly competitive markets.”
James Bradshaw