Canadian employer-sponsored or occupational pension funds are a cornerstone in the nation’s system of providing guaranteed income to working people and their families in retirement. With a total asset base of over $500 billion (i.e., the dominant fraction that is trusted) in 1998, these funds form the most sizeable portion of a system that also consists of federal and provincial income security programs, the Canada and Quebec Pension Plans and registered retirement savings plans.
Employer-sponsored pension funds are based on the deferred wages and benefits of employees. These comprise plan assets that are held in trust for the sole interest of plan members who are both participants and beneficiaries. Trustees are responsible for plan administration, policy-making and oversight of asset allocations and management which, if performed prudently and efficiently over time, will augment the value of worker savings for retirement. This is a fundamental and legally sanctioned mandate. It cannot be ignored, bypassed or subordinated to any other goal. Nor can it be changed lightly by legislators, trustees and other fiduciaries or any other stakeholders in business, labour or government.
To ensure the “pension promise”, fiduciaries are expected to govern their fund organizations with care and diligence and to avail themselves of the skills and experience of professionals in making informed decisions. Moreover, every investment decision and action must be transparent and measured against the prudent person rule embodied in Canadian law. Consistent with this and other fiduciary imperatives, such as balancing assets with liabilities over an appropriate time line, the lion’s share of pension money tends to flow to such relatively safe and liquid asset classes as public stocks, fixed income and cash.
Pension funds are also financial institutions. As predicted by American academic Peter Drucker (The Unseen Revolution, 1976) and other observers decades ago, such funds have accumulated assets at such a rapid pace that they have, in a short time, emerged as an overwhelming presence in the capital markets of advanced industrialized economies around the world. In Canada, pension funds have expanded by seventy-five times their recorded size in the mid-1960s. As a consequence, today, they make up this country’s second largest pool of capital resources, after the banks. In national public securities exchanges, pension funds perhaps wield their greatest clout as the owners of close to 40 percent of corporate equity.
In other words, while employer-sponsored pension funds are essentially an instrument of Canadian social policy — giving them legal and fiduciary roles and obligations that set them apart from the rest of the financial system — they are also potent institutional investors. Furthermore, they have increasingly deep roots in a diverse number of private and public capital markets. They are inevitably a vital force in the national economy.
These increasingly large and influential funds also cannot help but register an impact, one way or the other, on Canada’s ability to convert savings into productive investment and capital formation that, in turn, produces economic output, jobs and incomes. Indeed, as they grow, individually and collectively, their real and potential impact on economic outcomes grows commensurably. This is most apparent in the very largest private and public sector pension funds that are compelled always to seek new sources of investment diversification by which they can maximize financial returns, according to conventional risk-reward analysis.
On this journey, pension investment may generate what economists refer to as “collateral benefits”, or effects in the Canadian economy or society that are ancillary to the primary aim of obtaining optimal earnings performance. In the majority of instances, collateral benefits emerge incidentally, meaning that while pension funds have allocated assets solely in the pursuit of financial returns, they have inadvertently created non-financial ones. These can include growth, jobs or local development, among other social goods, and can be elicited due to pension participation in multiple capital markets and market segments. Of course, being incidental doesn’t make benefits any less valuable.