News & media What are the lessons the UK can learn from the Canadian pensions model?

10 June 2024

Cordiant CEO Benn Mikula recently gave an on-stage interview during the Pensions Asset Allocation Summit in London organised by SG Pensions Enterprise titled a ‘Canadian Perspective on Asset Allocation’.

Benn’s interview focused on the Canadian pensions model, which has long adopted a clear return-focused approach to turn savings into wealth. This model has been demonstrably successful because of the freedom to allocate assets towards the best return opportunities, high allocations to alternative assets (such as infrastructure) and ‘learning the ropes’ through partnerships with fund managers before upping the quantity of direct investments.

By contrast, UK pension funds – both Defined Benefit (DB) and Defined Contribution (DC) – face several challenges in pursuing similar goals, ranging from regulatory impediments, investment vehicles and structures, and the weight of a palpably risk-averse regulatory culture.

Benn aimed to confront this anomaly and discuss the lessons he believes can be learned from the Canadian experience. You can read a full transcript of his interview below.

Q&A: Stephen Glover interviewing Cordiant Capital CEO, Benn Mikula

Q: Welcome Benn and let me start by inviting you to describe some of the key features of the Canadian pension model.

BM: Thank you for having me, and I’m pleased to be here to discuss this topic, which I’ll be addressing from two distinct perspectives. Firstly, at a general level, I’m the CEO and managing partner of a Canadian firm originally founded by the Ontario Teachers’ Pension Plan, that has had a front row seat at the development of the so-called ‘Canadian Model’. Secondly, I’d like to comment as a practitioner: an investor in fast-growing sectors of infrastructure and real assets and tying this to the creation of superior returns for pensioners, boosting economic dynamism, efficiency and diversification.

My firm, Cordiant Capital, originally provided specific access to global infrastructure private credit. My partners and I purchased it from Teachers’ a few years ago when those activities were taken in-house. We reoriented the business around middle market, growth investing in three specific areas – digital infrastructure, energy transition infrastructure and agriculture value chain. Whilst London is now our largest office, I can put hand to heart and attest to firsthand experience with the Canadian model.

Now, what is the ‘Canadian model’? The most well-known elements are three-fold:

  • A returns-focus with governance to match;
  • Scale; and
  • A heavy emphasis on alternatives.

Other notable elements that make this an attractive model are as follows:

  • Paying staff market rates, for example in private equity;
  • Forming meaningful partnerships with alternatives investment managers and gradually building the muscle to do co-investment;
  • Lighter and more nimble regulatory framework
  • Over-allocating to Canada to take advantage of local knowledge and contacts to drive superior returns in Infrastructure, PE, and venture capital.

Q: What does the asset mix look like at a large Canadian pension plan – for example, Ontario Teachers’ or CPPIB?

BM: The $632 billion Canada Pension and the $245 billion Ontario Teachers’ have infrastructure and private equity allocations clustered around the 40% mark.

Both are overweight Canada because they can leverage local knowledge and relationships for higher returns: Teachers’ at close to 35% of the portfolio.

At the typical UK DB pension plan, allocation into alternatives is perhaps 1/3 of this level. For DC plans, it is much lower, with master trusts allocating an average of just 3%*.

It hasn’t always been this way. Preparing for today I read an academic paper from the 1990s, praising the fact that UK pensions were leading the world in assuming prudent risk to generate higher returns, with >70% equity allocations. Clearly, times have changed, and has had a profound impact on savers. It has been estimated that a pensioner commencing with £100,000 would, over the course of a decade, be more than £26,000 better off if they had invested in the Canada Pension Plan compared to an average UK plan.   Regulatory approaches have a lot to do with this.

Q: What were the factors and drivers by which Canadian plans have long committed such a large percentage of assets to alternatives and illiquids?

BM: The return pick-up through investing in alternatives is widely known, so this explains a large part of it. Over time it has also allowed Canadian funds to lower fees by building the skills to invest in deals directly, unmediated by funds. This skill takes time to develop – to do it at scale requires expertise – and the Canadian majors achieved by partnering with specialist fund managers over many years.  Put another way, pension funds didn’t jump right into co-investments. They built relationships, and as expertise increased, their specialisation increased, and this produced superior returns.

