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blue-sky (verb)
: to offer ideas that are conceived by unrestrained imagination or optimism.
Hosted by Erin O’Toole, President and Managing Director of ADIT North America. Erin is the former Member of Parliament for Durham and former leader of the Conservative Party of Canada. The Blue Skies political podcast explores issues facing Canada and the world in a format that brings together thought leaders for an informed and engaging conversation.
Hon. Erin OToole (00:01.829)
Welcome to Blue Skies. Today we're fortunate to talk about a current debate underway in Canada that affects the long -term pension security of all Canadians. I think we can all be very, very proud with the system of public pensions that we have in our country, led of course by the Canadian Pension Plan, CPP, and managed by CPP IV, which provides pension security for Canadians today and for a hundred years into the future.
and effective pension management is part of our national prosperity. It's also been challenging in recent years on a few fronts. One, the demographic changes in Canada. Many of these public pension plans were established several generations ago when life expectancy was different. The workforce was different in terms of participation. The nature of our demographics and society has made effective pension management even more challenging.
But in recent years, there's been a public debate to say, look, there are a lot of funds being managed by public pension funds. Why don't we ask them or pressure them or push them or mandate that they have to invest more in Canada? And many Canadians are now seeing a lot of talk about the Maple Eight pension funds. And we'll talk a little bit about that, but the Maple Eight have two trillion in assets under management.
So you can see why some people want to see more of that being spent in Canada. But is that in the best interest of the pensioners today and the pensioner 50 years from now? That's what we're gonna talk today on the Blue Sky's podcast. And we're very fortunate to have someone I consider a friend, a bit of a mentor on pension policy issues, and probably the most well -regarded executive from a pension background. Jim Leach managed the Ontario Teachers Pension Plan as President
and CEO between 2007 and 2014. He also wrote a book in 2013 on pensions, the third Braille confronting our pension failures that won the Canadian Business Book Prize that year. I'm also proud that he's an RMC grad, Royal Military College from 1968. He then served in the Canadian Armed Forces in the Signals Corps and later in his career as an honorary colonel. He's also a dual Kingstonian grad, an MBA,
Hon. Erin OToole (02:26.981)
from Queens University and he went on to be Chancellor of Queens for many years and I believe is Chancellor Emeritus now. He's an Order of Canada recipient, an Order of Ontario recipient and most impressively, he did an expedition to the Arctic with the True Patriot Love Foundation, business leaders, veterans together, pushing to the north of our country in 2014. We're so fortunate to have Jim Leach join us today on Blue skies. Welcome Jim.
Jim Leech (02:56.302)
Thank you, Erin.
Hon. Erin OToole (02:58.373)
Well, this should be easy since you've conquered the North Pole, you've written books on the third rail that no one's supposed to talk about pensions. We're going to talk about this debate that's currently underway in Canada, but I think to set the frame for Canadians, there's talk of the Maple Eight. Obviously, people know where the maple come from. It's Canada's pensions. Talk a bit about what the Maple Eight is, the eight pension funds that are considered the Maple Eight.
Jim Leech (03:02.126)
You
Hon. Erin OToole (03:27.205)
and why the maple model has become so well respected around the world.
Jim Leech (03:33.518)
Sure. The Maple Eight is exactly as you described it. They are eight defined benefit pension plans across the country, all with the exception of CPP, which represents all Canadians. And also the case de depot in Quebec, which represents all Quebecois. The balance are defined benefit plans for particular
groups. So for example, Ontario teachers pension plan for the teachers of Ontario, hospital of Ontario plan, same thing for healthcare workers. There's actually an expanded group is kind of like the G7 and the G8 and the G10. There's kind of a, the group is expanding now. There's probably 12 of the largest pension plans, public sector pension plans across the country, all defined benefits.
They all operate a little differently. However, they have kind of two or three things in common. Number one, they have all performed at the highest levels on all international rankings. So they are the highest performing pension plans in the world as a group. Secondly, they all follow a similar governance structure where they have a independent board of directors.
that oversees and delegates to a professional management group to manage the funds. Some of them are kind of pension plans soup to nuts, like teachers, where they not only manage the money, but they also administer the pension plans, collect contributions each month and pay pensions monthly. Some of them are simply asset managers. That would be like CPPIB.
where they manage the money on behalf of the Canada pension plan. So there are different models, but as I said, they follow basically the same governance structure. I can give you a little bit of history about the public sector plans. If you go back to the 1980s, and we'll use teachers as an example, the pension plan was totally run by the government, 100 %
Jim Leech (06:02.702)
by the government of Ontario. And the plans were all in deficit. Basically all of the Maple Eight were in deficit. And they were basically mandated to invest only in Canada. For example, the Ontario Teacher's Pension Plan was invested solely in Ontario hydro bonds, period. That was it. Nothing else. And as I said, they were all in...
