Rachel Reeves targets Canada-style pension model for UK

Chancellor Rachel Reeves wants to use Canada’s pension fund model as a template for the Local Government Pension Scheme (LGPS).

Reeves met with Canadian pension plans in Toronto on the 7th August with the aim of encouraging them to keep investing in the UK, as well as understanding how scale can help drive greater domestic investment.

In a statement ahead of the meeting, she said: “The size of Canadian pension schemes means they can invest far more in productive assets like vital infrastructure than ours do.

“I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment.

“We’re already beginning to see schemes announce plans to invest. That’s a vote of confidence in our work to fix the foundations of the economy, rebuild Britain and make every part of our country better off.”

The chancellor was meeting with representatives of the so-called “Maple Eight”, the largest pension funds in Canada. Between them, these eight schemes manage more than £570 billion in assets.

The initial focus of the Pensions Review, announced last month, is on consolidation and investing in UK assets. The chancellor specifically cited “fragmentation and waste” within the LGPS as a core concern, hinting at further pooling and other forms of consolidation.

Reeves also wants to encourage greater investment in UK growth assets, such as private equity and infrastructure. The LGPS has already invested substantially in local and UK assets at the individual fund level and through the pools, but the chancellor is clear that she expects more.

Pension funds such as the Ontario Municipal Employees Retirement System and the Canada Pension Plan Investment Board have made significant investments in the UK in recent years, buying up stakes in infrastructure companies and real estate.

Canadian domestic investment shrinking?
Turning to Canada’s biggest pension funds comes at an interesting time for these institutions, as they are also under pressure for a perceived lack of investment in their domestic economy – and are actively opposed to government pressure over investment decisions.

In an open letter to regional and national finance ministers sent in March, 92 Canadian business leaders claimed that the country’s biggest pension funds invested more in China than they did in their own economy.

The letter reported that allocations to listed domestic businesses had fallen from 28% of total assets in 2000 to just 4% at the end of 2023 – similar figures to those quoted for UK pension funds’ domestic allocations.

“Pension funds should not fear but rather embrace with enthusiasm the challenge of investing in Canada,” the letter stated. “The positive impact these investments have on their members’ incomes and development should not be ignored.

“Without government sponsorship and considerable tax assistance, pension funds would not exist. Government has the right, responsibility, and obligation to regulate how this savings regime operates.”

Canadian pension plans hit back strongly at the idea of mandated domestic investment. A report from Ion Analytics in June quoted the head of communications at Canada Pension Plan Investment Board – the country’s biggest fund as saying: “Pension contributions exist for one reason and that is to pay pension benefits, not to serve some misguided economic engineering that is as problematic as it is counterproductive.”

Former Canadian pension fund leaders wrote in response to the open letter that the country “leads the world in pension investing”, in part through independence and strong governance.

Their article, published in The Global and Mail in March, put domestic allocations at between 10% and 30% of assets depending on the individual fund, when including real estate, infrastructure and private assets.

“More compelling opportunities at home would be welcome, should the business climate, policy certainty, taxes and other investment factors strike the right balance of risk and return,” they wrote.

Maple Eight model not the only part of the answer
Richard Tomlinson, chief investment officer at Local Pensions Partnership Investments (LPPI), one of the LGPS pools, said the Canadian model was “a strong starting point to unlock the enormous potential within the LGPS”, in part by mirroring Canadian funds’ asset allocation, which heavily favours private markets.

“However, if the chancellor is serious about increasing the flow of pension fund capital to the UK more broadly, we must also see a concerted effort to break down barriers to investment,” Tomlinson added. “Currently, execution and regulatory risks all too often slow down or deter investors.

“The government needs to continue on its path to planning reform and consider formal incentives to encourage investment in assets that help pension funds deliver on their primary fiduciary responsibilities to members.”

Tomlinson said further consolidation within the LGPS could “help remove needless layers of decision-making and allow investment managers to be more agile”.

“With 100% of our client’s funds pooled, we see this in microcosm at LPPI with above-LGPS-average returns,” he said. “Replicated across the LGPS, greater pooling of funds could deliver better returns for both UK plc and pension savers alike.”

Jon Dean, head of retirement strategy at Altus Consulting, supported the creation of a Canadian-style LGPS “single superfund”, but warned that such a move would not be easy.

“The success of the Maple Eight model has been attributed to having sufficient scale to justify running the portfolio in-house to manage down costs,” he said. “Scale means the fund can create dedicated research and portfolio management teams for each asset class, rather than deploy generalists and hire investment consultants.”

Dean added that a scaled-up superfund would have improved access to investment opportunities in private markets and illiquid asset classes, and could take controlling stakes in some assets.

“A UK LGPS superfund has the potential to unlock all of these benefits, if thoughtfully designed and well executed,” he said. “That said, there is no guarantee that it would invest more in UK PLC. As we can see from Canada’s example, they spread their bets across the globe, and trustees must be mindful first and foremost to manage the fund in the best interests of the members.”