Research Insights

The Canadian Pension Fund Model: A Quantitative Portrait

Alexander D. Beath, Sebastian Betermier, Chris Flynn, and Quentin Spehner

March 2021

This original CEM research was published in the March 2021 edition of the Journal of Portfolio Management (JPM). If you subscribe to the JPM you can access the article here. If you don’t, but want to get a copy of the reprint, there is a chance we can get a copy for you in the future. Please, express your interest by filling out this form.

ABSTRACT

This article presents a quantitative portrait of the Canadian pension fund model. The authors show that, between 2004 and 2018, Canadian pension funds outperformed their international peers in terms of both asset performance and liability hedging. A central factor driving this success is the implementation of a three-pillar business model that consists of (1) managing assets in-house to reduce costs, (2) redeploying resources to internal investment teams for each asset class, and (3) channeling capital toward growth assets that increase portfolio efficiency and hedge liability risks. This model works best for funds whose pension liabilities are indexed to inflation.

KEY FINDINGS

From 2004 to 2018, Canada’s pension funds outperformed their peers in terms of investment performance and insurance against liability risks.

The Canadian model is cost efficient, not low cost. Canadian funds reduce costs by man¬aging assets in-house and then redeploy resources by growing their internal capabilities and allocating more capital to strategic assets.

The Canadian model works best for funds whose pension liabilities are indexed to inflation.

TOPICS

Pension funds, portfolio theory, risk management, performance measurement

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