Forcing pension funds to invest in Canadian equities is an idea that seems merely terrible at first glance but, when you really dig into the details, turns out to be truly abysmal.
Dozens of top business leaders have signed a letter urging federal and provincial finance ministers to alter the rules governing pension funds in order to boost the amount that they invest in Canada. In 2000, they point out, publicly traded Canadian companies made up 28 per cent of the assets of domestic pension funds. Last year, that proportion fell to 4 per cent. And – to get to the nub of their concern – that decrease has increased the cost of capital for business.
The letter links that decline with Canada’s economic woes: gross domestic product per capita has fallen relative to the United States, and investment per worker excluding residential real estate is less than half of the U.S. amount.
The diagnosis of economic decay is entirely accurate, but their proposed cure would accelerate the rot by attempting to remedy the effects of overregulation, excessive government intervention and corporate subsidies with even more regulation, intervention and subsidy.
The letter remains studiously vague about how the government might prod pension funds into shifting dollars into Canada. But one option proposed by some of the signatories would require pension funds to set aside a “reserve” when investing abroad. It’s not quite a return to the era of formally capping foreign investment, but the result would be the same: trapping capital inside of Canada.
That would undoubtedly benefit domestic companies by artificially depressing the cost of capital, but Canadians would have to foot the bill for that subsidy. Pension benefits would be lower than they otherwise would have been, or contributions would be higher. Either way, the proposal would erode the retirement income of Canadians.
Lest there be any doubt, the Canada Pension Plan Investment Board has (inadvertently) been running a natural experiment. The board administers the assets of the base CPP and the enhanced CPP – the top-up pension plan launched in 2019 – separately. The enhanced CPP has a much greater Canadian weighting; the strategic portfolio framework envisions it with 44 per cent of assets in Canada compared with just 8 per cent for the much larger base CPP. (The actual weighting for each isn’t disclosed.)
And what has been the result of that natural experiment? As of the end of fiscal 2023, the base CPP had a five-year net return of 8 per cent. The enhanced CPP had a significantly lower net return of 5.6 per cent. Or to put it another way, the plan heavily weighted to Canada did only 70 per cent as well.
The letter’s signatories seem to think those sort of lower returns are an acceptable tradeoff in order to create a pool of cheap, subsidized capital. But the cost of those subsidies will have to be borne by ordinary Canadians.
The proposal is bad enough; the justification is worse. The letter’s signatories go on to make some dangerously wrongheaded assertions about Ottawa’s right to monkey with pension funds. “Without government sponsorship and considerable tax assistance, pension funds would not exist. Government has the right, responsibility, and obligation to regulate how this savings regime operates,” they write.
Before pursuing that line of argument much further, they may wish to think about the other entity that would not exist “without government sponsorship and considerable tax assistance”: the modern corporation. Do these corporate executives really want to see a precedent set for such aggressive intervention?
The federal Liberals have said they want to encourage pension funds to invest more of their assets in Canada. So far, the government appears to be sticking to inducements, including a consideration of removing the rule that prevents funds from owning more than 30 per cent of the voting shares of a Canadian corporation.
So, what can be done to bring more pension-fund investment back to Canada? The answer is – it’s the wrong question. The solution is to address the policies that are undermining the dynamism of the Canadian economy: an overabundance of regulations; arbitrary and often punitive taxation changes; and protectionist policies that shield too many sectors from the rigours of competition.
Another round of corporate subsidies, disguised as economic nationalism, won’t address those ills.