To paraphrase Jane Austen’s opening in Pride and Prejudice, “It is a truth universally acknowledged, that a pension fund in possession of a good fortune, must be in want of ways to invest it.”
Some Canadians have argued that pension funds should invest more in this country. Earlier this year, more than 90 Chief Executive Officers (CEOs) signed a letter urging the federal and provincial governments to change the rules to “encourage” the funds to keep more of their capital at home.
The federal government provided a sympathetic ear, and launched an investigation.
But should current and future pensioners welcome such initiatives? The short answer is “No”. The long answer is the same; here are a few reasons why.
An obvious one is diversification; by spreading their investments globally, funds can reduce what are called country risks.
Fiduciary responsibility is another. Trustees and others who manage pension funds are responsible to their beneficiaries (retirees) and to no one else.
I’d like to focus on another issue: the types of stocks or equities that matter to pension funds and economic development. According to a report from Global News on Mar. 15, 2024, “the vast majority of CEOs supporting the push [to more investing in Canada] are from the mining and energy sector.”
Which begs the question, do we want more, or a lot more, mining and energy companies in our pension portfolios? I suspect that most of us do not. The prices of mining and energy stocks usually fluctuate rapidly with the raw materials they extract, process, or distribute.
Most of us want our pension funds to be stable and predictable, which we can’t get from volatile industries or stocks.
The same principle applies to the sizes of corporations held by pension funds. It’s no accident that funds invest mainly in large-cap stocks (market capitalizations of more than $10 billion) and only modestly in small and middle-cap stocks. Large-cap stocks provide stability and predictability, which are essential in pension funds.
Small and mid-cap stocks are more appropriate for economic development. They have the potential to not only grow themselves but also to power up industries or economic regions.
So, I would urge the federal government not to force pension funds to invest a greater proportion of their portfolios in Canadian stocks.
Nor should pension funds be used for political purposes. For those of us who live in Alberta, that’s a current threat. Premier Danielle Smith and the United Conservative Party (UCP) are trying to push Albertans out of the Canada Pension Plan (CPP) and into an Alberta Pension Plan (APP).
It’s not because Albertans were asking for this change; very few did. The minority asking for change are generally angry about the province’s mistreatment, or perceived mistreatment, by Central Canada and the Liberal Party of Canada.
While they are a small group, they were influential in the UCP leadership race and helped Smith to win it. Now, she wants to reward them with an APP.
In other words, the UCP government’s push for a provincial pension plan is based on political considerations, not better returns or other benefits for retirees.
While it’s true the party did promise a lot in a misleading ad campaign, its APP promise was based on the absurd premise that a province with 15 percent of the population (outside Quebec) could leave and take about 53 percent of the CPP’s assets.
Despite those rosy promises, most Albertans aren’t buying the Premier’s story. A Leger poll in January found that only 22 percent of Albertans approved of switching from the CPP to an APP. More than twice as many, 52 percent, disapproved, with 26 percent having no opinion.
Given the potential lawsuits, portability, and other issues that might be involved if Smith and the UCP proceed with their plan, the future of our pension fund may be decided in the 2027 election, when Albertans will have an opportunity to tell the government what they think about the politicization of their retirement benefits.
Leave pension funds to the pensioners.
Robert F. Abbott is a freelance writer who has analyzed more than 1,000 corporations for online investment sites.
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