you know, in severe deficit, i .e. didn't have enough money to pay those pensions 50, 60, 80 years out. So there was a wave of reforms that were done provincially and federally. It wasn't really a coordinated effort. They all just came to the same conclusion. my God, we got to do something about this, et cetera. And largely what they did was open up
the ability to invest in more than just government of Canada or government of Ontario bonds. They created independent boards of directors, which would oversee the investments. They hired professional management groups to actually run the assets. And the reforms, as I say, continued into the 90s.
where the restrictions on their investment ability. So first of all, it was you had to have no more than 20 % of your assets could be invested outside the country. And then it moved to 25 and then it moved to 30, moved to 40. And under, it was Paul Martin, I believe was finance minister at the time when they lifted the restriction altogether. There was a concern through successive finance ministers that by lifting,
the restriction that would be a run on the Canadian dollar, so to speak. But that never really materialized and the market just kind of absorbed it. Today, those pension plans have, I think the Canada pension plan, I think is invested around 15 % in Canada. The balance are kind of in the 30s, 40s and 50s.
Jim Leech (08:29.55)
So notwithstanding the fact that they can invest anywhere and there are no requirements that you have to be in Canada, there's still a very significant level of investment in Canada. When you consider particularly that on a global stage, Canadian capital markets only represent 3 % of the world's capital markets, one would say that the Maple 8 are heavily overweighted to Canadian assets as it is.
Hon. Erin OToole (08:56.421)
Let me jump in there because I think there's a couple of things I'd love to break out just for my listeners because you talked about the the May 8 or May 12 being defined benefit plans. Younger Canadians that may have a pension plan don't have a defined benefit plan at many of their workplaces. They may have a defined contribution and that means you know the contribution is sort of fixed for the employer.
Jim Leech (08:59.342)
So that whole reform... Sorry.
Hon. Erin OToole (09:28.517)
Talk about that and that difference because that also started evolving around the same time as these reforms in the 1980s was you started seeing the divergence in private sector plans going from the fine benefit into defined contribution. And when the Ontario government was making some of these moves, was that really to take the pension liabilities off the sort of general revenue risks exposure to the government? When all these reforms were happening,
The private sector was going to define contribution and the public sector were setting up these professionally run, professionally managed, independent public pension plans. Is that fair to say that this was all happening at the same time?
Jim Leech (10:13.262)
It certainly was all happening at the same time. So the start with basics, define contribution plan. It's all a question of where does the risk lie with regard to the obligation? Who is on the hook, so to speak? In a defined, in a stereotypical defined contribution plan, the risk lies with the
employee with the contributor. They put money into into a pot, their employer puts money into a pot. Basically, the employee decides where it's invested. And the day the employee retires, you open the box, and there's a bunch of cash there. And then the employer employee again is responsible for investing it in his in their retirement eight years. Okay, so they are totally
at risk. If markets have been great, and they chose the right investments, they're going to have a really nice and enjoyable retirement. If markets have been bad, they happen to retire, you know, during a financial crisis or something, then they're not going to have so much in their retirement. On a defined benefit plan. It's the exact opposite in that the liability rests with
the employer. The employer is the one who says we'll collect money from our employees, we'll put money into the pot as well. And when they hit retirement age, there's usually a formula that says something like, you'll get 2 % of your salary for every year you worked, and the benefit is guaranteed. And so that's, again, why it's very important that that pot of money be sufficient.
that you don't have to look beyond the pot of money to pay those benefits. The other thing with a defined benefit plan is you don't have discrete accounts. So you are pulled into a group. So the advantages are that you're pooling the longevity risk. In other words, if you and I are in the same defined benefit plan, I die early and you die much later.
Jim Leech (12:40.974)
In a fact, I'm helping I'm because we're pooled I'm subsidizing you into the future. And that's a that's a very important component of part of the the so those are kind of the two bookends find contribution to find benefit. Most of the maple eight are called defined benefit, but they shift a little bit towards the defined contribution side in that there is a risk sharing mechanism.
Hon. Erin OToole (12:46.213)
Thank you.
Jim Leech (13:09.742)
built into those plans. So it's not quite so black and white. In the case of Ontario teachers and several others, I think Hoop, hospitals of Ontario, and I think Omers as well, they are actually a new iteration of it, which is called a jointly sponsored plan. And that's where in teacher's case, the teachers unions and the government formed a partnership to be the
Sponsor and that means they together make decisions with regard to contribution levels with regard to benefit levels They oversee the pension plan management. In other words the board they appoint the board members etc jointly and if there's a deficit they jointly pay there isn't one party who is Who is solely liable they are jointly liable
And if it's in surplus, hey, they enjoy the fruits of being in surplus. So they've taken it one step further and they are kind of the ultimate hybrid plan that is a model that has not really been copied anywhere else in the world. It's really a Canadian model.
