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Prime Minister Justin Trudeau looks on as Deputy Prime Minister and Minister of Finance, Chrystia Freeland speaks at a news conference after meeting with families at a local child care centre in Ottawa on March 29. While delivering the federal budget, Freeland outlined a plan for the Public Sector Pension Investment Board to run the Canada Growth Fund.Sean Kilpatrick/The Canadian Press

The federal government’s decision to tap the Public Sector Pension Investment Board to run its $15-billion Canada Growth Fund provides a reliable shortcut to get the program up and running but also raises thorny questions around governance and independence, pension experts say.

Ottawa first announced the Canada Growth Fund in last year’s federal budget as a tool to attract a larger share of private capital being invested in the global clean economy. It earmarks government money that can be used to reduce the risks to outside investors of backing Canadian companies creating new technologies.

By choosing PSP to manage the fund, the government is tapping a sophisticated, arm’s-length investor that already manages $230-billion in pension assets for the federal public service, RCMP and Canadian Armed Forces. The pension fund manager’s expertise, including in sustainable investing, should help the Canada Growth Fund make its first investments quickly and manage its risks.

Yet the arrangement is unusual and surprised many industry experts, creating a dual mandate for PSP that could test its governance structure. The operating model for PSP to run the Canada Growth Fund is still in development, as are safeguards to keep investment decisions and competitive interests separate from PSP’s core mandate to invest for about 900,000 pension contributors and beneficiaries.

Now, PSP has to run a government program backstopped by public funds that has political and economic goals, which targets sustainable investments that overlap with pension funds’ existing climate-focused portfolios.

This year’s federal budget outlines a plan for PSP to manage the Growth Fund independently from government, as a distinct project led by an independent investment team and overseen by an investment decision-making committee, while continuing its existing work for pensioners.

A senior government official said Tuesday that the PSP, which is Canada’s fourth-largest pension-fund investor, was selected to manage the Canada Growth Fund because it has a strong track record and the expertise to oversee complex investments. The official said the government has no intention of compromising the PSP’s independence.

The Globe and Mail is not naming the official, in keeping with the terms of a budget briefing for media on Tuesday.

PSP spokeswoman Maria Constantinescu said in an e-mailed statement that the pension fund manager “will be responsible for all aspects of the investment process,” and will use its existing expertise and staff “to build and lead the team that will service” the Canada Growth Fund.

She added that PSP “will continue to operate at arm’s length” from government and that its role managing investments for the Canada Growth Fund “will be operationally distinct and independent from our pension investment management mandate, to which we remain deeply committed.”

Choosing PSP is an imaginative solution, said Jim Leech, a pension-industry veteran who was formerly CEO of the Ontario Teachers’ Pension Plan, in an interview. And it shows government learned a lesson from the years spent building the Canada Infrastructure Bank from scratch – a similar federal initiative launched in 2017 to draw more investment to infrastructure projects.

“It is unique. … You could say it’s a relatively smart move because it’s faster,” Mr. Leech said.

But expanding PSP’s mandate is not without potential pitfalls, he said. “Sometimes, government finds it difficult not to meddle for political reasons. It all depends who makes up that investment committee.”

Several pension-fund investment managers including PSP serve multiple clients and some oversee separate funds outside their core pension assets. For example, Alberta Investment Management Corp., or AIMCo, invests Alberta’s Heritage Savings Trust Fund, which produces income to fund government programs.

The country’s largest pension-fund investor, the Canada Pension Plan Investment Board (CPPIB), manages $536-billion in assets for the Canada Pension Plan, also at arm’s length from government. But it would have been more challenging to change CPPIB’s mandate to include running the Growth Fund, which would need approval from two-thirds of participating provinces representing two-thirds of the population.

At first blush, PSP “is a fairly logical answer” to manage the Growth Fund, said Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the University of Toronto’s Rotman School of Management, in an interview. “A logical next step for this process is for the actual mandate of the Canada Growth Fund to be explicit. There’s no reason it should be a secret.”

Among the key issues to be addressed in more detail are how extensively the team that runs the Canada Growth Fund will be walled off from the staff managing investments for PSP’s investment clients to avoid conflicts of interest, and whether PSP will be allowed to invest in Growth Fund projects.

“This gets into some heavy-duty governance issues around incentives. Which group has what mandate, and how are they incented to get the best possible outcomes? Within that context, how are you going to deal with conflicts?” Mr. Ambachtsheer said.

Part of the fund’s mandate will be to approve contracts for difference, in which public funds can be used to make up the difference if a private investment underperforms, and investors have to pay a return to the fund if the investment overperforms.

The senior government official said such contracts can be quite complex and require investment expertise, and that PSP already has a large stable of expert investors.

The government will also need to define what it expects from PSP in terms of performance. By its nature, the Growth Fund will make higher-risk investments in early-stage companies and nascent technologies, accepting below-market returns or higher exposure to losses to make it more attractive for private investors to join in.

“It’s a new thing. I think it’s interesting. It has some risk attached to it, but no risk, no reward,” Mr. Ambachtsheer said.

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