Given the rising Pension Benefit Guaranty Corporation (PBGC) premiums and persistently low interest rates, many U.S. pension plans have been adapting some of the practices of what Cerulli Associates call The Canadian Model.
The Model is
centered around three attributes, according to Cerulli: cost mitigation, a
well-diversified investment portfolio across several asset classes and
geographies, and a large appetite for illiquid investments.
While the Canadian pension market is considerably smaller than the U.S. pension market—$1.2 trillion in assets compared to $6 trillion—the top 10 Canadian pension plans account for 45% of the market, compared to the top 10 U.S. pension plans accounting for just 22%. As a result, Cerulli says, Canadian pension plans are very sophisticated.
While U.S. pension plans typically turn to outside investment managers, Canadian pension plans handle a great deal of their investing in-house, thus lowering costs even though they pay their investment managers more than U.S. pension plans do, according to Cerulli.
Canadian pension plans are also very well diversified, Cerulli found. For instance, the Ontario Teachers’ Pension Plan has 46% of its assets invested in equities, but only 2% in Canadian equities, as well as 23% in bonds. The fund is also invested in a variety of alternative investments and borrows in the money markets to help fund other investments.
Cerulli says that given the long-term horizon of pension plans, they can afford to invest in illiquid alternatives, which also provide returns not correlated to other investment classes. In addition, some alternatives, such as infrastructure, can provide steady cash flows, which are very beneficial to pensions as they provide retirees with income.
Cerulli says, “Many plan sponsors are keeping a close eye on President Donald
Trump’s much-anticipated infrastructure plan. While many of the details
surrounding the plan are unknown, some suggest new opportunities for
infrastructure will arise.”
Cerulli’s complete report, “The Canadian Model for Defined Benefit Pension Plan Management,” can be purchased here.