U.S. Pensions Aim to Be More Like Canadian Funds

American pension plans are modeling their funds off northern peers like the Ontario Teachers’ Pension Plan, according to Cerulli Associates.


The “Canadian Model” is coming to the U.S.

New research from Cerulli Associates suggests that American pension funds are striving to become more like their northern counterparts, such as Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan.

“There are best practices to be learned from Canadian plans, which today are considered among the most sophisticated investors in the world,” Chris Mason, senior analyst at Cerulli, said in the research report released Tuesday. He said the largest Canadian pensions tended to exhibit three distinct characteristics: “an emphasis on cost savings, a well-diversified investment portfolio, and a large appetite for illiquid alternative investments,” such as infrastructure and real estate.

Large asset owners are insourcing more of their investments, a cost-saving technique and key component of the “Canadian Model,” according to Cerulli. The insourcing trend is large enough that 43 percent of investment consultants interviewed by the research firm voiced concerns about losing business due to large investors bringing asset management in-house.

“As with institutions around the world, U.S. pension plans, particularly public plans, are taking a few pages where they can from the Canadian model,” Mason said.

At the end of December, OTPP had earned five- and ten-year returns of 10.5 percent and 7.3 percent, respectively, besting its internal benchmark. Similarly, CPPIB reported five- and ten-year returns of 10.6 percent and 6.8 percent as of March 2016. Both funds have more than doubled their assets under management since 2008.

While Canadian plan sponsors “view their in-house teams as valued investment professionals, and compensate them accordingly,” most chief investment officers at U.S. pensions receive much lower compensation than what they could earn at an asset manager, according to Cerulli. Furthermore, “much leaner” staffs make it more difficult for most U.S. funds to avoid reliance on third-party managers, the firm said in the report.

Among smaller pensions, Cerulli found that plan sponsors were less likely to adopt the “Canada Model” – and more likely to hire an outsourced-CIO due to lack of internal resources. Outsourced assets measured nearly $1.3 trillion in the first quarter of 2016, having more than doubled since 2011, when OCIO providers managed $600 billion. Over the next five years, Cerulli projects the outsourced assets under management will increase to nearly $2 trillion.