Infrastructure Boosts Canadian Plans, Why Not US Ones?

These vital physical assets are a steady-returning opportunity that American pension programs under-utilize, fans say. 

Reported by Larry Light

Art by Woshibai


Infrastructure, the building blocks of civilization, gets a lot of attention from Canada’s public pension plans. Far more than it does from their US counterparts, who trail in their commitment to a good opportunity, proponents say, with some justification. Nonetheless, infrastructure’s stable returns are a demonstrably important fuel for Canadian programs’ solid financial status.

In terms of infrastructure investments, Canadian public pension plans eclipse the rest of the world. Canada’s plans have an average 10% of assets devoted to infra (as it’s known), says the World Pensions Council. In the US, the figure is 2%. The average allocation for public plans worldwide this year is 2.7% of assets, by the count of Preqin researchers.

Infrastructure offers good single-digit performance, with global core infrastructure equity returns expected to rise to 6.1% in 2021, and global core transportation to 7.6%, a JPMorgan study found. Yes, funds can earn a lot more than that in the stock market. But the point is that infra performance isn’t correlated to other asset classes—and its cash flows tend to be robust and stable.

That’s why, the JPM report stated, infra will be a solid play for at least the next decade. “We’re not trying to hit home runs,” said Patrick Samson, global head of infrastructure investments at Canada’s Public Sector Pension Investment Board, or PSP, which has 8% of its C$170 billion (US$130 billion) in assets devoted to the investment class.

“Canada is the model for pension fund management, and infrastructure is a big part of that,” said Norman Anderson, head of CG/LA Infrastructure, a well-known project developer. Canadian funds got in early, back in the 1990s, and have expanded their reach both at home and abroad.

Infrastructure covers a lot of areas, including transportation mainstays (bridges, tunnels, roads, railways, ports), energy (pipelines, wind farms, solar fields, power transmission), and infotech (data centers, cell towers, fiber-optics networks). The overriding truth about infra is that the world needs more and more of the stuff.

Demand is increasing for several reasons. In the developed world, a lot of the physical framework is crumbling, and governments lack the fiscal wherewithal to fix it all by themselves. That leaves an opening for pension plans. In developing nations, there’s a basic need to install infrastructure for the first time. Everywhere, new technology calls for constructing the means to bring digital wonders to the public. Witness the rush to build nodes to handle the new 5G telecommunications build-out.

The US Effort: Growing, Yet Relatively Small Scale

A key difference between adjacent nations: Canadian funds are not under pressure to make up the funding gaps that too many US public programs suffer from. In the US, public defined benefit (DB) pension plans are just 72% funded, at last count, per the Center for Retirement Research at Boston College (CRR). Canadian DB pension funds are 99% funded, says an Aon study.

Perhaps because of their bigger mandates and smaller funded statuses, US pension plans often are looking for more current income—meaning higher returns in the short run, in the teens—than long-term-oriented infrastructure customarily provides, in the single digits.  

Thus, when it comes to infra investing, US plans farm asset management out to private equity (PE) funds, whose performance is anchored in capital gains, rather than in long-running revenue streams. The PE idea is to buy an asset and flip it in a few years for more money, as opposed to reaping its ongoing revenue over the fullness of time. That’s the observation of an academic study from Ingo Walter, an emeritus finance professor at New York University, and Clive Lipshitz, managing partner of Tradewind Interstate Advisors.

Upshot: For US plans, “there has been insufficient investment in infrastructure as an asset class,” they wrote, “using the wrong investment vehicles and for the wrong purpose.” 

A better approach, they argued, would be to follow the lead of Canada and some other, smaller countries such as Australia and the Netherlands, which understand how to monetize infra investments. After all, the paper contended, infrastructure is a long-term investment generating recurrent and dependable cash flows for patient investors—the very traits that pension programs prize.

To be sure, with its enormous population (331 million), the US is a lot larger and more complex nation than its northern neighbor (38 million). The American road system alone is many times larger than that of Canada. And US public pensions have many more beneficiaries than do their Canadian counterparts.

And, in fairness, major US pension funds have earmarked significant sums for infrastructure, and they intend to do more. The New York Common Retirement Fund (NYCRF) last year made a $300 million capital commitment with Blackstone’s Saudi Arabia-backed infrastructure fund. The Oregon Public Employees Retirement System (PERS), California State Teachers’ Retirement System (CalSTRS), and State of Michigan Retirement System are among the sizable US pension funds energetically investing in infrastructure. 

