Canadian Investment Review

Smaller Plans Can’t Compete: Ambachtsheer

Written by Scot Blythe on Monday, November 28th, 2011 at 1:08 pm

big and smallLarge Canadian pension funds – OMERs, Teachers’, AIMCo CPPIB – have clout. It’s not just because because they have a large stable of assets under management. It’s also because they have internalized investment management.

The result: small pension funds are uncompetitive, suggested Canadian pension expert Keith Ambachtsheer, who gave the annual FairPensions lecture last week in London, England. FairPensions is a British NGO oriented to socially responsible investing.

In his lecture, according to Investment and Pensions Europe, he argued

“You need scale to be successful in this business,” he said. “You need large-scale pension delivery organisations. We need compensation schemes inside those organisations that allow those organisations to be competitive on the people-side.”

He argued that, even if an internal investment team each demanded a hypothetical salary of $1m, if this brought down overall external asset management costs, it was worth considering.

More interestingly, the private equity efforts of some Canadian plan sponsors were saluted, according to IPE.

Responding to Ambachtsheer’s lecture, Mark Fawcett, chief investment officer at NEST, agreed with many of the points raised, saying it was in his scheme’s DNA to be a long-term investor.

He also said that much could be learned from the investment approach taken by Canadian pension funds and cited Ontario Municipal Employees Retirement System’s joint ownership of the Channel Tunnel rail link with Ontario Teachers’ Pension Plan.

“As a result of having it in-house, they benefit fully from the growth of those investments,” he said, adding that this allowed them to “capture all that value in-house”.

Evidently, that raised the question of too big to fail. And certainly big pension plans can have a greater impact in the economy than small ones. As IPE reported:

Challenged by Bill Galvin, chief executive of the UK Pensions Regulator, on the question of whether the creation of these large-scale vehicles did not risk creating a small number of larger schemes that would then lead to systemic risk, Ambachtsheer countered that this could be avoided by having a clear set of rules to ensure each pension organisation delivered on its promises.

“Another thing to keep in mind: If you play this strictly inside your own country, you are missing a huge competitive advantage,” he said.

“You should be benchmarking yourself against the best in the world. The best in the world are organisations that seem to be in the order of magnitude of $100bn (€74bn) and 250,000 to 300,000 members.”

What’s interesting is that Ontario has proposed allowing smaller pension plans to have bigger ones manager their assets. More than that, some smaller pension plans have formed investment circles to be able to co-invest with the big players in infrastructure and private equity deals.

As Professional Pensions reported on Ambachtsheer’s lecture, the debate between DB and DC is stale. What counts is this:

• Aligned interests with pension plan participants
• Strong governance
• Sensible investment beliefs
• Right-scaled
• Competitive compensation

Ambachtsheer added: “Without the existence and legitimacy of highly-focused, well-managed long horizon return maximization instruments, pension funds cannot play the wise intergenerational investor role that we have cast them in.”

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