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Can a homegrown model for pension management change the course of retirement funding and HR administration?

By Joel Kranc

Many of Canada’s largest pension funds have gained much success and adoration on the global financial stage. Not so far in the past, Canadian public pensions were relatively conservative investment vehicles focusing mainly on investments such as government bonds, and were funded on a “pay-as-you-go” basis.

There was little by way of independent governance and the funds were administered in an “outdated fashion,” according to a new report entitled The Evolution of the Canadian Pensions by the World Bank Group.

According to the report: “The same organizations that today are regarded as global leaders had little to no independent governance lacked investment diversification, operated under strict investment limits, suffered from significant administrative errors and poor member service and were considerably smaller in terms of assets under management.”

Since the 1990s, however, a Canadian “model” for pension governance and investing has emerged and was the focus of the report, and a subsequent panel hosted by the Canadian Club in Toronto earlier this year. The four participating pensions within the report included the Healthcare of Ontario Pension Plan (HOOPP), the Alberta Investment Management Corporation (AIMco), OPSEU Pension Trust (OPTrust) and the Caisse de depot et placement du Quebec (CDPQ).

One of the first key lessons of the report highlights the success of the collaborations between diverse stakeholders such as labour, government, business and finance, which allows for each sector to perform the role best suited to their expertise.

“Having the right balance between governance and accountability to all the stakeholders is like the magic triangle,” said Kevin Uebelein, CEO with AIMco. “Without that, it’s hard to build on.”

In fact, the report states, “Strong, independent governance is perhaps the most important element of the Canadian model.”

This is epitomized by many Canadian public pension plans and those that participated in the report, which operate at an arm’s length from government, are run as high performing investment management institutions and meet high standards of transparency, accountability and ethical conduct.

Setting themselves apart

Jim Keohane, president and CEO of HOOPP, speaking on the panel in Toronto, explained that Canadian pensions have had remarkable success withstanding financial crises – something that sets the Canadian model apart from other pension models.

“There are three factors that can adversely affect pension plans: a decline in long-term interest rates, a decline in equity markets and an unexpected rise in inflation,” said Keohane. “It’s about understanding and controlling those risks.”

This attention to risk, he further added, led to the creation of different portfolio structures such as liability matching – a further expansion of risk control at the pension plan level.

From an HR professional standpoint, pension funds like OPTrust, which has about half union and half non-unionized employees, can’t distinguish who are who at the board level (which is a good thing).

“I think our governance structure works well because our trustees, when they come to the table, you can’t tell which side they [represent] because they are laser-focused on ensuring that the member interests are fully protected,” said Hugh O’Reilly, president and CEO with OPTrust.

Oftentimes issues, and the way in which they are addressed, should be indistinguishable and handled in a fair and equitable way.

This is a lesson that can be learned by both HR and employee representatives. Oftentimes issues, and the way in which they are addressed, should be indistinguishable and handled in a fair and equitable way.

Also from an HR standpoint are the challenges facing pension funds. These are not dissimilar to issues being faced by other pensions on a global scale. Over the next five to 10 years, according to the report, innovation, leadership, change management and public policy will need to be addressed in order to meet the following challenges. They include:

Lower expected returns and interest rates over the long term will make it harder to meet pension promises.

More pressure is being placed on plan sustainability as active members continue to support a growing and aging retired plan member population.

A pension gap is growing between who has a good pension and who does not.

As pension funds grow, they gain economies of scale but also become more complex and difficult to navigate global investment opportunities.

Value-for-money will become more of a concern as pensions grow and fall under more scrutiny. Trust will need to be continuously built and maintained.

Regulatory environments in Canada remain fragmented and are not always up to date with pension fund sophistication. Also, world regulations have become more complex and uncertain post-financial crisis.

The inevitability of another financial downturn or crisis will test the strategies of the current pension models.

Overall, collaboration between HR stakeholders, trustees, pension boards and others will help navigate challenges and maintain the already strong governance model being built by the current incarnation of the Canadian pension model. The current benefits of risk mitigation and accountability are the foundation that future pension models will be built on. 

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