Flaherty briefed on pension plans’ increasing investment in infrastructure

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Municipalities insist Canada's cities need billions in new spending to fix aging bridges, sewers and roads and to build new highways and transit.

Governments – both federally and provincially – don't have extra billions lying around.

Enter the pension funds.

The Canada Pension Plan Investment Board manages about $166-billion in assets as of 2011 figures. The Caisse de dépôt et placement du Québec is not far behind with about $159-billion in assets.

Add in the Ontario Teachers Pension Plan, the BC Investment Management Corporation, the Alberta Investment Management Corporation and the Ontario Municipal Employee Retirement Scheme and those six funds alone are making investment decisions involving about $660-billion in assets. Measured more broadly, the assets managed by the 140 members of the Pension Investment Association of Canada – which represents about 80 per cent of Canada's pension plan holdings – were valued at $1.05-trillion as of 2011, according to Finance Canada.

Briefing notes prepared for federal Finance Minister Jim Flaherty reveal his officials have taken a close look at these specific funds to analyze how infrastructure fits into their investment mix.

The briefing note – dated Sept. 6, 2012 – was prepared by Mr. Flaherty's deputy minister, Michael Horgan. The note was obtained through Access to Information.

"Infrastructure investments by Canadian pension plan constitute a small portion of their holdings but there has been significant growth in the last years," the note states.

Infrastructure investments currently makes up $48-billion, or 4.6 per cent, of the more than $1-trillion in pension assets. However that percentage varies widely.

The Caisse de dépôt et placement du Québec has 3.6 per cent of its funds invested in infrastructure, while the Ontario Municipal Employee Retirement Scheme is highest at 17 per cent.

The note says Canadian pension plans "appear to be more aggressive than their foreign counterparts" in pursuing infrastructure investments, noting that the OECD estimates less than 1 per cent of pension plan assets worldwide are directly invested in infrastructure projects.

Some of the specific investments have been announced publicly; however Canadian pension plans do not publish complete information on the projects in which they are invested. A scan of public information by Finance officials found the pension plans generally invested in infrastructure overseas.

"Recent communications indicate that investments have been directed to other countries (e.g., Ontario Teachers' acquisition of interests in Chilean water and electricity companies, Scottish gas companies and European Union airports; Canada Pension Plan Investment Board's participation in Grupo Costanera operating toll roads in Chile)," the note states.

Mr. Flaherty was informed that a 2012 Towers Watson survey found the "home" bias of Canadian pension plans, meaning the proportion of domestic equity over total equity exposure, is the lowest among a group of major industrialized countries.

The note points out that infrastructure is a relatively new category of assets that have opened up as a result of government policies "to privatize the provision of infrastructure services in order to alleviate pressures on public finances."

Mr. Flaherty has been an advocate of so-called P3s – or public private partnerships. He recently wrote an opinion piece in the Regina Leader Post headlined "Why I'm giving Regina $58.5-million" to promote a federal investment in a local P3 wastewater treatment plant project.

"Having private money on the line gives a strong incentive for the private-sector partner chosen to make sure the plant is built on time and on budget — a key cost saving for taxpayers. But the benefits go beyond financial considerations, as it also ensures that private-sector experts are available and used," Mr. Flaherty wrote in the Aug. 16 edition of the paper.

"At a time when all levels of government are focused on both infrastructure renewal and getting the most out of government spending, public-private partnerships are an innovative way to stretch every taxpayer dollar even further."

Still, the review by Mr. Flaherty's department found that P3s aren't always a great investment for pension funds.

"Experience to date, however, suggests that infrastructure investments have produced mixed results for pension plans and other institutional investors," states the note to Mr. Flaherty.

Bill Curry covers finance in the Ottawa bureau.