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Is Canadian pensions’ secret sauce the perfect recipe?

Research suggests the ‘Canada Model’ for pension fund management can lead to superior returns, though a closer look at their agri holdings hints at varying strategies and results.

China and Canada flags

Research suggests the ‘Canada Model’ for pension fund management can lead to superior returns, though a closer look at their agri holdings hints at varying strategies and results.

There is no denying Canadian pension funds have a certain something. Over the past few decades they have burgeoned into giants within the alternative assets arena, with seemingly more in common with leading asset managers than with their pension fund counterparts in other countries.

Canada’s total pension assets increased from $965 billion in 2006 to $1.58 trillion in 2016 – a 10-year compound annual growth rate of 5 percent – according to the latest global pensions asset study from Willis Towers Watson.

But, while undoubtedly impressive, do they really perform better than other pension plans?

Keith Ambachtsheer, founder of CEM Benchmarking, analyzed the overall investment returns from eight Canadian funds, the majority of which are public, from 2006-15 and found that the ‘Canada Model’ of pension fund management did, indeed, produce superior returns – as much as 0.6 percent above a passive index.

Ambachtsheer defines the ‘Canada Model’ as including three key features: a clear mission, a strong independent governance function and the ability to attract and retain the requisite talent to be successful.

The analysis used ‘net value add’ – gross return minus the cost of running the investment operation minus the return on the passively managed reference portfolio – to compare the Canadian funds’ performance with a passive benchmark and a broader pool of 132 unspecified pension funds.

While the Canadian funds produced NVA of 0.6 percent per year above the passive benchmark, the broader pool produced just 0.1 percent NVA on average.

Similar research into Australian superannuation funds cited by Ambachtsheer found a negative average NVA of 1.3 percent below the benchmark between 1997 and 2016.

KNOCK ON WOOD

A key finding was that ‘Canada Model’ pension funds insource the investment function to a much greater degree than the wider pool – 75 percent on average, versus 17 percent. Canadian funds are also more inclined to invest in private market, on average 23 percent versus 11 percent.

When it comes to agriculture and timberland, these two assertions seem to hold true. The Ontario Teachers’ Pension Plan, for instance, holds direct stakes in three agriculture businesses, representing 4 percent of its $10.5 billion natural resources portfolio. PSP Investments also prioritizes sizable, direct stakes in agriculture and timber, which accounted for most of the $1.2 billion net assets yearly growth posted by its natural resources last year.

Performance has often proved satisfactory. The Alberta Investment Management Corporation, for example, posted a 10.1 percent net return on its $1.22 billion timberland portfolio in FY 2016, exceeding its 5.7 percent benchmark. Over the same period, PSP Investments generated a 19.5 percent one-year return on its natural resources holdings, 89 percent of which are accounted for by timber and agriculture.

For others, however, strategic changes are afoot. Last April, a report stated that the Canada Pension Plan Investment Board intended to cease further investments into farmland to instead focus on agribusinesses elsewhere in the supply chain, amid a mooted sale of its existing farmland portfolio.

Additional reporting by Matthieu Favas