Former Bank of Canada Governor Stephen Poloz is examining a list of ideas to get the country’s pension funds to invest more in the domestic economy — including the creation of a pooled fund that would make dealmaking easier for some of them.
The government may need to change regulations for pension funds, potentially opening the way for them to play a more activist role in companies they’ve invested in, the former central banker said in an interview with Bloomberg News.
In April, Finance Minister Chrystia Freeland tasked Poloz with exploring ways to “catalyze” more local investment opportunities for Canadian pension funds. His study comes at a time when there’s a debate in the country about how to solve weak productivity, soft business investment and a general lack of excitement in capital markets. The initial public offerings market in Canada has been largely frozen for the past two years.
Some pension funds may be discouraged from looking at smaller opportunities within Canada because the analytical work in making an investment decision is costly and eats up a greater share of their potential profit, Poloz said.
That’s where the pooled fund concept comes in. Pension plans could make allocations to a central fund devoted to Canadian assets, where those costs are shared. It’s “one of the ideas that solves scale,” Poloz said, increasing the likelihood that pension managers will say yes to investing in assets that they would otherwise take a pass on.
He pointed to the Venture Capital Catalyst Initiative or VCCI as one potential model. Through the initiative, the federal government invests in venture capital funds, which then use the public money to leverage private-sector investment. Most recently, the government made C$450 million ($334 million) available through three streams of the program.
The 30% Rule
Poloz, who ran the central bank from 2013 to 2020, said some pension funds would like to play a more active role in their investments, including board seats where they can leverage their expertise, but there are “impediments” to doing so.
In Canada, there’s a rule that restricts pension funds from holding more than 30% of the voting shares of some companies. Last year, the government said it will explore changing that rule, but it hasn’t acted yet.
Another roadblock to the pension investment is the reluctance of governments, including provincial administrations, to allow the privatization of larger infrastructure assets such as airports and highways.
Canada’s largest pension funds tend to deploy a much smaller proportion of their capital in domestic assets now than they did two decades ago, when reforms were kicking in that permitted them to become more active in global public and private markets.
The manager of the largest public fund, the Canada Pension Plan Investment Board, had 12% of its assets in its home country as of March 31. Twenty years earlier, that figure was around 70%. It’s a matter of diversification — and bigger opportunities being available in other countries. CPPIB had C$646.8 billion in total assets as of the end of June.
Poloz, who’s now a special adviser at law firm Osler, Hoskin & Harcourt, declined to comment on a news report that Brookfield Asset Management had pitched itself as a potential manager of a new investment fund that would be seeded with federal money.
The story led to criticism from members of the Conservative Party because Mark Carney, the chair of Brookfield, recently became an adviser to Prime Minister Justin Trudeau’s Liberal Party. Carney is also the chair of Bloomberg.
Neither Brookfield nor Carney has commented on the report.
A person familiar with the matter said Brookfield brought the idea to all the major pension funds shortly after Poloz was hired in April, but the funds declined. The federal government didn’t endorse the idea either and Carney’s new political role officially makes it a non-starter, said the person, who asked not to be identified to discuss sensitive information.
A senior government official said it did not ask Brookfield to initiate a fund.
Carrots, Not Sticks
Poloz said consultations have been wide-ranging, with proposed reforms going from broad suggestions to specific policy proposals. “It’s an amazing number of cool ideas that have emerged,” he said. “It’s a restaurant with too big of a menu to choose from.”
It’s not clear when Poloz will deliver his report to Freeland. He’s met with her several times on the matter and he has a team at the Finance Department supporting him. Freeland has declined to say whether the document will be made public.
Some firms have worried that the government will consider coercive measures, like taxes or new constraints on non-Canadian investment, to push pension funds to use more of their capital in Canada. Still, Poloz was clear to point out that all of the solutions he discussed in the interview “fall into the carrot category, not the stick category.”
He reiterated that one of the quickest ways Canada can unlock investment, economic growth and productivity gains is by removing regulatory and trade barriers between the country’s 10 provinces.
