By Joel Kranc
It’s been quite the year for pension funds in Canada, and one of the biggest bombshells happened just as the year was coming to an end.
In late November and early December the Alberta Investment Management Corporation (AIMCo), which has assets under management in excess of C$168 billion, saw a huge shake-up in its management and investing structure. The plan, which manages pensions for the Alberta Teachers’ Retirement Fund, Local Authorities Pension Plan, Provincial Judges & Application Judges Pension Plan, and more, was given a new Board of Directors to “reset the investment corporation’s focus.”
The new appointees include Danielle Smith (who serves as premiere of Alberta) as deputy minister of finance, and former Prime Minister Stephen Harper as chair. The provincial government will now have a permanent representative on the board; which is an important change from past AIMCo boards, which have operated independently from the government since 2009, a year after AIMCo was created.
All of this came after the Finance Minister of the province, Nate Horner, fired the previous CEO and Board.
Keith Ambachtsheer, emeritus director of the International Centre for Pension Management, in a New York Times interview said, it looked like a “Soviet style” purge.
“I’ve talked to people from Australia to the United Kingdom about what’s going on,” Ambachtsheer said. “The Canadian pension model has become the global standard for how you should think about these things. Now here is a government that is kind of stepping outside those rules.” Horner had cited “low investment returns and rising operating costs, management fees, and staffing [costs]” to justify the change in management, but in a separate article, Ambachtsheer told Institutional Investor those claims were unsupported by AIMCo’s annual reports.
The news is still fairly fresh and could mean government control of assets that could be directed in ways that reflect government policy or influence – not the way Canadian pension funds have been operating, to be sure.
Domestic vs. International Investing
Besides internal turmoils, a report from Desjardins Group this past year said that Canadian pensions are underinvested in the country’s public markets. This may reduce capital available to Canadian companies and potentially leave them exposed to foreign takeovers, says the head of capital markets at Desjardins Group.
That lack of investment “sucks a lot of liquidity out of the market, which has an impact on valuations and your ability to grow and thrive as a public company,” said François Carrier in an interview with Bloomberg News.
The country’s largest pension manager, Canada Pension Plan Investment Board, had 12% of its capital invested in domestic assets as of March, compared with 70% in 2001, when the board was a relatively new entity and Canada had rules that capped pension funds’ investments in foreign assets. Just 8% of CPPIB’s active equities portfolio was in Canadian stocks as of March 31.
In March, more than 90 business leaders signed an open letter to Finance Minister Chrystia Freeland and her provincial counterparts, urging them to change the rules for pension funds to “encourage them to invest in Canada.”
In fact, the Finance Minister has asked former Bank of Canada Governor Stephen Poloz to look into the issue and find ways to entice pension funds to invest more at home. Discussions have included potential solutions, such as regulatory adjustments allowing pensions to take a more activist stance in their investments or establishing a pooled fund to facilitate deal-making for smaller pension plans.
Economic Outlook
Overall, the Canadian economy is expected to be slower as compared to the US in 2025. RBC’s Global Insight 2025 Outlook, Canada’s productivity is slower relative to the US and a reduction in immigration targets will take away one percentage point from GDP over the next three years.
Lower interest rates have eased concerns about consumer spending. Generally, there is an expectation that the Canadian equity market will remain strong as earnings growth climbs, relative to the US equity market. Continued rate cuts by the Bank of Canada will support fixed income returns in 2025.
After a two-year bull market in which much of the gains have been concentrated in tech stocks, Canadian institutional investors name valuations their number one market risk (50%), with 81% of institutional investors believing that equity valuations do not currently reflect the fundamentals, according to the Natixis Investment Managers Survey.
However, institutions are optimistic with almost three-quarters (72%) believing that 2025 will be the year that markets realize that valuations matter, even though 78% say the sustainability of the current market rally will be determined by central bank policy.
“Institutional investors are heading into 2025 with a more optimistic outlook,” noted Dave Goodsell, executive director of Natixis Center for Investor Insight.
“Although they acknowledge a range of risks on the horizon, they remain confident in their ability – and the market’s – to weather geopolitical challenges and adapt to macroeconomic shifts,” he said. “While most are staying committed to their long-term strategies, many are making tactical adjustments to strengthen their positions. Ultimately, their success will depend on how well they navigate today’s macroeconomic and market conditions.”
