One of the many challenges COVID-19 poses is accelerating the global pension crisis. Low interest rates and a slowdown in economic activity are causing pension liabilities to skyrocket and questioning return assumptions, which is ultimately weighing on pension plans around the world.
To illustrate this, look no further than America’s largest public retirement plan. CalPERS, the retirement plan that provides retirement benefits for millions of Californians, is currently estimated to have less than 72 percent funded.1 The pension situation in much of Europe and Asia is at best in a similar position.
Canadians are not isolated from this worrying trend. According to a study by the Healthcare of Ontario Pension Plan, nearly three-quarters of Canadians agree there is a retirement income crisis.2 Canadians are concerned about how the global pandemic will affect their ability to comfortably retire. Fortunately, Canadian pensions are well managed and secure. In times of crisis, however, the risk of governments making ill-advised decisions increases significantly.
Canada has world-class retirement plans, and in order to ensure the continued security of Canadian pensions, it is vital that these plans continue to operate with the independence and strong corporate governance structures that have existed in these institutions for decades.
After the financial crisis of 2008, Ireland plundered its national pension plan for up to 17.5 billion euros as part of an agreement with the European Union to bail out its banks.3 That was not long after Argentina nationalized nearly $ 30 billion in private pensions as a result of the financial crisis in that country. A 2019 study by the Argentine Ombudsman found that around 70 percent of retirees in Argentina could not afford basic services.4th demonstrate the dire situations citizens find themselves in when governments fail to respect the independence of pension plans.
What is important is that independence from governments alone is not enough to ensure the success of retirement plans. These plans also require strict corporate governance structures similar to those of a publicly traded company. In fact, poor corporate governance is the main reason for CalPERS ‘recent struggles.
First, the CalPERS board of directors is heavily politicized. His former chief investment officer resigned abruptly in August after compliance officials discovered he had personal interests in some of the investment firms in which CalPERS had invested. However, many observers see this forced exit as being driven by the policy of the board of directors. To make matters worse, the board is difficult to find a permanent replacement, not least because many qualified candidates do not want to work on a politicized board.
More troublesome is the fund’s inability to invest in private equity, an asset class that has become an integral part of achieving pension fund return targets. The data shows that CalPERS ‘private equity allocations and returns are consistently lower than industry benchmarks, largely due to board members getting in the way of management on key investment decisions.5 The board should oversee strategy and risk management, but should not be involved in the day-to-day investment decisions of the plan.
The Ontario Teachers’ Pension Plan (OTPP) is a retirement plan with both independence and strict corporate governance structures.
Thanks to the brilliant foresight of former Chief Executive Officer Claude Lamoureux, OTPP is accountable to, but not controlled by, the government. The sponsors of the plan – the Ontario Teachers’ Federation and the Ontario Ministry of Education – have equal responsibility to ensure that the plan has good corporate governance and sufficient funds to meet its long-term pension obligations. The board members are obliged to act independently of both the plan sponsors and the management and to make decisions in the best interests of all plan beneficiaries.
All of these factors enable OTPP to consistently achieve and exceed the targeted returns. The same is true of most public pension plans across Canada, including the Canada Pension Plan Investment Board (CPPIB) and the Caisse de dépôt et Placement du Québec (CDPQ), which manage the assets of the CPP and the QPP, respectively, to help ensure that the old-age pension of virtually every Canadian worker.
To date, Canadian governments have understood that the money in these plans is not invested or spent by them, but rather belongs to Canadian beneficiaries and should be managed in such a way that the risk-adjusted returns for those beneficiaries are safely maximized.
There is no safer place in the world for your retirement than in Canada. The Canadian pension plan model has shown that pension plans with exemplary corporate governance and principled independence can help ensure that the citizens of a country can fall back on a retirement provision even in these difficult times.
Mark Wiseman is a seasoned Canadian investment manager who currently serves as the chairman of the Alberta Investment Management Corporation (AIMCo). Previously, he was the Global Head of Active Equities at BlackRock Inc.; Prior to that, he was Chief Executive Officer of the Canadian Pension Plan Investment Board (CPPIB).