Hon. Erin OToole (14:31.653)
Yeah, and you know, I remember and I've written a little bit about when Paul Martin and David Dodge changed and created the CPP -IB and brought the Canadian pension plan out of a funding deficit in the projections by making the tough move to increase contributions by pensioners, members and their employers. They created the CPP -IB. They looked...
to Ontario teachers as one of the examples at the time for governance. So I wanna talk a bit about your experience at teachers because you talked about what makes the Maple Leaf so unique is that high level of performance, the independent governance and the delegation of the governance and then the professional managers, whether they're administering the pension or just managing assets.
Teachers, for instance, a lot of Ontarians knew for many years they were owners in Toronto Maple Leafs. And there was a lot of talk about the teachers owned the leafs, but also got into infrastructure investments around the world and these sort of alternative assets that really helped returns. Is that a hallmark of the Mapleade as well? And just talk about your experience there navigating for the return of your members.
speak to them for a moment to the concept of your duty to them, because I think we have these debates about these big pots of money, but there's a fiduciary element to this in that the pension plans are to take care of people, not just today, but into the future. How did that weigh on you when you were running Teakers?
Jim Leech (16:19.758)
Very good question.
The structure, the governance structure that we talked about, independent, et cetera, allowed, and teachers was, you're absolutely right, teachers was at the forefront and was the model that was used when CPPIB and public service, PSP, public service pension plan were put together. Claude Lamoureux, who was the inaugural chair, and Gerald Bowie, who was, sorry.
Hon. Erin OToole (16:41.509)
PSP.
Jim Leech (16:51.662)
Claude Lemmer, who was the inaugural CEO, and Gerald Bowie, who was the inaugural chair of Ontario Teachers, were both consulted when CPP IV was set up and PSP, for example. Gerald Bowie is actually not heralded enough for his contribution. When he was brought in as the inaugural chair, he told the teachers and the government, yes, I'll do this.
But I have several conditions. And he said, my first condition is that the plan will be run like a business. And I don't think either party, the government or the unions, had any idea what he was talking about. But what he meant was, we're going to have a board of directors that is duly elected or appointed by the two of you guys, the unions and the government. And then you're going to let them do their job.
to oversee the plan. And the plan is going to delegate authority to management. Yes, we're going to oversee strategy. Yes, we're going to oversee risk and all those things that a good, highly functioning board does. But we're going to hire a CEO, and we're going to delegate to that person. And that person will have the right to sub delegate. Now, that's kind of business 101. But that's not how pensions were run in the past, nor is it how
any of the US pension plans are run. All of the power rests with the board in the US, which are usually appointed by government. And so you get political agendas coming in and all of that stuff. What that did was basically free up management to start thinking outside the box. As I said before, traditionally in Canada, you're investing in government bonds.
That's what you were doing. All of a sudden, whoa, the doors are open, we could invest in equities, etc. And start to move from from that, the move into private equity, which is like the Toronto Maple Leafs, etc. was really driven at teachers by the fact that there were no funds in Canada to invest in. There were one or two private equity funds. Onyx was around. That was about it.
Hon. Erin OToole (19:14.917)
Thank you.
Jim Leech (19:17.55)
And so.
They said, well, why don't we just do it ourselves? And so they started doing it themselves. Funny story there, the very first investment they made, they lost every, they put, I don't know, 20, $30 million into a transaction in partnership with a Canadian bank and they lost all of it within weeks. And one would think that that might cause a board of directors to say, well, wait a second, we just drilled a dry hole. We're not playing this game anymore. And kudos to them.
that they said, no, no, what did we learn? What mistakes did we make? Let's carry on. And then, you know, teachers is now one of the largest private equity firms in the world and one of the most successful. And so, buoyed by kind of those successes, they just kept pushing the envelope and doing things the pension plans didn't normally do because they were being run like a business. And that got them into
the whole derivatives market was created in Canada by those pension plans looking for different ways to invest. The whole swap market was created. And as you say, infrastructure, we looked at it and said, there's this class of assets that doesn't give us the return of private equity, which is you're usually looking for around 20 % return.
But what they do give us is very steady, reliable, predictable cash flows that maybe when we first got into the business could give us 10 % returns. But they were reliable and lower risk. And so and they also had a component that grew with inflation or grew with GDP. So in a way they were
Jim Leech (21:14.414)
a like an index like a inflation index bond, but in on steroids. And that's what attracted us to infrastructure. And bingo, all of a sudden, that became a brand new asset class. We became the first pension plan in real estate. Up until then, yes, the real estate company might file an interest in a building here and an interest in a building there. What teachers did is
They said, to heck with that, we're going to buy all of Cadillac Fairview. So they bought the entire company and they had a full operating real estate company. And that was followed quickly by Omers buying Oxford and the Casey Depot buying a fund as well. So it, you know, it just kind of exploded. And then maybe they started to earn their reputation as being centers of innovation.
Hon. Erin OToole (22:00.837)
Eyes are closed.