A California Public Employees’ Retirement System (CalPERS) Investment Committee report in September noted that infrastructure is  “a strong contributor to absolute and excess returns” at CalPERS, the largest US pension fund. Over 10 years, infra delivered an annual 13.8% performance, although over the past 12 months that dwindled to 0.16%, likely due to COVID-19 interruptions.

One recent CalPERS venture was a $1 billion commitment in Australian dollars to a joint venture for Asian power operations, with Australian money manager QIC. Another was to invest $485 million into a partnership with UBS Global Asset Management, seeking infra projects around the world.

Nonetheless, the CalPERS effort pales before those of Canadian funds. At CalPERS, infrastructure investments are valued at $5.4 billion, making up just 1.3% of the Golden State giant’s $422 billion in assets. At the largest Canadian retirement investment organization, the Canada Pension Plan Investment Board (CPPIB), infra constitutes almost 9% or $31 billion of its $350 billion portfolio total, in US dollars.

An impediment for US public pensions has long been that they don’t pay as much as Wall Street does. That’s not to say that a lot of talented people don’t work at American retirement programs; they do. It’s that this stricture is a false economy. Capping the pay for pension professionals—some US state governments, like Kentucky’s, mandate that no one can make more than the governor—forces the programs to outsource asset management.

That, paradoxically, drives up costs, which eats into performance. In Canada, much of the work is in-house. Internal investment management is one-third cheaper, according to research based on CEM Benchmarking data. “We have a much leaner structure than the US model” allows, PSP’s Samson observed.

O, Canada: A Tale of Big Ambitions

Montreal needed more mass transit. Well, up stepped pension fund Caisse de dépôt et placement du Québec (CDPQ), which currently is building a light rail system to supplement the city’s subways. The 41-mile Réseau express métropolitain (REM), which should be fully operational in 2024, will link underserved suburbs and the airport with the city. With assets of C$333 billion, of which 8% is in infrastructure, CDPQ has been at the infra game for many years. An early project was a Toronto toll road two decades ago.

“These investments have paid out for us very well,” said Emmanuel Jaclot, the plan’s head of infrastructure, adding they have averaged an 8% annual return over the past five years. CDPQ holds interests in infra across the face of the earth, such as: Vertical Bridge (30% stake), a US wireless tower owner; Azure Power Global (49%), a solar power provider in India; the Port of Brisbane (27%), an Australian harbor; and Heathrow (13%), the British airport.

CDPQ is so happy with infrastructure’s contribution to the plan, Jaclot said, that it wants to enlarge its presence there. Over the next five years, he stated, the asset category at the fund will double in size.

At the Ontario Municipal Employees Retirement System (OMERS), infra makes up almost a fifth of its C$109 billion asset trove. Since it entered this field in the 1990s, it has amassed a portfolio that includes Tank & Rast, a German owner of hotels, restaurants, and gas stations; Niagara Health, which has Canadian hospitals; High Speed 1, a British railway; and NET4GAS, a natural gas pipeline system that spans Europe.

Typical of most Canadian pension plans, this one keeps its assets for many years. But OMERS doesn’t shy from occasionally  unloading a holding “to be more efficient,” said Ralph Berg, the global head of infrastructure.

Last month, OMERS sold its 83.5% stake in the Detroit River Rail Tunnel, which joins Detroit and Windsor, Ontario. Canadian Pacific Railway, holder of a minority interest in the property, was the buyer for what it didn’t own. The pension plan, which first invested in the tunnel in 2001, received a reported US$312 million from the sale. Over the past five years, OMERS has logged an average 8.5% return per year from infrastructure.

The newest entrant to infra investing is the Healthcare of Ontario Pension Plan (HOOPP), which branched into the asset class in mid-2019. The idea is to get income that low-yielding bonds aren’t delivering. To date, the fund has only allocated $1.2 billion for the endeavor, some 1% of its C$100 billion in assets, and much of that hasn’t been committed yet.

Stephen Smith, the managing partner in charge of HOOPP’s infra, said the amount invested will soon expand to 5%. The plan is eyeing fiber-optic networks in Europe, along with US wind and solar emplacements, co-investing with private equity house KKR.

Given the need to enhance the planet’s physical plant, Smith said, opportunities are manifold. “We’re in only the second inning of the infrastructure game globally,” he declared. “HOOPP has billions available for investment in infrastructure. And we know there is growth ahead.”

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CalPERS, Canada, CDPQ, Healthcare of Ontario Pension Plan, Infrastructure, New York State Common Retirement Fund, Ontario Municipal Employees’ Retirement System, Public Sector Pension Investment Board,