Canadian pension plan investments in Canadian public equities are heading to zero — here’s what we can do about it
If current trends continue, investment in Canadian equities could disappear in as little as three years.
Just how much of Canadians’ hard-earned pension plan contributions should be invested in foreign securities? The Canadian public equity portion of pension plan assets represented by the Pension Investment Association of Canada has declined by 85 per cent, from 27.9 per cent in 1990 to just 4.1 per cent in 2020.
Pension funds comprise 30 per cent of the total savings held by Canadians. The current trend represents a potentially significant loss to Canada’s economy, says Daniel Brosseau, president of investment management firm LetkoBrosseau, resulting in less money available for innovation, less risk taken to develop Canadian companies, fewer jobs created and reduced investment in research and development. It’s not about ill-will toward Canada, he says, just the result of the current policy environment.
Why is this happening? It’s not based on returns or diversification to reduce risk, Brosseau argues.
“Since 1988, domestic stocks have performed better than foreign ones, with the S&P/TSX generating an 8.7 per cent annualized return,” he says. “The MSCI Index showed a 7.8 per cent annualized return for foreign stocks over the same period. During that time, the Canadian market also demonstrated no unusual volatility compared to world markets and LetkoBrosseau achieved a return of more than 14 per cent, aggregated across all our Canadian investments.”
“Historically, they made projections for major asset classes, based on information provided by plan sponsors,” he says. “Today, they make very detailed projections on every type of asset and state, for example, that Canadian equities are riskier than US small cap equities. In essence, they have taken over the allocation of assets, based primarily on backward-looking statistical analysis.”
An actuary may recommend that a Canadian pension plan hold no more than three per cent of its investments in Canadian equities, representing the Canadian share of all equities across the globe.
“Does it follow that United States, representing 56 per cent of global equities, should invest 56 per cent of its already larger savings in its economy, while Canada invests only three per cent of its smaller savings here and 20 times more in the U.S.?” he asks. “If the U.S. actually invests 70 per cent in its own equities, why shouldn’t Canada invest 70 per cent here?”