In her first overseas trip as UK chancellor, Rachel Reeves said she wanted pension funds to “learn lessons from the Canadian model” ahead of a roundtable with eight of the country’s largest retirement funds, the titans of the global pension industry.
Those lessons, she hoped, would inspire a gush of money into British infrastructure and fast-growing businesses.
But Britain is seeking to fast-track its way to a system that took three decades to develop — and which is coming under fresh domestic political pressure of its own.
Canada’s pension system has become the envy of the world since pioneering the so-called Maple model at the turn of the 1990s.
That model — which combined robust governance with independent managers; large and well-paid teams who select investments themselves; and a deep allocation to private markets — has helped create the second-largest pension system in the world, according to the OECD.
It also provides sustainable defined benefit pensions via both the state pension and supplementary schemes for Canadian public sector employees: for example, on top of the Canada Pension Plan, the average teacher in Ontario can retire in their late fifties with an annual income of C$50,000 ($35,000) if they are an Ontario Teachers’ plan member.
In contrast, the average annual pension paid out of the UK’s local government pension scheme in 2023 was about £5,400, while the full state pension is around £11,500 per year.
But there are questions over whether applying the three core components of the Maple model to the UK’s local government pension scheme will lead to the same sort of success.
“Those three factors 30 years ago were extremely compelling,” said Rashay Jethalal, chief executive of CEM Benchmarking, a Toronto-based consultancy. But he added: “There’s a bit of a question over if you were to establish a model like the Canadians — would you do so in the same way today?”
In 1990, Ontario Teachers’ Pension Plan was facing a significant funding shortfall. With the state-managed fund delivering lacklustre returns, its trustees hired a former insurance executive to run it like a business instead.
He built a team of investment professionals, expanded into private markets — and has turned out returns in the past of about 20 per cent a year from its private equity holdings, according to current chief executive Jo Taylor.
That became a blueprint rolled out across the country’s public sector funds, from the Canada Pension Plan Investment Board in 1997 to the Alberta Investment Management Corporation, the youngest of the Maple 8, in 2008.
All the Canadian public sector schemes offer defined benefit pensions, but have different approaches to suit the needs of their members and stakeholders.
CPPIB, the country’s largest, helps fund Canada’s state pension, but the government pays for most of it.
Pension plans in Quebec, British Columbia and Alberta are set up as asset managers running multiple funds, while teachers, healthcare workers and local government workers in Ontario have their pensions provided by separate companies.
Common to them, however, are substantial investments in private equity, real estate and infrastructure.
With international offices to invest in critical infrastructure spanning London’s ports to Brazil’s utilities and India’s transport networks, Canada’s pension funds are major players in global private markets. A high proportion of their holdings are international, partly because many critical infrastructure assets in Canada — such as airports — are publicly owned.
Infrastructure holdings have given Canadian funds access to assets that behave like bonds — helping them meet their pension obligations — but with better returns.
Over the long term, their risk-adjusted performance has beaten rivals “on every measure,” according to researchers at CEM Benchmarking.
Their in-house model had also enabled them to access private market strategies for around half the cost of rival funds that did not manage the assets themselves, CEM Benchmarking said.
However, sprawling global private market portfolios and international offices have brought heightened investment, operational and governance risks.
Returns over the past two years have been weaker, as rapid rises in interest rates have hit investment valuations, particularly in commercial property.
The Ontario Municipal Employees’ Retirement System and OTPP both delivered returns of under 5 per cent for the 12 months to June, far below their long run average of more than 7 per cent, after they have both suffered from a relatively high exposure to real estate.
Meanwhile, some private holdings have turned sour. In March last year, Omers issued a “full writedown” of its 31.7 per cent stake in British water company Thames Water, which it had valued at £700mn at the end of 2022.
In November, three former employees of Caisse de dépôt et placement du Québec’s India office were charged by US authorities for allegedly colluding with Adani Green Energy to pay bribes to Indian officials to win lucrative solar contracts to help plug an earnings gap in one of the pension funds portfolios, and then tried to cover it up.
“My impression is that [the Maple 8] were a little too bullish,” said Oliver Gottschalg, founder of Gottschalg Analytics, referring to the funds’ high level of private market exposure. “There are question marks as to how realistically they can be geared up to do that much.”
It is also a platform that has increasingly become a target for political interference. While some of the Maple 8 have high domestic exposure, such as the Healthcare of Ontario Pension Plan, which has more than half of its investments in Canada, only about 12 per cent of the Canada Pension Plan’s assets are invested at home.
In March last year, more than 90 Canadian corporate executives signed an open letter calling on the government to amend the rules governing Canadian pension funds and have them increase their domestic investment — claiming that the amount they allocated to Canadian equities had dwindled from 28 per cent in 2000 to 4 per cent by 2023.
While Rachel Reeves in the UK has pointed to the Canadian model to “fire up the UK economy”, at the turn of the century, UK pension funds had even more allocated to domestic stocks, according to research by think-tank New Financial. The figure in 2000 was close to 50 per cent; by 2024 it had shrunk to 4 per cent.
Like the UK, Canada has been examining how to channel more Canadian pension assets to domestic targets, at a time when the country is trying to address weak productivity and poor business investment.
“The whole business model across the Maple 8 rests on the assumption that you can operate at an arms length from the government,” said Sebastian Betermier, associate professor of finance at McGill University. “We’ve seen evidence over the past year of increased politicisation, and that I’m concerned about.”
The high-water mark for government intervention came in November, when the Albertan government abruptly sacked the entire pensions board of the Alberta Investment Management Corporation (Aimco).
Alberta said the decision — which led to former prime minister Stephen Harper being installed as chair — followed “significant increases” in costs. Operating costs at Aimco increased to 0.66 per cent of assets under management in 2023, from 0.63 per cent the previous year, broadly in line with Canada’s other large pension schemes.
Canadian pension experts said, however, that it was part of a wider agenda to reshape Aimco, depart from its green investment strategy and encourage more investment in domestic oil and gas to help boost the local economy.
“The official line is that costs are out of line but the argument didn’t make sense . . . it’s very political and really seems more about the Albertan government objecting to Aimco’s green agenda,” said Alexander Beath, who consults on Canadian pensions.
Events at Aimco have raised questions over whether the managers of public sector pension schemes can ever really operate independently of government.
“This is a signal to the rest of Canada and the rest of the world and it’s a scary one,” said a former Aimco employee.
The firings also have the potential to make it difficult for the pension fund to hire quality professionals back into the organisation, a challenge that could undermine one of the pillars of success for the sector in Canada.
John Graham, CPP’s chief executive, earned C$5.38mn in 2023. In contrast, the highest salary paid at Border to Coast — one of the UK’s largest so-called pools, which manages more than £50bn on behalf of local authority pension fund assets — was £489,000.
Ontario Teachers’ chief executive Jo Taylor said that the Canadian model had served Canadian pensioners well but cautioned it might be difficult to replicate in the UK today.
“We spent 35 years building a really good investment business around the world that knows how to invest in private companies and that to me is a huge asset for us versus the debate you have in the UK where you’d have to build that,” he said.
Michel Leduc, senior managing director at CPP, added: “The job has absolutely become more difficult.
“It’s more unpredictable and more uncertain . . . you wouldn’t want to be creating the platform today to deal with the future.”
