Prime Minister Justin Trudeau's first date with the country's pension plan CEOs went well. He snagged the hardest-to-book tables in town last November, at Toronto's swanky Shangri-La hotel, and said all the right things in pitching money managers on a $35-billion commitment to the planned infrastructure bank.
Short of sending flowers the next morning, Mr. Trudeau hit all his marks. Leaders of the largest funds, who collectively call the shots on more than $1-trillion, all committed to getting serious. Sadly, the once-promising courtship between politician and pension plans is breaking down. Their differences may be irreconcilable.
Like many relationships, the issue here is one of control: Both sides want to call the shots. The federal Liberals tabled draft legislation Wednesday on the planned infrastructure bank, which is meant to kick-start the economy by marrying private-sector capital with public projects. For the pension funds, the key test of the Liberals' bill revolved around governance: Is the board of directors and, by extension, the investment team at the planned bank independent of political interference?
Ottawa flunked this test. C.D. Howe Institute, a think tank with bipartisan support, quickly pointed out flaws in the legislation. The federal cabinet would have the right to remove infrastructure directors, and the power to approve or nix certain investments, such as loan guarantees.
A governance approach that gives Mr. Trudeau and his cabinet control of the boardroom is never going to fly with the money managers. Their CEOs have taken pains to spell this out. Last November, just ahead of that love-in at the Shangri-la, the Ontario Teachers' Pension Plan sent out a press release with a bold headline that stated the fund supported the Liberals' infrastructure plan.
The real message to Mr. Trudeau was buried deeper in the release, when Teachers' CEO Ron Mock spelled out the terms of engagement on the planned bank. He said: "We recommend the government appoint a strong, professional and independent board to ensure it is run like a business, as is the case for Canadian pension plans, which have validated the soundness of this model on the global investment stage."
Teachers' and the country's other major pension plans own roads, water systems, airports and other essential infrastructure around the world. The funds enjoy tax-exempt status. Their reluctance to invest in domestic projects must drive the Liberals a little nuts. However, as Mr. Mock said, the ability to invest independent of political interference has created a Canadian pension system that's the envy of the industrialized world.
Pension plan CEOs are comfortable saying no to requests for capital, even if the caller is as charming as our Prime Minister. Mr. Mock, for example, get endless investment advice from well-meaning teachers who want to make the world a better place: No nukes, no smokes, no trans fats. Mr. Mock smiles politely, points out that the fund's only goal is to earn superior risk-adjusted returns, and quietly invests in uranium, tobacco and junk-food companies, if that's where he sees value.
None of Canada's biggest investors – pension plans, banks and insurers – have ruled out backing the Liberal's infrastructure bank. But it's clear these institutions are only going to make a commitment on their own terms.
At a press conference in early April when Teachers' announced its financial results, Mr. Mock took time to point out that jurisdictions with track records for successfully attracting private capital to infrastructure, such as Britain and Australia, started with an overarching philosophy that these assets should be in private hands, and got sign-off on that approach from every level of government – provinces and cities control the bulk of infrastructure assets in this country.
The Liberals can still get their infrastructure bank off the ground, but to win the hearts and wallets of Canada's biggest fund managers, Mr. Trudeau is going to let them run this relationship.
Andrew Willis