Canadian Pension Funds Decrease Domestic Investments

Canada’s pension funds have proportionally decreased their domestic investments in recent years, which has contributed to a growing economic productivity gap.

A report from CEM Benchmarking, in collaboration with the University of Toronto, noted that one driver of this decrease is a lack of strategic assets available for sale in Canada and suggested solutions to mitigate this issue.

Strategic assets are defined in the report as specific asset classes that demonstrate distinct strategic benefits to pension fund portfolios so that pension funds can meet their mandates.

The report found that from 2013 to 2022 there was a decrease in the domestic share from 33% to 18% in public equity markets in Canada, illustrating pension funds’ trend towards global diversification over the past decade.

It recommended that Canada’s policy makers free up Canadian domestic public infrastructure assets and make them available to pension funds through privatization or long-term leases, similar to the UK’s proposed Mansion House reforms.

However, it also noted that this method can face challenges in terms of scale and gaining public support.

The report cautioned against the Canadian government implementing policies that introduce requirements for pension funds to invest domestically. It said these policies would impact funds’ risk-return calibrations and expose members to potential losses.

However, there is widespread support for direct government intervention on the issue.

In March 2024, nearly 100 Canadian corporate executives called on the government to amend the regulations for pension funds to encourage them to invest in Canada.

The letter noted that the eight largest pension funds in Canada have more capital invested in China (roughly C$88 billion, or $64 billion), compared to their investments in Canadian public and private equities (roughly C$81 billion, or $59 billion).