Canada’s pension funds need to get their elbows up

With over $3 trillion in assets, Canada’s pension funds are some of the most powerful institutional investors in our economy—and in the world.

But as questions of economic sovereignty and resilience take centre stage, it’s time to ask: are they doing enough here at home?

Data show that, at the end of 2023, Canada’s pension funds had reduced their holdings in publicly traded Canadian companies to just 4% of total assets, down sharply from 28% in 2000. Canada’s largest pension funds—the so-called Maple 8—currently hold more public and private equities in China than in Canada. That’s hard to justify.

Those on both sides of this argument were very self-interested. The call from business executives to invest more in corporate Canada would likely inflate stock prices, which would be good for them, but not the wider Canadian economy. Similarly, the warnings from the pension executives reflected a vested perspective: they have been very well-compensated and left alone to do as they please, even as they oversee funds that don’t perform better than the markets.

In April 2024, the federal government took a tentative approach in appointing former Bank of Canada governor, Stephen Poloz, to lead a federal working group to work with pension plans to identify opportunities to unlock more domestic investment. His recommendations were not made public, and the process did not invite broad participation on the question of how pension funds could be required to deliver better results for Canadians and a resilient economy. But the 2024 Fall Economic Statement pulled from his report and announced that that they would try to crowd in venture capital, incent new investments in mid-sized firms focused on growth, allow funds to take a larger stake in Canadian companies, and encourage investment in existing infrastructure like airports.

These suggestions don’t go far enough, nor are they built for the collective challenges we face at this historic moment of economic disruption and transition.  Rather than pensions simply investing more in the TSX or investing in and then selling existing infrastructure, pension capital should spur new ventures, support new infrastructure and help Canadian businesses grow and thrive.

We are calling on the government to establish a small number of strategic investment priorities and then deploy de-risking tools to encourage pension fund investment in these areas. It is possible to use co-investment vehicles, invest first-loss capital and guarantee benchmark rates of return to create blended-finance models that enable pension funds to invest in domestic resilience at a scale they are accustomed to, without compromising their fiduciary duty to shareholders.

Three areas we think Canadian pension investment could make a significant impact:

1. Bolstering Canada’s manufacturing sector and other key vulnerable sectors by investing alongside government in a new, independently managed sovereign buy-out fund. This fund would buy or invest in existing firms that face liquidity challenges in the coming years and leverage sector expertise and patient capital to build out an advanced and resilient manufacturing sector. This fund could be created as a new entity modeled on the Canada Growth Fund, or integrated within the existing Canada Growth Fund structure, with a newly appointed independent fund manager.

2. Advancing Employee Ownership Trusts (EOTs) by co-investing in a fund to facilitate employee-ownership transitions by making loans to employees to purchase the businesses they work for. The federal government would offer concessionary capital in order to de-risk pension investment. This too could mimic, or be housed within, the Canada Growth Fund.

3. Supporting housing affordability by contributing long-term capital to expanding their real estate portfolios to include more affordable housing development, which would positively impact the financial security of both current and future pension contributors. Although real estate is an important asset class for pension funds, most of it is in things like airports and commercial real estate, with the sole goal of delivering financial returns. We need more investment in new infrastructure, like affordable housing near economic activity, which has not been a strategic priority.

If pension funds allocated just 5% of their $3 trillion in assets toward strategic domestic priorities, that would amount to $150 billion in catalytic capital. Even if those investments yielded returns 1% lower than the rest of their portfolio (which we think is unlikely), the overall return would only fall from 8% to 7.95%, a negligible difference with enormous potential upside for the country.

This approach would not only be good for Canada, but for pension funds. Pension funds’ success depends not only investment returns, but on the overall health and stability of the economy, which requires Canadians to have steady jobs, steady incomes and affordable housing near economic centres.

We also believe that if pension funds asked their members, to whom they are beholden, whether a portion of their capital should be invested in the local economy, even if it meant a modest reduction in returns, the answer would be a resounding “Elbows Up.”

Our new federal government needs to insist that all pools of capital find more creative ways to help Canada emerge from this geopolitical transition stronger, more resilient and less exposed to future vulnerabilities. If pension funds approach the challenge creatively and collaboratively, there are ways they can deploy their enormous wealth for the benefit of both plan contributors and Canada’s longer-term economic well-being.