Jim Leech (22:13.806)
And that allowed us to attract people from all across the spectrum. People who would have, you know, 10 years before said, you're gonna go work at a pension plan. I mean, pension plans were, you know, somewhere between dumb money and sleepy. Okay. All of a sudden, these pension plans became the leading investors around and the what's now referred to internationally as the Canadian model.
Hon. Erin OToole (22:29.893)
Thanks.
Jim Leech (22:43.534)
Chook off.
Hon. Erin OToole (22:44.285)
Yes, you would attract talent by innovating with these asset classes, but you also became a preferred partner to other, you know, general investors that were looking for limited partners. So people were bringing opportunities to the Canadian pension plans because of this reputation.
Jim Leech (23:06.158)
That's right. In our mission statement at the private equity area, the private investing area at Teachers, we had our vision was, quote, to be the first call. And that really meant we didn't, particularly in Canada, did not want a transaction to have gone on in Canada that we didn't have the first opportunity to invest.
Hon. Erin OToole (23:31.717)
Yeah, that's it. And that was a reputation that was earned by your success. Okay. Let's close the chapter on the, on teachers. You know, it's, it's, it's interesting teachers exited make -believe sports. Omer's got in. So there's a, there's a, there's a different maple eight player. if you look back from your time running teachers, what's an investment or a strategy that you're very proud of, of being a part of during your time that.
really help generate some strong returns for your teachers. My mom, Peggy, is an Ontario teacher, so there's so many families that rely on your fun. What's one, big or small, that you look back on with a lot of pride being involved with?
Jim Leech (24:17.87)
I think there's a couple. One is the whole move into private equity. When I went to teachers, they had started to dabble in it. And we made the decision that this is the breakout area for the next 10 years. And so I think when I first started running that, the portfolio was about a billion dollars. And when I stepped
into the CEO role, it was probably up to $30 billion. So it was, and we took it internationally. And that's where we caught everyone by surprise, because they weren't used to, the Americans weren't used to a pension plan, all of a sudden going toe to toe with the likes of, you know, KKR and the big boys in the industry. And we were playing in the big leagues.
And we had the talent base to do it. So it works. So I'm really proud of that. Secondly, I'd say some of the work that we did in emerging or developing markets, we pushed into Brazil, into Chile very early on in both largely in infrastructure, but also in
in private equity and public equities. And we were probably one of the first into South Africa. So, you know, we had footholds in Turkey. So there were a lot of very interesting strategies that we did, you know, risk contained, but exposure to markets that had the potential to really do well.
Hon. Erin OToole (26:05.157)
Yeah, geographic diversification on top of the asset class diversification. You've also done a lot for sustainable finance and especially with Queen's and you and I've talked about that, but we'll leave that for a separate conversation and we'll move on to this current debate that's underway because you know, there's a lot of industries, there's a lot of sectors of the economy that look at those assets, you know, the two trillion plus in the Maple 8.
and want to go back, kind of want to turn back the clock. You talked about under Paul Martin when the mandate of a certain level of investment in Canada was taken away, but most of the pension funds are still major, as you said, overweighted in Canada. This current debate that's underway, you and Mr. Lamoureux, several other very well regarded pension leaders and op -ed in
March in the Globe and Mail saying let's not meddle with the success that the model has, which is this independence. Talk about this debate and any concerns you might have of politics creeping back into the mandate of our public pension funds.
Jim Leech (27:22.542)
So the debate really has been fueled by some initiatives, a crusade, I'll call it, by a Canadian asset management group headquartered in Montreal called Let Go Brussels. They're the ones who have been pushing and making representations, et cetera. And it was kind of a quiet, you know, everybody knew what was going on. It's the guys in Montreal, you know, stirring the pot on it.
you know, they were somewhat dismissed because they're Canadian asset managers and yeah, it would be wonderful. They'd love to get a mandate from the Maple Eight to invest their money in Canada. And also if you, if you, you know, directed an extra $200 billion, $500 billion towards the Canadian public markets, that would do, you know, their holdings very well because there'd be more demand brought into the market.
So they were kind of dismissed on that level. What kind of raised it in profile was when they convinced 90 or so business people to take out an ad in the globe, basically parroting what they had been saying. And we started looking into it and there was a lot of misinformation. I talked to a number of those CEOs and they said, well, you know, let go Brasso says reminds us that
You know, all of these monies are really government monies because they're guaranteed by the government. And the answer was no, they're not. You know, first of all, CPP ID, there's no government money in it. It's employers and employees. And the government of Canada does not guarantee that pension. The teachers of Ontario, it's the same thing. The government doesn't guarantee these funds. It's not government money. Indeed, the fiduciary
responsibility lies with the board of directors of each of those organizations. And it is their fiduciary responsibility to make sure that there's enough money to pay pensions today and tomorrow forever. Because the idea of a pension plan is to give financial security to people who are past their earning years so that they don't become a burden on society in the future. They're self -sufficient.
