Canadian Pension Funds & Infrastructure Investments

[yrt+viva=1system]

I decided to start a general catch all thread as it seems to be a key and important topic that determines whether large scale projects are built or left for failure in the early stages of announcements. Something that has always drawn my curiosity are the news headlines about Canadian Pension Funds investing large amounts into foreign projects and transportation infrastructures yet are hesitant to almost willing to ignore our infrastructure projects. What are the reasons why the Pension Funds are so hesitant to invest in our own infrastructure projects? We rarely hear about them participating in Ontario infrastructure projects but some are willing to do so in Quebec projects (eg. Caisse).

A good article to start the discussion:
Millions of Canadians have pension money offshore — without knowing it
https://www.cbc.ca/news/business/canada-pension-plans-offshore-tax-haven-investments-1.4454514

 

[kEiThZ]

Simple question. What do you as a shareholder in the Canada Pension Plan want your investment manager to do? Do you want them to generate returns or build infrastructure? If there's a conflict which one do you want prioritized?

 

[crs1026]

The quote about pension plans needing to go for maximum rate of return needs a little context. Certainly, fund managers try to make as much money as possible. But that doesn't mean that they invest in high-risk or high-volatility ventures. If they do, they hedge their bets.

At least part of a pension plan's money is invested in things that generate a lesser, but reliable and non volatile, income. The theory is, the investment may not skyrocket up in value, but it will chug along making money and never lose value. It's the tortoise side of the investment strategy. Nobody in pension land enjoyed the recovery from 2008..... a pension plan never wants to have to recover from a downturn.

Infrastructure is attractive to pension fund managers for the very reason that earnings are pretty much guaranteed for the long term. If the asset is government backed, or at least something that government is bound to fix if it fails, the income is that much more guaranteed. They may not put their entire portfolio into infrastructure - but it's a good hedge.

Canada lags in attracting pension money for infrastructure, among other reasons, because

a) we are behind the curve in learning how to package infrastructure deals to attract investors
b) government of all stripes is reluctant to actually bow out of control of public enterprises, leaving investors skeptical of the business direction - Ontario electricity being a glaring example
c) we seldom actually have consensus that the infrastructure is needed and wanted, so there is continuing public resistance to the deal being done, making government overly cautious and sensitive to criticism of a deal, and
d) with Canadians actually pretty desensitised to government spending, especially deficit spending, there is seldom true government incentive to seek P3.... they simply plow ahead and borrow. Only Ontario is anywhere close to a point where further deficits could be a no-go proposition. But even Ontario still has the ability to borrow money freely.

- Paul

 

[kEiThZ]

I'm not even sure if it's actually a great deal to have the pension funds build infrastructure. Their need for returns drives long term costs higher. The real value is that it stays off the government's books. And as Paul says, we don't seem to have this great drive to avoid deficits. Indeed, we simply won't build anything instead!

 

[muller877]

Simple question. What do you as a shareholder in the Canada Pension Plan want your investment manager to do? Do you want them to generate returns or build infrastructure? If there's a conflict which one do you want prioritized?

To be clear, the CPP transfers money to the CPPIB and they invest on their behalf. The CPPIB has 3 objectives (and 3 only):
- meet the obligations of the CPP (i.e. pension payouts)
- manage any surpluses transferred from the CPP to the CPPIB
- invest to achieve a maximum amount of return without undue risk

It has been very clear for the past 20+ years that we are keeping politics out of the CPP so that politicians don't waste the money on pet projects.

 

[kEiThZ]

To be clear, the CPP transfers money to the CPPIB and they invest on their behalf. The CPPIB has 3 objectives

It has been very clear for the past 20+ years that we are keeping politics out of the CPP so that politicians don't waste the money on pet projects.

Right. But some who are pushing for pension funds to invest in Canada more need to understand the implications of that idea. Do they want to coerce CPPIB to invest more in Canada or do they want to create the conditions that enable pension plans to invest here? The former is a change to established norms. The latter involves taxpayers effectively spending more.

 

[muller877]

Right. But some who are pushing for pension funds to invest in Canada more need to understand the implications of that idea. Do they want to coerce CPPIB to invest more in Canada or do they want to create the conditions that enable pension plans to invest here? The former is a change to established norms. The latter involves taxpayers effectively spending more.

The CPPIB has a mandate to manage undue risk. Geographical concentration and sectoral concentration are both undue risks they need to minimize (which includes too many Canadian investments). It's not a change to the norms but a change to the underlying legislation which most politicians won't touch with a 10 foot pole (they will be branded as someone who is stealing from your retirement...and correctly)

 

[Jonny5]

When it comes to investing "offshore" that CBC article is sensationalist horse shit. You don't pick where your fund administrator keeps assets in trust, and many keep them in "infamous offshore tax havens" simply because of their high concentration of expert global market services staff and accounting professionals that simply don't exist in Canada.

 

[kEiThZ]

There's been an interesting flood of articles recently about the CIB. They are trying to push back on accusations they didn't get much done and are not partisan.

Infrastructure bank CEO rebuts claims of project delays, political meddling: 'It’s easy to be on the sidelines'

'You can’t be in the infrastructure business and sort of extract yourself from governments,' Pierre Lavallée said in a wide-ranging interview with the Post

nationalpost.com

The Canada Infrastructure Bank's CEO: 'Things are good' - Macleans.ca

Pierre Lavallée talks to Paul Wells about the bank's next project, criticisms about past investments and why politicians have no sway at the bank

www.macleans.ca

Canada Infrastructure Bank becomes a political issue in upcoming federal election

The federal government has committed $35-billion over 11 years to help lever a major commitment of private capital for new infrastructure at a time when governments are hard-pressed to meet Canada’s massive new infrastructure needs out of public funding alone. Yet both the Conservatives and the...

www.hilltimes.com

They really hurt themselves by letting ministers announce projects. And launching a pre-election blitz of announcements.

Be interesting to see if they survive a Conservative government. Personally, can't see large institutional investors getting involved in Canada without something like the CIB.