How to make pensions Canadian
The first chief executive of the Ontario Teachers’ Pension Plan told AOX forcing funds to invest in their domestic economy usually results in ‘suboptimal’ returns (Reuters/Amber Bracken)
If you wanted to sum up the UK government’s ambitions for pensions, it would fairly simply be that they wanted to ‘make British pensions Canadian’.
So AOX thought it might be a good idea to seek some advice from the man who made Canadian pensions Canadian.
Claude Lamoureux was the first chief executive of the Ontario Teachers’ Pension Plan between 1990 and 2007.
When he joined, the fund invested exclusively in $16bn Ontario government debt. It is now about $270bn in size and invests in real estate, infrastructure and private equity around the globe.
Rather than reproduce a lengthy conversation here, we thought we would condense it into three takeaways:
1) Mandation is a terrible idea
Lamoureux was, it’s fair to say, very sceptical of the idea of government forcing pension schemes to invest in a particular way on the basis that ultimately it produces rubbish returns. In fact he highlighted that the Ontario Teachers’ investment philosophy was created at a time when the Canadian government imposed its own mandation, of 80 per cent, to invest in Canada.
He said independence is “very important”, saying mandated investments - particularly in the domestic economy - only create “suboptimal returns”.
Lamoureux added: “It is not that we don’t invest in Canada, but the Canadian market is 3 per cent of the world market whereas the US is something like 70 or 80 per cent of the world market.”
When he ran Ontario Teachers’ he skirted Canada’s investment mandate by using swaps to trade the fixed returns of the Ontario government debt for the returns of foreign stock markets such as the S&P 500.
Lamoureux said: “We were probably one of the biggest investors in derivatives at one point.
“We got a letter from the minister but I think I destroyed it. He said he understood what we were doing, he understood it was legal, but he said he didn’t like it.”
Lamoureux did suggest consolidation was a better idea, giving the example of New York, where there are five pension funds - despite former mayor Michael Bloomberg’s attempts to consolidate them which was scuppered by unions in 2011 - which he said would perform better if it were merged into one.
2) It starts at the top
Lamoureux said the UK government should, instead, be focusing on making sure pension scheme boards have sufficient freedom and are willing to use that freedom to invest where they could get the best returns.
Lamoureux said: “It starts with the board because they have to be willing to do this sort of thing and supportive of what you’re trying to do. Without that you get nowhere. We had terrific board members but they did ask good questions. We had good controls.
“For example if you want to do co-investment you need to be able to act quickly so you need a management who can act quickly and you need a board which is flexible and isn’t meeting once a month or once every quarter.
“You need a good board which focuses on the investments.”
3) You can build in-house teams if you incentivise them correctly
One of the big questions facing UK pension funds is whether, or how, to build an investment team - essentially turning themselves from an outsourcer to doing it all in-house.
Lamoureux said the advantages of building an in-house investment team are obvious.
He said: “My promise was that from the start I wanted 80 per cent of the money being managed in-house.
“At Ontario Teachers’ we have a big team that does private equity and our return is better than most outside managers but you need to create incentives.
“My goal when building the team was to have a low fixed salary and if you do well I will triple or even quadruple your pay.
“That’s how I was able to attract some good people.”
Lamoureux’s concern is that too often he sees incentives working only in one direction, with staff being rewarded even during poor years, which encourages a conservative approach.
He said: “The danger sometimes is you stop being successful because you become too conservative, you don’t give your management real incentives. You want to make sure people have incentives.
“Incentives need to work two ways. When you have a bad year, you don’t often see the incentives being zero.”
