By Erik Sherman

If infrastructure is a framework that supports and enables a system, it is also an integral part of a Canadian pension fund.

“They are big clients of most of the larger US infrastructure managers,” says Scott Gockowski, a senior manager at Casey Quirk, a strategic consultancy for investment managers that is a Deloitte company. As annual reports indicate, top Canadian pensions are also well involved in infrastructure in Canada and throughout the world.

“There’s really been tremendous growth of infrastructure as an asset class over the last five years. If you ask most investors how their infrastructure strategies have performed, most of the data we’ve seen says that they’re very satisfied,” Gockowski adds.

In a survey of institutional investors, 44% were trying to increase infrastructure exposure, 40% looked to stay flat, and only 7% wanted to pull back.

Data from pensions’ annual reporting shows how important the sector is to their portfolios:

  • Retraite Québec, which administers the Québec Pension Plan, wrote that at the end of 2022, its four major funds incorporated between 10.3% and 12.5%, up significantly from 8.8% to 11.0% of the previous year.
  • The Alberta Investment Management Corporation (AIMCo) manages a global infrastructure portfolio of more than $11 billion, 7.0% of total assets under management.
  • Healthcare of Ontario Pension Plan said in its 2022 annual report that it had “added more private market assets, such as real estate, infrastructure and private equity, which have generated strong returns.” Infrastructure in particular represented $356 million in 2022 net investment income — a 9.4% return that was far more than the $207 million from short-term fixed income, let alone the respective $9.7 billion and $4.1 billion losses from bonds and public equities.
  • British Columbia Investment Management Corporation (BCI), as of mid-2022, had 9.5% of its total assets, or $20.2 billion, in infrastructure and renewable resources, including regulated utilities, gas, water and wastewater, transportation, power, telecommunications, and agribusinesses. The investment horizon is 20 years.
  • Canada Pension Plan Investment Board (CPP Investments) has held 9% of its total assets in infrastructure for the last couple of years. According to its reporting, infrastructure and other invested real assets “generally carry a lower level of market risk and corresponding returns than the public equities in the Reference Portfolios,” have “attributes of both equities and fixed income in addition to their own specific attributes,” and “contributed returns of 10.8% in fiscal 2022.”
  • The Ontario Teachers’ Pension Plan in its 2022 annual report mapped its infrastructure and natural resources investments across equities, real assets, and credit. OTPP increased its infrastructure real assets from $26.1 billion to $39.8 billion, 16% of its total asset mix — the highest of any of the biggest Canadian pension funds — for “stable inflation-linked cash flows and capital preservation.”
  • The Public Sector Pension Investment Board in its 2023 annual report called its “platform approach to both Infrastructure and Natural Resources investments” a “winning formula.” The 12.1% of total net AUM ($29.4 billion) has provided a 10.5% 5-year annualized return. That was the second highest return after private equity investments.

The numbers are part of a bigger pattern. As noted in a 2023 article in the Journal of Asset Management from researchers at Maastricht University and the Dutch financial analysis firm Finance Ideas, “Pension funds across the globe face infrastructure investment costs that are comparable, but we observe significant scale advantages in infrastructure investments, with larger pension funds exhibiting lower investment costs, and higher net returns.”

“There’s large diversification benefits to investing in infrastructure. It doesn’t have a terribly high correlation to public equities, to public fixed incomes,” Gockowski says. “I think it is a good diversifier and many allocate for that reason. At least part of the interest in energy transition is for ESG reasons and a sense of social responsibility as well as an investment case.”

One reason for a greater interest is the recent performance of infrastructure investments, which have “demonstrated strong returns through the economic cycle,” says Michael Ryder, partner and co-head of North America at Igneo Infrastructure Partners, formerly known as First Sentier Investors.

“During the past year, while interest-rates have increased and economic activity has moderated, the sector has continued to provide attractive base returns for investors,” he says. “The essential nature of the services that infrastructure assets provide, such as energy and water supply, digital network access and public transportation, remain in high demand regardless of the economic cycle.”

But there are complications for some provincial Canadian pensions. Significant government legislation in both Canada and the U.S. for infrastructure support has large aspects focused on clean energy and reduction of carbon footprints. “It’s an interesting challenge,” says Frank McGillicuddy, a revenue agent focused on tax subsidies for green energy. “You don’t want to invest in a sunset industry, but you don’t want to look like you’re exiting” because Canada is a significant oil exporter. “Inside money knows it’s time to exit, but it’s a hard look in Canada to look like you’re existing too soon.”