Clément Gignac – veteran Canadian economist, rookie Canadian senator – says that if Canada is going to meet its economic goals of a green transition, improved productivity and sustained healthy growth, it’s going to need an awful lot of private-sector money to do it.
He knows where we could find a couple of trillion dollars in investment money – from domestic sources, no less. Tapping into it will be the tricky part.
“I doubt that Canada will be able to succeed in energy transition without the participation of pension funds,” he said in an interview last week. “It’s important to understand what policy-makers have to do to interest Canadian pension funds in more Canadian investment.”
Mr. Gignac comes at the problem from an interesting background, both professionally and politically.
The 66-year-old spent decades as one of Canada’s leading private-sector economic voices, first as chief economist at National Bank of Canada and, later, in the same role at insurance group iA Financial. In between, he served as special adviser to then-federal finance minister Jim Flaherty (a Conservative) during the 2008-09 global financial crisis, then as a cabinet minister in the Quebec provincial government of Jean Charest (a provincial Liberal who is now running for the federal Conservative leadership). Prime Minister Justin Trudeau (a Liberal) named Mr. Gignac to the Senate last summer. (In the Senate, Mr. Gignac is aligned with the Progressive Senate Group.)
With nearly a decade to spend applying his economic expertise to government policy before he reaches the Senate’s mandatory retirement age of 75, Mr. Gignac is determined to address the “conundrum,” as he puts it, of Canada’s lacklustre capital investment – which has become a more pressing issue as the country recovers from the COVID-19 pandemic.
“We have to understand that government has done the right thing during the pandemic, but now they need an exit strategy. They need a long-term plan – to restore public finance, but also to foster Canadian GDP [growth] potential,” he said.
“We cannot have a sustainable long-term expansion without the contribution of business investment. I have a concern that the current recovery has really relied on government spending, and real estate.”
Meanwhile, business investment has stagnated. Statistics Canada data show that businesses’ non-residential gross fixed capital formation – essentially, investment in machinery, equipment and physical structures – is essentially flat over the past five years in inflation-adjusted terms, and is 10 per cent below its prepandemic levels.
A report from last fall from a former colleague of Mr. Gignac, National Bank chief economist Stéfane Marion, brought to light the huge potential of Canadian pension funds to fuel much-needed private-sector capital investment in this country – as well as an alarming drift by those funds away from Canada as a destination of choice to invest the massive amounts of Canadian money they oversee.
As of the third quarter of last year (the latest data available from Statistics Canada), the country’s trusteed pension funds held a collective $2.2-trillion in assets, having doubled in the past decade. Yet less than half of those holdings are invested in Canada; a decade ago, the domestic share was 70 per cent.
If pension funds’ domestic holdings were to somehow return to their proportions of a decade ago, it implies an additional $500-billion invested in Canada. That’s the kind of money that might actually make a dent in the country’s massive need for capital, as it faces challenges not only to reignite tepid business investment and generate much-needed productivity growth, but to pay for the daunting costs of a net-zero carbon transition.
“On the fight against climate change alone – to build a net-zero economy by 2050 – Canada will need between $125-billion and $140-billion of investment every year over that period. Today, annual investment in the climate transition is between $15-billion and $25-billion,” the government said in its budget this month. “No one government can close that gap.”
The most glaring shortfall in pension funds’ domestic investment has been in equities. Domestic stocks now make up less than 30 per cent of Canadian funds’ holdings – down from more than 50 per cent a decade ago. This lack of domestic equity investment has almost certainly weighed on business spending – those are funds that otherwise would have fed capacity and productivity growth in the private sector.
“The federal government, with provincial governments, [need] to have a discussion with pension funds about what Canadian policy-makers have to do to create the winning conditions for Canadian pension funds to become more interested in Canadian investment,” Mr. Gignac said. “What exactly is the reason Canadian pension funds have reduced their exposure in Canada so much?”
Coming from Quebec, Mr. Gignac believes there are compelling arguments to having public-sector pension funds take on investment mandates similar to that of the province’s Caisse de dépôt et placement du Québec, whose mandate includes investing in the province’s economic development. However, he’s also a realist, especially when it comes to private-sector pensions.
“Pension funds need independence, I understand that. ... It’s not politicians’ business to manage pension fund money. But it’s politicians’ business to understand why investment in Canada continues to fall short of expectations, and underperform the U.S. If you want to succeed in this [green] transition, it’s important,” he said.
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