Polls consistently indicate Canadians feel a high level of pride in their country. This one, for example, found 90% of respondents are proud to be Canadian compared to 74% of Americans who expressed the same sentiment toward their country.
One area of excellence that has likely escaped the attention of many Canadians is our public pension plans. Despite being one of Canada’s least sexy attributes, the strength of our pension funds is one the most important because it helps to ensure the financial security of all Canadians.
The high quality of Canada’s pension funds hasn’t escaped the attention of such international observers such as The Economist and the World Bank that have lauded this country’s expertise.
Now, a new study confirms that Canadian pension funds are world-beaters. It compared Canadian funds to international peers and found that “Canadian funds outperformed their peers on all fronts. Not only did they generate greater returns for each unit of volatility risk, but did a superior job hedging their pension liability risks.”
For large Canadian public pension funds, a major factor in their strong performance is cost control. They achieved this by managing more of their assets inhouse than non-Canadian funds (52% versus 23%). This allowed the Canadian funds to reduce costs by about a third, according to the study, which was co-authored by two researchers from McGill University’s Desautels Faculty of Management.
Pension plan managers redeploy those cost savings to spending much more than foreign counterparts on internal investment teams, risk management on external managers and IT systems.
Canada’s public pension managers are also lauded in another recent study by a pair of U.S. researchers. It compares large Canadian public pension funds to U.S. peers and found that the Canadian funds outperformed the U.S. ones “on almost all metrics.” It states that “the so-called ‘Canadian Model’ of pension management is often seen as a global gold standard in the realm of public finance.”
The authors point out that Canada’s public pension system is the result of difficult decisions made in the 80s and 90s that led to “independent, well-governed professionally managed investment organizations to invest pension reserves.” The large scale of fund managers such as the Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan allows them to benefit from economies of scale, including the ability to negotiate lower fees, and diversify their assets more effectively.
Both studies assert that pension fund managers in other countries have much to learn from their Canadian counterparts. Notably, the latter study says small U.S. pension funds could benefit from pooling their assets with other funds as is the case in Canada.
For PWL clients, there are two main takeaways from these studies. First, costs matter. The cost advantage that Canadian pension fund managers have over their peers in other countries helps them to outperform. At PWL, we know that keeping investment costs low is the key to earning the maximum returns markets have to offer.
The second takeaway is that having pension managers that are among the best in the world means we can have a high degree of confidence that our public pensions will be there when we retire. That may not make headlines, but it really is something to be proud of.