Jim Leech (29:45.934)
and they can carry on and they can be contributing taxpayers, they can be contributing consumers in society as opposed to a burden on society. So we, a number of us, as you say, ex -CEOs, ex -chairs got together to write that note, an op -ed that said, this isn't the way to go. This, you've got something that's highly, that
for 30 years ago, 40 years ago was not working, is now working really well. It's recognized internationally as the best form of pension management. Like you would be dumb to play with that. And secondly, it's not your money. And what's the difference if it's in a pension plan versus in individual RRSP or other pots of money?
And I think the concern that we start we were feeling was number one, it seems like a fairly facile argument or discussion that one could easily say, well, that makes sense. There's two trillion dollars there. It should all come into Canada. But secondly, you've got governments at all levels who are strapped financially, and they're looking for, you know, pools of capital that they might draw in as opposed to
And here I don't want to be partisan, but as opposed to saying, well, let's just find new sources of, or instead of saying, let's, maybe we should cut back what we're doing or sell something that we own to pay for healthcare, as opposed to ever expanding, let's continue to draw in more money and eventually government controls everything. So I think, yeah, there's two things going on, kind of a self -interested group promoting something.
with a very facile argument and potentially government was looking at it and saying, wow, that's an answer to my prayers because I don't want to raise taxes. I'll go take it from the pensioners. And our message really was like, hands off guys, it's not your money and don't screw up a model that is working very well. And I say one other thing and I've said this and nobody's come back to me yet. I've thrown it out as a challenge and I said,
Jim Leech (32:15.854)
to people, name one pension appropriate investment opportunity in Canada that has gone lacking because it couldn't attract the capital. And nobody's been able to give me an answer. You know, sometimes people will say, well, you know, the pension plan should invest in the Ring of Fire in Ontario. Well, thank you very much. But that is totally unproven, totally
venture capital investment and to stick billions of dollars into that kind of vision at this stage? No. Pension plans aren't there to take the first risk. They're there to invest to protect the assets for the future for their pensioners. So I've yet to hear of an investment that is pension plan appropriate.
that has gone without capital. I think the second thing is that, and here we kind of get into Stephen Paulus' work, is that we shouldn't just be looking at the Canadian, you know, what's attractive for Canadian pension plans. We should be looking at what's attractive for foreign capital as well, because it's the same thing. Whether the dollar comes from a British pension plan or from a Canadian pension plan really shouldn't matter.
Hon. Erin OToole (33:43.973)
Yeah, well, that's great overview. And so there's a bit of a campaign drive by some self -interested folks, but also government strapped for cash and almost liking this debate. But it comes down to a robbing Peter to pay Paul. And I'll speak for a moment on why I have such concerns. In my 10 years in politics, I saw generally the parties on the left, like you might call the NDP and even some of the liberals,
you know, wanting to restrict investments in certain classes, period for Canada, especially maybe with some of the pension funds, whether it's hydrocarbons or, or other parts of nuclear or other parts of the economy. But on the right, I had even in my own caucus, you know, when CPTIB had an investment that was a controversial one in China, I had MPs from Western Canada wanting to ring fence CPTIB and say, no investment in these 10 geographies around the world. And if you start
letting all this politics creep back in very quickly, you'll have a whole range of ideologies, a whole range of other people's interests, clouding the fact that teachers or, or OMERS or any of these funds, their obligation is to their members and the members today and their members in the future. And gosh, there's two things on a global finance level that Canada is respected for.
and the ability to raise for exploration and resources were still known as the top destination for prospecting and developing. And the pension model, the Canadian model, why would you, and I've seen this around the world, the Canadian pension plans are extremely well regarded and many countries have emulated the governance and the professional management.
Jim Leech (35:25.39)
Heh.
Hon. Erin OToole (35:37.413)
and pension executives from Canada have gone out and run sovereign wealth funds and other pension plans. Why we would ever touch it is beyond me. But let me say one thing I do hear and get your take on this. I do hear from some folks in the sort of private equity, if we want to call it that, that the immense size of the Maple Eight and their private equity arms often kind of crowd out.
entrepreneurial capital, pure private sector, private equity, because the pension funds have become so big and dominant, it's hard to compete against them. Is there some, you know, fairness in that? And, you know, some people criticize how many people have been hired at CPPIB or the growth of the administration of these funds. Are any of these arguments I hear in the counterpoint fair in your view?
Jim Leech (36:33.166)
Let's talk about the last point first, hiring.
Jim Leech (36:42.894)
Ontario teachers, I keep going back to that, were really the leaders in this. They were the first group that said, maybe we can do this directly ourselves. And what they discovered is that they could do it on a very cost effective basis. They could do it cheaper than taking their money and giving it to KKR or giving it to Onyx or someone like that. That they could...
you know, a private equity, a private private equity firm, as you call, basically with their fee structure of charging 2 % of the assets plus 20 % of the profits. If they're successful, that represents somewhere around a 6 % per annum cost for that money. Okay, so as I said, we had $30 billion in private equity.
at 6%, you know, that gives me $1 .8 billion to spend. Okay. And I could build a team for a lot less than $1 .8 billion per annum that could do just as well. Thank you very much as KKR. Because we weren't we weren't hiring. We were hiring real professionals, we were attracting people off Wall Street, we were attracting them off Bay Street out of the banks, etc.
