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Canada's pension funds: stronger returns, at a cost Add to ...

It's a Canadian success story that has garnered little attention at home, but a strong following abroad: the performance of the country's biggest public sector pension funds.

Big public sector pension funds in Canada are outperforming their U.S. peers, and money managers around the world are taking note.

One key to the funds' performance: Over the past decade, most have shifted management of a larger proportion of their funds in-house to both boost returns, and to avoid paying hefty fees charged by outside money managers.

A Globe and Mail review of average annual returns of major public sector pension funds in Canada and the United States suggests that the new model is paying dividends for Canadian funds through improved performance by internal managers.

The review shows Canada's nine largest public pension funds earned an average annual return of 5.5 per cent over the past 10 years while data from eight top U.S. public pension funds shows an average annual return of 3.2 per cent in the same period.

But better performance comes at a cost.

With top investment professionals moving to public sector pension funds, salary levels have soared.

A decade ago, many funds were largely staffed with civil servants and professional administrators - much the way many major U.S funds are still managed.

The heads of all major U.S. pension funds make a fraction of the income of Canada's pension fund leaders, in some cases earning just one-twentieth of Canadian pay levels.

"You get what you pay for - there's no doubt in my mind," said Kristopher McDaniel, editor of New York-based ai5000, a magazine aimed at major asset fund managers.

Mr. McDaniel is among the industry watchers who argue that Canada's internal management model for public sector funds is generating the stronger returns.

"If you look at the stats of returns in America, the funds that have the worst returns are always the public pension funds, compared to corporate pension funds and endowments and foundations," he said.

"One thing that correlates to that is investment manager pay."

Many public sector pension funds are run as part of the state civil service, typically part of a state treasurer's or controller's office.

Even funds with a more independent management structure are still part of the civil service and have boards of directors that include elected politicians or top state bureaucrats.

Better managers, bigger salaries

The rapid evolution that has occurred at many major Canadian funds has attracted a chorus of complaints about the climbing pay levels for managers.

Critics say the Canadian pension executives don't need outsized private-sector paycheques to manage public money, and should not be allowed to impose their Bay Street salary expectations on unwitting plan members.

David Denison, the 57-year-old Bay Street veteran who now heads the Canada Pension Plan Investment Board, earned $3-million in fiscal 2009 to manage Canada's largest pension plan with assets totalling $124-billion. That's considerably less than the $4.2-million he earned in fiscal 2008 as head of Fidelity Investments Canada Ltd.

Anne Stausboll, by comparison, is paid about one-tenth that amount to run the California Public Employees' Retirement System, which is the largest pension plan in the United States with assets of $205-billion.

Ms. Stausboll, 53, earned a base salary of $270,000 (U.S.) and received a bonus of $49,208 for half a year's work in fiscal 2009 as the fund's newly appointed CEO.

Last year, politicians from all parties in the House of Commons voted to support a non-binding motion tabled by the New Democrats, calling on the federal government to claw back bonuses paid to Mr. Denison and other CPPIB executives.

The bonuses were left untouched, with Finance Minister Jim Flaherty arguing he did not have authority to interfere in the autonomous organization.

NDP Deputy Leader Thomas Mulcair has also led opposition last year to bonus payments for executives at the Public Sector Pension Investment Board, which manages $34-billion of pension money for federal government workers. In fiscal 2009, ended March 31, PSPIB chief executive officer Gordon Fyfe saw his pay climb 11 per cent to $1.4-million even as the PSPIB lost 22.7 per cent of its value in the market crash.

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