Consolidating money management for state or provincial public pension plans under one entity is a concept that has been accepted both in Canada and in a few U.S. states, leading at least one analyst to suggest that investment expectations of the future will require other states to do the same.
“They will have to,” said Jill Eicher, visiting scholar at Stanford University's Pension Infrastructure Collaborative, Global Projects Center, Palo Alto, Calif. “It's not possible for state and local funds to sustain even a 4% return on a one- to three-year basis. Change is going to happen, and low returns will be the driver of change. ... So pension plans that provide a model, like Indiana and Ontario, and that cause people to try and make changes are a big help. The expectation is for the stock and bond markets to be below return averages for the next decade. If you're the CFO of a state or local government, you have to do something.”
Independent Canadian money management companies that manage public pension assets include the Investment Management Corp. of Ontario, which was launched in July and is expected to begin investment operations in early 2017; the C$248 billion Caisse de Depot et Placement du Quebec, Montreal; the C$121.9 billion British Columbia Investment Management Corp., Victoria; and the C$90.3 billion Alberta Investment Management Corp., Edmonton.
In the U.S., the $30.8 billion Indiana Public Retirement System, Indianapolis, has managed assets of the state's five pension plans since they were combined under one investment management and administrative system in 2011. However, INPRS does not operate as an independent money management corporation as do IMCO and the other Canadian companies.
Officials in Canada and at Indiana point to the economies of scale, overall cost savings and broader asset-class investment options that such combinations provide.
Canada in particular is attractive, Ms. Eicher said, because its managers, though created by their provincial governments, operate independently of the governments and the pension funds maintain control of their individual asset allocations. The Indiana system, along with the other 15 U.S. state investment boards — 12 of which manage assets for all their states' pension funds — do not operate independently of state government and do not allow individual funds to set their own asset allocations.
“The idea of a non-profit investment management function at the heart of a platform, I just don't know how the U.S. plans can do that,” Ms. Eicher said. “State investment boards are a baby step on a progression toward what IMCO is trying to do, which is a more efficient approach. IMCO takes that to the next level. Canadians are much further ahead than the U.S.”