Because with that model, we were liberated to be able to meet compensation levels that were competitive in the marketplace. And so I don't think you can look at, well, you shouldn't look at how many people are at CPTPIB. What you need to look at is what's the cost per dollar administered. And I think you'll find it's far less than if you said,
Well, let's take CPP down to five people and we'll just farm all the investments out to professional managers and see what that fee structure will be. That's why in the US, they cannot tolerate having salaries because the guys, the people running CalPERS and CalSTRS, huge, enormous funds are all civil servants and they're paid on a civil service structure. Okay, they cannot get paid more than
Jim Leech (39:07.534)
$150 ,000 a year or something like that. So they basically farm, sorry.
Hon. Erin OToole (39:09.477)
So let me jump in there for a second because you're right. And from time to time, the compensation issue has been raised in the House of Commons with CPPIP. I remember Tom Mulcair used to love talking about it. And that's the politicization as well, because that independence and that independent oversight allowed for a competitive structure to be built. That's part of the Canadian model, right? We talked about the independence, but it's that ability to compensate
in line with the private sector that's allowing you to have the capital and allowing you to have the teams. I'm at for a second because you shrinking down CPPIB to five people, that sort of crazy analogy you use remind me a bit of the Andrew Coyne op -ed after CPPIB's results where he said, well, they could just invest in the TSX general listing and have better returns. I found that pretty flippant.
Jim Leech (40:04.462)
index funds, yeah.
Hon. Erin OToole (40:08.485)
for someone that should know better in terms of, you know, taking little snapshots of time and really looking at the need to diversify. Speak to that for a minute, because is it even fair to suggest schemes like this, shrink it down to a few administrators and then send it all out to the private sector? That's the opposite of the Canadian model, right?
Jim Leech (40:29.326)
Yes, that would be the CalPERS model. And interesting discussion I used to have with the chief investment officer at CalPERS was a friend of mine when I was at teachers and we used to compare, be it conferences or phone calls, et cetera. And we were 105 % funded in surplus by 5%. And he was
75 % funded. And I said, well, yeah, but that's not the worst of it. I said, in working out the funding ratio, what you do is you project your liabilities going forward, how much you're going to have to pay pensioners, and then you discount it back to today using a discount rate. And that's how it's done on a standard basis.
I said, what discount rate are you using? And he said, 9%, which is an assumption that you can earn nine plus costs. Let's call it 10 or 11 % forever and ever, ever amen. Ontario teachers at that time was using 3%. And I said to him, one of us is wrong. I said, both of us are wrong, probably. We're maybe too conservative. You're crazy.
Jim Leech (41:58.286)
But I like my hand a lot better than your hand. So there's a lot of math in all of these pension plan valuations and in their performance, et cetera. But the true honest way to do it is to say, what does it cost me per dollar of assets managed compared to doing it outside and take a
10 year period or a 10 year period and see if the investment results plus costs exceed the passive investment strategy. If they don't, then you should then you need to look at your structure and say, maybe we're not doing it right. I know that, for example, there are people would argue and I would tend to agree with them that there are some asset classes that have basically become
too efficient. There are no inefficiencies that you as an investor can exploit. So some people would suggest that US equity markets are maybe too efficient and a better way to play them is using ETFs or index funds of some sort as opposed to having a whole bunch of stock pickers on your staff.
But things like private equity, like infrastructure, like real estate, those things have, A, larger margins and, B, much greater inefficiencies that can be exploited. So you have to look at, you know, it's a balancing.
Hon. Erin OToole (43:40.965)
It's mounting and as you said earlier, you have to make sure you're having the plan funded amidst really challenging economic times, which I think we're going into a lower return long -term future because of demographic changes. And I learned from when I brought my private members will on unfunded pension liabilities in the private sector. And I got some input from you and Keith Ambashir and a number of other smart people that
The worst thing when you dissolve plans or liquidate is it's usually done at the bottom of the market. The plan and the bankruptcy is happening because of an economic recession. So if you can somehow get past that period, some of these plans would correct themselves as we've seen with General Motors and others that were in major deficits. But when there's a recovery, there's a reorganization internally.
You have to look at the long term and not snapshots like Mr. Coyne did. So let's turn on to the final discussion, which is the Stephen Paloes has been charged with looking at this debate. But the wider debate, I guess, is if we want CPTIB to go from 15 % to 25 % without mandating that, shouldn't we be looking at ways we can make Canada more investable? And aren't there other ways to improve our
our productivity or the investment climate here other than mandating pension funds. Do you have any thoughts on what Mr. Pelosi should look at or the wider debate Jim on what Canada can do to be more attractive to both the Maple Leap and CalPERS? We should want people investing and taking risks on Canada because it's a sign of confidence in Canada.
