What does this have to do with employer-sponsored pension funds? Well, a lot, say some market analysts and practitioners. Research attesting to intractable barriers to financing in the current Canadian economic context has raised business concern about a possible "disconnect" between productive investment demand, on the one hand, and optimal allocation of capital resources, on the other.
Historically, most aggregate pension asset allocations in Canada have eluded entrepreneurs and s for the simple reason that the latter represent a much higher level of cost, illiquidity and risk than other types of investment. This situation is something of a quandary: here we have one of Canada's largest capital pools disinclined to supply new and developing business that is not only potentially prosperous, but that also offers the potential collateral benefits of future jobs, income and living standards to Canadians.
Many in Canada's business constituency believe this must change. Indeed, some might likely echo the voice of American business management professor Peter Drucker, who was one of the very first to argue that the legal and fiduciary policy restrictions governing pension investment had to be reformed to help them address key economic challenges in the United States and elsewhere. Today, Drucker continues to maintain that pension investment decisions function on too narrow a definition of risk and is inordinately pre-occupied with liquidity and short-term returns. Instead, he says, pension funds should concentrate more on the long-term, wealth-producing capacity of a national economy.Endnote 3
The "Drucker thesis" has several strong proponents in Canada, especially in the business constituency. An important example is seen in the above-quoted Focus 2000 Task Force Report on Making Investment Capital Available, issued by the Chamber in the late 1980s.
In Focus 2000, Chamber representatives were concerned about the limited engagement of Canadian pension funds in SME financing of all kinds and, in particular, as a source of supply to the then fledgling venture capital market. To rectify this situation, new incentives were recommended to support the equity participation of funds as well as a target of five percent of total pension assets to venture financing.
Interestingly, the Focus 2000 report was published at a time when pension funds were close to doubling their commitments to the institutional venture capital market, predominantly through indirect, externally-managed pooling vehicles (e.g., limited partnerships). At the beginning of the 1990s, many funds and other institutional investors moved to reduce their commitments or to withdraw from this and other private capital markets altogether. In other words, Canadian pension funds are further away from the Chamber of Commerce's objective today than they were a decade ago.
For the most part, unions whose members belong to workplace pension plans have little to say about how the pension funds are invested. Funds are used to buy stocks and bonds and few questions are asked about the securities that are bought except what rate of return should be expected. This state of affairs has been questioned by trade unionists from a number of perspectives.
- Canadian Labour Congress, 1998
Our bottom line is that pension fund money is plan member money - deferred wages - and it is the plan members that must decide how best to use their money. We believe that our pension funds can and should be used to help our communities and the economy.
- Darcie Beggs, Canadian Union of Public Employees, 1993
Given the great need for investment capital, there can be no restructuring of the (Canadian) economy that does not include a role for pension funds.
- United Steelworkers of America, 1991