Opinion: Pension funds don’t want to be told to invest more in Canada. That doesn’t mean it’s a bad idea

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Let’s say you’re Deputy Prime Minister and Finance Minister Chrystia Freeland.

You’re looking to jump-start productivity, in part by investing billions of dollars in Canadian businesses. Problem is, there’s no cash in the kitty – those darned deficits remain stubbornly high – and you know that, historically, politicians have done a dreadful job of picking corporate winners and avoiding losers.

As you spend summer mulling fresh approaches to economic growth – bold ideas that could, you know, get a government re-elected – your eye turns to a handful of domestic pension plans overseeing some of the world’s largest capital pools. You see roughly $3-trillion in assets, mainly invested outside the country.

Hmm …

A long-running campaign to force domestic pension plans to invest more of Canadians’ retirement savings in Canadian companies is gaining traction in federal and provincial political circles, despite ardent opposition from fund managers. Ironically, the champions of this keep-it-in-Canada crusade – the founders of Montreal-based fund manager Letko Brosseau & Associates Inc. – are also partly responsible for creating some of the world’s most liberal pension investment rules in the first place.

Peter Letko and Daniel Brosseau both lobbied the federal government to lift its 10-per-cent cap on plans’ foreign investments after they joined Canadian National Railway’s pension fund in the 1970s. The politicians listened. After gradually raising the threshold for several years, the federal government eliminated what was known as the Foreign Property Rule in 2005.

The largest funds, led by the Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan, responded by shifting the bulk of their money into global markets. In 1990, Canadian equities made up 23 per cent of pension portfolios, according to a survey by the Pension Investment Association of Canada. By 2022, the group found funds allocating just 4.3 per cent of their capital to domestic stocks.

As they read this, pension plan chief investment officers might say: “Yes, and that’s actually more capital than the country deserves, based on its 3 per cent weighting in global equity markets.”

Mr. Brosseau, president of the $18-billion fund manager, begs to differ.

“It should be a major policy concern for Canadians and our leaders that the country’s pension industry has moved large amounts of its funds to other countries,” Mr. Brosseau said in a statement. “When investment managers send Canadians’ hard-earned savings outside of Canada, they aren’t just moving money out of the country, but also some of its important associated economic benefits. That means less innovation, fewer jobs and reduced economic activity and security for Canadians.”

On Monday, Mr. Letko outlined a better way of managing capital in an interview.

He pointed out that Canada is now an outlier when it comes to pension fund support for local companies. In Australia, an economy of comparable size, pensions allocate five times more of their assets in domestic equities. As a result, Mr. Letko argued Canada is losing its vitality, with the country seeing declines in research and development, business investment, venture capital and initial public offerings compared with other industrial nations.

“This message resonates with political leaders,” Mr. Letko said. “The questions is always: What do we do?”

Rather than return to the Foreign Property Act’s fixed investment threshold, Mr. Letko proposed what he calls “relatively easy fixes” to the way pension plans invest. First, he recommended pension plans be required to set aside reserves that accurately reflect the risks associated with different types of assets, a move that puts the risks and returns that come with domestic equities on more equal footing with foreign stocks.

“Owning a Canadian bank doesn’t come with the same risks as owning an Indonesian bank,” Mr. Letko said. He says domestic funds often take on currency and country risk that aren’t reflected in the decision to invest outside the country.

Pension plans have also steadily increased their allocations to private markets, including real estate and infrastructure. These investments are typically made with borrowed money, and don’t feature the mark-to-market transparency that comes with prices of stocks and bonds. Mr. Letko said pension plans should be obligated to disclose detailed return hypothesis used in actuarial valuations on private assets. Again, he said if the risks on these investments is made clear, domestic equities often look better by comparison.

Letko Brosseau isn’t simply talking its own book by pushing for more Canadian content in pension plans. The firm invests globally, offering funds dedicated to Chinese and emerging market equities.

“While we understand the need for international diversification, a principle we have followed for many years, balance is required,” Mr. Letko said. “The strength of the Canadian economy and self-sustaining benefits of investing in our own industries should be an equally important priority. A country that stops investing in its future will wither.”