Can the Canadian Model Be Improved? | Chief Investment Officer

The “Maple-8” Canadian public pension funds are known for many things, such as their use of direct investments and internal management of assets, as well as their globally diverse portfolios.

Many have considered the Canadian model to be the prime pension fund investment model, with many pension funds, including the California Public Employees Retirement System, aiming to replicate some of its features.

The term “Maple-8” refers to the major Canadian public pension funds including, the Canada Pension Plan Investment Board, Public Sector Pension Investment Board, Caisse de depot et placement du Quebec, Alberta Investment Management Corporation, British Columbia Investment Management Corporation, Ontario Teachers’ Pension Plan, Healthcare of Ontario Pension Plan and the Ontario Municipal Employees Retirement System, which collectively manage more than C$1 trillion in assets and have become pioneers of the model, starting in the 1990s, when Canadian public pension funds were woefully underfunded.

But does the model still have a future today? In an academic paper, “On the Sustainability of the Canadian Model,” author Eduard van Gelderen, the CIO of the PSP Investment Board, aims to find out if the Canadian model is still relevant today, and what its future looks like.

Issues With the Canadian Model

The paper identifies several issues that currently exist within the Canadian model, following interviews with executives from the Maple-8 pension funds who identified some problems that the Maple-8, and the Canadian model might face.

The paper discussed the impact of the expectation that Maple-8 pensions’ will be expected to adopt or have adopted net zero climate impact by 2025 and climate targets. Due to this, these pensions will be de facto impact investors, adopting impact in principle.

The paper notes that some executives voiced concerns that investing in green assets would lead to lower investment returns, conflicting with their fiduciary duty to generate strong investment returns. However, the paper also states there is evidence that green investing also provides strong returns.

The paper also states that the Canadian model is not applicable everywhere, citing evidence that for many emerging markets, the Canadian model does not work. Canada and other developed markets have unique circumstances that are not transferable to emerging markets.

As Baby Boomers retire over the next 20 years, this could put pressure on cash withdrawals from these pension funds, as they have high allocations to alternative investments, thus these funds will have to focus less on alternatives, once a staple of the Canada model to meet pension liabilities.

How the Maple-8 Can Adapt

The paper offers many solutions for the Maple-8 to adapt to their changing environment. First, Van Gelderen suggested that the Maple-8 focus on long-term risk management and avoid taking short-term focus, which could do more harm than good.

Finally, the paper suggested that the Maple-8 adopt new technologies and data processes, noting that many of the pension funds are underutilizing newer technologies in their systems.

“New technologies and advanced analytics make the industry less dependent on historical data alone and provides huge opportunities to determine associations and correlations we were not aware of before,” the paper states. “As such, AI application could be found, amongst others, in alpha-generation, total fund management, risk management, and trading. The task for the Maple 8 is to figure out how they will benefit the most, which is dependent on their specific situation and mandate.”