Jim Leech (45:30.99)
I agree with everything that you said. And I am encouraged that the wording in the budget actually was not, didn't track the wording from Letko -Praso, which was how do you effectively mandate pension plans, but rather I think the wording was something along the lines that he should work with the Canadian pension plans to see if there are opportunities to create.
more investment opportunities in Canada. That is something that everybody who signed that letter had been trying to do throughout our careers and even after retirement. It's how do we make Canada a very attractive place for not only Canadian pension plans, but as I said, international pools of capital to invest in. I mean, that's a win -win -win. So...
I start from the premise and I think people, your listeners should understand Canadian pension plans actually would prefer to invest in Canada for a couple reasons. One is they don't take any currency risk to the extent because all of our liabilities are in Canadian dollars, right? You're receiving your your mother's receiving her pension in Canadian dollars. If I'm investing in the United States, I'm taking a currency risk.
Secondly, we do have hometown advantage. We're big, we know what's going on in this country, we know everybody in this country. And so there is an advantage to us just playing on our home turf. Now, there are some reasons why you also need to diversify. Like it would not be wise to have everything in Canada because you've got...
You want to have diversification of demographics that you already spoke to. So you want to be invested, not in not all in a mature and maturing demographic, but also in some developing and emerging demographic. There are many industries that aren't in Canada. I mean, if I want to if I want to invest in banks, if I want to invest in mining companies.
Jim Leech (47:56.046)
if I want to, not just banks, financial institutions, Canada is a pretty good place. We got lots, our stock exchange is dominated by those things. But if I want high tech consumer products, other industries, I can't really find them in Canada. They're much more prevalent elsewhere, and they're much higher component of other public stock exchange indices. So
There is a reason to diversify away from Canada. But by and large, if I had a bridge in the United States and a bridge in Canada that had similar traffic patterns and all this stuff, I'd rather have that Canadian one for those reasons.
It is in everybody's interest to say how can we encourage how can we create investment opportunities for Canadian pension plans and as I say, foreign capital as well. I have been coming up with kind of four main ways to do it. What is we should you know, we've talked about it.
but we've never done it is really address inter -provincial trade barriers. I mean, it's one of the reasons why we don't have huge company champions coast to coast is because of inter -provincial trade barriers. And every study that I've read talks about it costing us at least 1 % of GDP, if not a little bit more. So I didn't know it's a politically hard decision, but you know.
it should be done. Secondly, I think the government own assets that they shouldn't necessarily own. Back in the days when governments were washing money, that was okay. But today when we have some crumbling infrastructure that they're responsible for, we've got a healthcare system under a duress, etc. They need to go back to basics.
Jim Leech (50:10.382)
and say that's what is more important for us to fix the health care system than it is to own booze distribution. Okay, so why own the LCBO? Why own roads that could be told? You know, I think the Ontario government made a huge mistake when it uploaded the responsibility for the Don Valley and the Gardiner.
from the city. That was a good thing. But the bad thing is they promised they would never be told. And that was just dumb. I mean, keep your options open. And why do you necessarily want to own them? So I think governments have got to go through that. And we can talk about airports. I mean, no other, most other countries in this world have airports that are as good or better than ours and they're privately owned.
Et cetera. And our pension plans actually have a lot of experience in that. We own a bunch of airports around the world. So that's the second one. Third one is and this is really important, is you need stable, predictable regulation. You can't have regulation. So an infrastructure asset is purchased by a pension plan because they want to own it for the long term. I said it has long term cash flows.
They want to own it for 10, 20, 30 years. They can never sell it because if it just clipping coupons. The problem is if the rules change halfway through, then they're kind of stuck. And we've seen it multiple times and they're all small cases. But when they add up, they create a reputation for our country internationally and with the pools of capital in the country.
that we are unreliable. So for example, one of the first infrastructure investments we made at teachers was in a company called Elta Link, which was the distribution, electrical distribution in Alberta. Within two years of us making the investment, the Alberta government changed how they would set regulated rates. And they basically said, if you are a pension plan, we are going to
Jim Leech (52:37.55)
give you 50 % of what you would give someone else. And like we took it to cabinet, we took it, we appealed it all the way up and say, are you guys crazy? And you know, we eventually sold. And we told the Alberta government at that time, it's the last time you'll ever see us investing in your province. Thank you very much. I mean, we had a half a billion dollars there. And you just changed the rules. We've seen it.
The McGinty government tried to change the rules on 407. Now they lost in the courts. And one might say that was a good thing because the court said, no, no, no, you can't abrogate this contract. That should give you reassurance. But the fact that they tried hurts. The Alberta government and the Ontario government, the Alberta government fooling around with the wind farms and...
and renewable energy that they've just put moratoriums on and stuff like that, half -built projects. They're sitting there half -built. And Ontario did it with the wind farms in Eastern Ontario, too, where projects were again three quarters built and they just stopped. And you might say, that's just a small little political decision. But aggregates, it suggests to people that we are unreliable.
