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Delivering secure retirement - lessons from Canada

Fiona Stewart's picture


How does my pension fund invest my money? More and more people around the world are asking this question. As the global population ages, it has becoming increasingly important to ensure that pension funds are efficiently and effectively managed so they can deliver a secure income in retirement.
 
At the same time, countries require more investment in productive areas such as infrastructure, housing and new businesses to continue to grow. Pension funds can provide that long-term domestic capital that countries desperately need for investment in these areas. 

Globally, pension funds have some US$38 trillion in assets under management; the world’s 300 largest pension funds manage around $16 trillion. This ranges from the Government Pension Investment Fund (GPIF) in Japan -- the largest pension fund in the world with $1.3 trillion in assets -- to funds such as the Government Institutions Pension Fund (GIPF) in Namibia which, though smaller in absolute terms (owning $7 billion), constitutes almost 70% of domestic Namibian GDP.

 Yet the majority of pension savings continue to be invested in short-term deposits or government bonds. As the OECD statistics show, this is particularly true for developing economies, where long-term capital is most needed. 
 
Public pension funds, which manage reserves for public pension systems and civil service schemes, frequently have particularly poorly diversified portfolios. However, there are public pension funds that have combined strong performance with investment in the real economy, which has furthered economic development and growth.
 
Canada’s pension funds are a leading example of long-term, impact investors.  Canadians have used their scale to develop in-house investments skills or worked with specialist external managers to rebuild their sustainability, diversify their portfolios, actively focus on risks and deliver the investment returns which enable them to pay secure pensions.
 
However, this was not always the case, and the starting point of the Canadian funds 20 or so years ago will be far more familiar to funds in developing economies than one might expect. Issues which had to be tackled included:

  • Problems with poor governance and political interference;
  • Lack of investment expertise, or indeed investment departments at all;
  • Investment required in non-marketable government securities;
  • Lack of scale to drive down costs and free up resources for areas where investment was sorely needed; and
  • Outdated administration systems that struggled to keep up with the demands of the funds and at times led to very large errors.
Canada’s example showcases how to start the journey from a ‘pre-reform’ entity through stages of progressively higher performance as funds build solid foundations; develop independence, professionalism, and strong governance; and eventually became the mature, sophisticated entities they are today in Canada.

This journey has been documented in a new report, “The Evolution of the Canadian Pension Model: Practical Lessons for Building World-class Pension Organizations,” produced by the World Bank Group in conjunction with these funds.
 
We are also working with other leading schemes around the world to showcase examples of well-managed funds – not just in Canada. While their paths may be different, and they may be at different points in the journey and have delivered for their members in different ways, the messages are clear:
  • Good governance is key to ensure that public pension funds can make productive investments in the real economy and successfully deliver secure retirement incomes; 
  • Independent investment decision-making is essential, with a focus on long-term goals not short-term political interests, and active risk management. 
Why do we at the World Bank Group think that these lessons are important? Because of our focus on eradicating poverty and boosting shared prosperity in a sustainable way. Pension funds have an obvious and direct role to play ensuring that people have an income in old age. Our strategic aim is to support greater coverage of good quality pension programs.
 
We also help bridge private capital and development. Our maximizing-finance-for- development approach encourages private sector participation, while leveraging and preserving scarce public dollars for critical public investments. Today, there is a greater focus not only in international development community but also amongst major investors on how to attract private capital flows to support sustainable growth and reach the Sustainable Development Goals. 
 
We are working with institutional investors in countries such as Brazil, Kenya, Indonesia, Peru, and South Africa to help structure infrastructure investments which crowd-in the local currency financing which they can provide, while providing the risk-return profile the members of these funds need. 
 
In the coming months, we will be documenting the story of public pension funds from Asia, Europe and North America. Each study will provide practical lessons that can be applied by other emerging economies with large pools of domestic long-term capital available in their pension funds and with substantial development needs.
 
Our goal is that in years to come, everyone who asks ‘how does my pension fund invest my money?’ can proudly answer ‘for my future and the good of society.”