Keith Ambachtsheer, Conscience of the Pension World

Ambachtsheer, the Director of the University of Toronto’s Rotman International Centre for Pension Management, has been talking about pension governance for years. It will come as no surprise, then, that ai5000 sought out the man who, if anyone can be, is the conscience of the pension world.

The thumbnail sketch is this: Canada has multiple pillars in its pension system, some mandatory, some voluntary. The problem is, the pillars are confusing, because sometimes they’re just half pillars, really. The first part, the government-run mandatory part, is actually quite good. It’s meant to provide a basic level of support, but what Canada has done well is that it is sustainable. The Canadian Pension Plan (CPP, the main pillar of the government system) is sophisticated in its asset allocation, is globally regarded as a top-quality national reserve fund, and, importantly, is kept at arm’s length from politicians. The rational for that is straightforward: this money needs to be seen as the people’s money that politicians can’t touch. God help them if they do. It’s so we don’t end up with the kind of stuff seen around the world – Ireland’s reserve fund has been forced by politicians to buy the banks; even in Norway, the politicians are using that fund to look good in the eyes of the electorate, by being moral with investments. Any time you have politicians on the board as trustees, look out: trouble is coming. We don’t have as much of that in Canada; these funds are leading the world in terms of governance. The problem with the endowment model in the US is the outsourcing and the high fees. If you properly cost it out, it’s expensive. The top Canadian funds — CPP, Ontario teachers, Alberta’s reserve fund – they are all high class, arms length, and the money is managed internally. They are world leaders in infrastructure investors, for one; to protect against inflation, they moved away from old ways of investing of trading paper. How can we get better returns than TIPS? Infrastructure. There are problems of course. The corporate sector has the issue of solvency and funding, and with the public sector, these big public-employee plans, the issue is the under-disclosure of the cost of the system. It’s hugely expensive to have such guaranteed benefits– but the true cost has not been fully exposed. These liabilities should be considered like government debt. They cost over 30% of pay, and the contribution rate is only about 20% — that 10% is a wealth transfer from future generations to this generation. These plans will remain, but the full costs of the old formulas will be shown to be to expense, and I suspect that they’ll stop being pure DB plans. They’ll move towards the Dutch model; the level of guaranteed benefits will go down. My solution? The Canadian Supplementary Pension Plan, which would help solve the problem of the five million middle-income people who are without any employment-based plan. Another pooled capital fund. It would auto-enroll; it would have all the characteristics of the best of Canadian pension management. It would be arm’s length, have experienced managers and board members. It could do some outsourcing, but it needs to be, needs to be, arms lengths.

aiCIO Editorial Staff