Pension funds not a sure thing in Canadian infrastructure plan

The Canadian government plans on seeking institutional investment to help it make C$120 billion ($92.2 billion) in infrastructure investments across the country over the next 10 years. But it's uncertain whether large public plans within Canada's borders — some of the world's largest infrastructure investors — will join in.

In its 2016 budget released March 22, the Canadian Finance Ministry announced a plan to commit to projects in public transportation, water and wastewater systems, affordable housing and protecting existing infrastructure from climate change. The budget document said the government would work with “global institutional investors and older stakeholders” in plans for infrastructure investments.

The government has reached out to the large public pension plans in Canada with sizable infrastructure portfolios, including the C$282.6 billion Canada Pension Plan, Ottawa and the C$171.4 billion Ontario Teachers' Pension Plan, Toronto, as well as the C$248 billion Caisse de Depot et Placement du Quebec, Montreal, which manages provincial pension and other assets. But the pension plans' managers haven't announced any plans to participate in the new infrastructure initiative.

“Over the last few years, we've engaged with the federal government on infrastructure thinking,” Ron Mock, CEO of the Ontario Teachers' Pension Plan, said at a news conference March 30. “We're not unique. Other large Canadian plans have joined in those talks ... the federal government has talked to us all about what the right structure might be for large infrastructure investments.”

The question of structuring infrastructure investments to attract larger plan interest is a crucial one. Most of the pension plan investors have direct partial or full ownership in infrastructure, as opposed to participating in public-private partnerships, which have much more debt than equity. Infrastructure executives such as Andrew Claerhout, Ontario Teachers' senior vice president, infrastructure and natural resources, have said in the past that such partnerships, called PPPs or P3s, make large investments problematic for big plans like OTPP. Efforts to reach Mr. Claerhout for this story were unsuccessful.

Said Janet Rabovsky, Toronto-based partner at Ellement, an investments and benefits consultant: “Look at what the big plans own — the Chunnel, stakes in airports, ports. Is the government here planning to sell stuff outright, or ask for investment to build? It's still early days right now.”

There are examples of Canadian pension funds striking deals with governments for direct ownership of infrastructure. Chief among them is in Quebec, where a unit created by the Caisse last summer, CDPQ Infra, will develop and manage two public transportation projects in Montreal.

However, executives at the Caisse are tight-lipped about participating in any federal program. Maxime Chagnon, Caisse spokesman, said the Caisse does not comment on federal budgets.

If Canadian pension giants don't join in the government's plan, that could leave the door open for investments from smaller Canadian defined benefit plans whose executives, sources said, are excited about making more investments in infrastructure as a liability hedge.

“What we are hearing from clients is they are looking for more infrastructure product and there is an appetite for infrastructure pension activities, especially given plan sponsors' needs to meet funding ratios and search for returns in this current low-interest-rate environment,” said Tim Rourke, vice president, relationship management and pension practice lead at CIBC Mellon, Toronto. He said pension plan clients have had difficulty reaching their target infrastructure allocations because they can't find investments in the marketplace.

“The government's commitment in the federal budget to short- and long-term infrastructure spending could be a good opportunity for plan sponsors,” Mr. Rourke said, “by offering more projects and investments to tap into, and as a result, we may see more plan sponsors increase their asset allocation in infrastructure.”

Todd Nelson, senior investment consultant at Willis Towers Watson PLC in Toronto, said the question of how the infrastructure investments could be structured remains unanswered, as does what role public markets would play. “But we wouldn't feel there's that large a gap” between what the government would need and what large plans would invest, he said. “A lot of managers and smaller plans would love to participate in PPPs and have the expertise to do it. There isn't a shortage of willing participants.”

Added Ellement's Ms. Rabovsky, “We're all waiting with baited breath” for the details on how the investments would be structured. “The question is, how will that play out, and how much would be left for the smaller guys? I know multiemployer and smaller DB plans would love to get into infrastructure investing this way.”

Infrastructure serves an important role plans' asset allocation as a way to match their liability profiles, which means plans of all sizes in Canada are looking for investments, said Scott McEvoy, partner at law firm Borden Ladner Gervais LLP, Toronto. “It's constantly a topic that's revisited by pension plans,” he said.

Mr. McEvoy said another element of the government budget could make it easy for pension plans to invest in infrastructure — the elimination of the 30% limit on pension plan holdings in voting shares of a corporation. That proposal, already introduced in Ontario, would open up investment opportunities, particularly in public infrastructure, by putting Canadian plans on a level playing field with other investors.

In a February report, Mr. McEvoy wrote: “Canadian pension plans have argued that they are at a disadvantage when competing with foreign plans for high-quality investment alternatives” because of the 30% limit. “In the current low-yield environment, this disadvantage has been exacerbated, resulting in a mismatch between plan liabilities and investment returns in the medium to long term.”

Mr. McEvoy said in an interview that removing the 30% limit could open the door for more infrastructure investment, with pension fund investors taking on higher voting stakes and increasing their governance over the projects. n