Hon. Erin OToole (53:58.693)
sends the wrong message. So what's the fourth one? You said you had four and
Jim Leech (54:00.142)
We have an unreliable regulatory regime. Absolutely.
My fourth one is they've actually started to do this. And that is creating concessionary financing vehicles that can help de -risk some of the more high risk opportunities, particularly greenfield infrastructure. So pension plans like to buy what is called a brownfield infrastructure investment because it's
highway, a road, an airport, whatever that's been operating for a number of years. And you can get your analysts to do great big spreadsheets and say, you know, in 19 or in 2022, the revenue was this and we project in 2026, it'll be that and they got a nice model and they can say, okay, it's worth it. If it's a brand new airport or a brand new toll road, like you're not sure whether you build it, you know, our car is really going to go across it and how much of the toll is going to be and it's too many questions.
So there's the what what institutional investors, just because they're not built to take that type of risk, construction risk, right, you know, zoning risks, all of those stuff to build it. If if governments can provide concessionary financing to de -risk them, they can attract. And so kudos to the Canadian government creating the Canada Infrastructure Bank and kudos to Ontario.
who's now creating, I think it's called Build Ontario or something like that, that is to do exactly that, is to take on some of the risk of a brand new investment, which will attract others in. So those are my four things that I would suggest to Mr. Paulus.
Hon. Erin OToole (55:49.445)
Would the Canada Growth Fund be another example of that, you know, that de -risking that they have PSP, right? Okay, so final thing, let's go back to the Ring of Fire and we'll end on this. I'll ask you a question, because you say, yeah, somebody, I've been a big booster when I was in politics, the Ring of Fire for a whole range of reasons, but that's not the type of investment pension plans would make. But if there was a long -term power purchase agreement and at First Nations, we're going to build the transmission.
Jim Leech (55:54.126)
Yes, yep. Yep.
Hon. Erin OToole (56:17.893)
for to get power to the sites, whether it's from Manitoba or something else. And that power purchase agreement provided certainty that power will be purchased and the mines and all whole other things will be separate from that. That would be a way that there could be the environment for investment open up without mandating an investment. That type of infrastructure play would probably be something that attention on the woodwork.
Jim Leech (56:47.95)
Yeah, absolutely. And I mean, they look at the power purchase agreement and say, okay, what's the credit risk here? Who's the, who's the counterparty? Bah bah bah bah bah bah. And they can come up easily come up with a value for that. That's, that's kind of what I mean by Canada infrastructure bank and build Ontario doing those sorts of helping with those sorts of things. Yeah, they are.
Hon. Erin OToole (57:10.373)
So there's a lot of way.
Jim Leech (57:15.502)
every CEO of the Maple 8 that I've talked to would love to be investing more in Canada in large projects. They can't invest in the little things. They're just too big. It's not economic for them. A number of them have seeded outside organizations to do small things. So teachers...
there was a private equity firm, there is a private equity firm called Torquest that we gave money to and said, you handle transactions less than 100 million. Somebody phones Ontario teachers says I have this deal for $50 million. We say go phone Torquest. And so we looked after them. And same with CPPIB. They did it with Northleaf, I think, and other groups like that.
So that's how we looked after the, you know, try to keep our fingers in the little smaller market. But by and large, if you want the heft of those pension plans and the $2 trillion, they need to be substantial projects.
Hon. Erin OToole (58:24.197)
Outstanding. Well, and as you said, whether Torquest or others, you're helping the wider ecosystem of finance in Canada with the expertise that the Canadian model and the Maple Eight, the Maple 12 has established. Look, this has been fascinating, Jim. You know, there were some people might think that discussion on pensions, as you said, would be dry or working for a pension fund would be like insurance would be boring.
There's innovation here, there's excellence. And one of the areas where Canadians can actually chest up a little bit about establishing something that not only has generated wealth and opportunities, but has provided pension income security for millions of Canadians, including CPPIB, all Canadians with case for Quebec. So these conversations are not boring, they're critically important. And I'm going to send this podcast to Stephen Paloes and I really
In an essay I wrote on him, I called him Obi -Wan Kalos because we need him to be the wise Jedi to make sure we get through this debate without messing with a system that is working very well for Canadians. And your leadership, Jim, is a big part of that. So thank you very much for talking with us today on Blue skies.
Jim Leech (59:44.878)
Super, thank you very much, Erin. Good luck.
Hon. Erin OToole (59:45.765)
And thank you for tuning in. That was a Blue Sky podcast on the current pension debate. Stephen Palo has been tasked in the last budget to work with industry and work with the government on ways that we can look at Canada being more attractive for investment. If you have any comments on this podcast, reach out, aeronautool .ca or through social media. Thanks for blue sky and this important topic with us today.