In short, while other markets retreated into a ‘safety-first’ model, the Canadian ‘returns-first’ approach evolved and thrived.

This cannot be said about its UK counterpart.

Q: When you compare Canada with the UK, is not a large proportion of the difference explained by the fact that most UK corporate DB plans are closed to new members?

BM: It’s a flattering question to ask, assuming I am a pension strategist such as the previous speaker. I am, however, a Private Equity investor focused on buying platforms, investing them for growth, and building larger and more successful enterprises.

I accept that many corporate DB plans are closed, and ‘under pressure from the regulator’ is a common refrain. However, government and DC schemes are not facing this. I think one of the main reasons you see a difference comparing the pension complexes in Canada and the UK is a difference in attitudes, especially in terms of allocations to alternatives.

I’d like to share a quote I recently found from Julia Hoggett, the CEO of the LSE, on investing in infrastructure and growth equity: ‘We’re not asking for radical risk taking, we’re actually just asking that our pension funds do what other established (funds such as) […] the CPPIB in Canada do […] But somehow we have, in a sense, got to a point where we have stopped doing that, and then created a narrative that this is extreme risk taking […] I think it is risky not to invest in our own futures’.  

Ms Hoggett’s remark is a useful bridge to a point I have made in a City/government seminar Cordiant hosted with the CPS as well as in a broadsheet OpEd some weeks ago, namely, to temper the regulatory culture of ‘safety first’ in the UK.

Let me offer one example. Many of you on the private or fixed income side probably do not pay much attention to investment trusts. Yet this quarter of a trillion-pound sector (sadly shrunken from even a year ago) is a mainstay of the LSE and has, for 150 years steered capital into alternatives such as Marconi’s transatlantic cable. Yet today the FCA regulatory machine penalises trusts by forcing them to report fees in an illogical and exaggerated way and blocks the ready flow of DC money into the sector.

Trusts offer low cost and excellent governance. If trusts grow large enough, they offer good liquidity. Given size and liquidity, trusts investing in infrastructure and private growth capital could be an excellent allocation decision for DC plans. Yet somehow the DC community is being offered the LTAF, truly the epitome of the horse designed by a committee.

What if DC pensions were to partner with the largest alternative investment trusts to create multi-billion-pound funds offering substantial daily liquidity and retaining the existing, attractive fee and governance structure? Cordiant’s digital trust is, at 800 million pounds raised over the last three years, able to take billions more in and would happily welcome pension partnerships. (For the avoidance of doubt, we’d also happily take money in our closed-ended GP/LP funds too!)

I’ll end this rather long-winded answer by quoting economist Sir John Kay, on British ‘safety first’ pension regulations. It is ‘one of the great avoidable catastrophes of British public policy […] a system that worked pretty well, was replaced by [a regulatory regime] that constrained investment strategies and effectively killed UK private-sector defined-benefit schemes.’ 

The palpable ‘safety-first’ and risk-free culture in this country is firstly driven by regulatory guidance, a series of interlocking rules that emphasise cost and investor protection and unattainable demands for liquidity over superior returns, dynamism, and wealth creation.

Q: Why are you here if regulation is so tough.

BM: Put simply, the people. We have immensely talented people here in London, succeeding despite a tough and complicated regulatory burden that’s led to a sadly weakened LSE.  

Q: Please describe briefly some of the investment opportunities that you feel UK pension plans could take greater advantage of and what they would need to do to access them?

BM: Firstly, it would have to be allocating a greater percentage to alternatives, specifically growth capital and infrastructure targeted to areas such as the digital economy, energy transition and security, food security, improved transportation and [innovative housing solutions for the evolution of the Millennial and Gen Z cohorts].

Secondly, the funds could combine scale and local knowledge to earn incremental returns through or in partnership with managers able to deploy local knowledge of the UK for higher returns.

Thirdly, allocations to mega-funds in buyout and infrastructure might diminish, and allocations to managers able to focus on growth and the middle market increased. This would diversify sources of MOIC and IRR.

Finally, it might focus on nurturing the LSE, which is a critical part of the British financial ecosystem. Managing to link the alternatives investment trust complex with DC plans would be a tremendous win for pensioners and for the country.

*3% into infrastructure for members in the default fund who are 20 years from retirement (Pensions Policy Institute)

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