Canadian pension funds’ pioneering strategy of investing big abroad is set to survive a government inquiry sparked by pushback from local business leaders who want the industry to inject more capital into domestic assets. 

But the clash underscores the tussle between public and private sectors unfolding in several countries worldwide over where deep pools of retirement savings should be invested amid global competition for institutional capital and pension funds’ rise as a conduit of FDI. 

In March, 92 Canadian business leaders signed an open letter urging the government to find ways to make the country’s pension funds invest more at home. The government has responded by launching a working group which is investigating how to catalyse domestic investment opportunities for the industry in the likes of infrastructure, buildings and start-ups. 

“Government has the right, responsibility, and obligation to regulate how this savings regime operates,” states the open letter which was spearheaded by Montreal-based investment firm Letko Brosseau. It also describes the re-evaluation of pensions’ investment model as a “national priority”.

But the man leading the government review, former Bank of Canada governor Stephen Poloz, is calming fears that the country’s public pension funds (PPF) — which invest 73% of their portfolio overseas, according to data provider Global SWF — will dial back their international focus.

“I don't expect a major change for this,” Mr Poloz, now a special advisor at law firm Osler, tells fDi. “The main question here [is], should there be rules that keep investment domestic? We’re trying to avoid that whole discussion by instead working out what are the barriers [to investing domestically], and if we can remove them as opposed to coercing investment.”

Rather than “a major legislative effort”, he is focused on “concrete and actionable ideas … that the government can do in a fairly short time-frame”. Possible solutions raised by commentators include more public private partnerships and improved tax incentives to improve local firms’ attractiveness as investment targets. 

The working group expects to issue its recommendations this summer.

A global tussle

Canada’s PPFs had $1.8tn in assets under management (AUM) as at June 2024, according to Global SWF, making it the world’s third biggest source of public retirement savings after the US and Japan. 

The country has led the global industry’s move over the past two decades to invest more overseas to minimise risk and maximise retirement income for members. Compared with Canada’s 73% foreign allocation, the only other PPF industries to invest a bigger proportion of AUM abroad are Finland (77%) and Sweden (75%), where domestic investment is constrained by their comparatively small economies.  

More on institutional capital:

• Labour's proposed SWF to be funded by oil windfall tax and debt
• Sovereign investors are the new conduits of FDI
• Opinion | Sovereign wealth funds and foreign investors still need each other

Canadian funds’ reputation as internationally-focused investors means their clash with the business community has brought the topic of pension funds’ market biases into the “mainstream”, says Mr Poloz. But in some European countries this tension between governments, businesses and the pension industry has existed for decades.

“There has been quite a lively debate over the past year to 18 months about the role of UK pension funds investing in the UK,” says Joe Dabrowski, deputy director of policy at the UK Pensions and Lifetime Savings Association. The recently ousted Conservative government was exploring how UK pension funds could boost the ailing London Stock Exchange. It also proposed industry targets for investing in levelling-up infrastructure and sought rules requiring funds to disclose how much they invested domestically.

In April, Germany’s finance minister Christian Lindner called on the country’s pension funds to invest more domestically. Back in 2011, Poland’s government was ordered by the EU’s top court to scrap its caps on pension funds’ investments abroad. 

While channelling local retirement savings into domestic growth may make political and economic sense, “pension funds do not want to be forced into specific investments”, says Matti Leppälä, secretary general of PensionsEurope. 

Former executives of Canada’s biggest pension funds warned in a national newspaper op-ed against meddling with the country’s retirement model. A spokesperson from the US National Conference on Public Employee Retirement Systems says: “In Canada, the push to require funds to invest more domestically adds unnecessary risk.” 

The tussle over where pension funds invest is not one-way traffic, however. Diego López, Global SWF’s managing director, notes that in South Korea there are calls for its biggest pension fund NPS to invest more overseas to enhance returns. 

But in Europe and Canada where “government coffers are more threadbare than they’d like”, Mr Dabrowski says officials are realising the capital they are seeking is in institutional money. “How to encourage, provoke or ultimately compel [investment] are some of the questions going around in these debates,” he says.

Do you want more FDI stories delivered directly to your inbox? Subscribe to our newsletters.