With pandemic lockdowns crushing the private sector, it’s obviously time to launch an ambitious redesign of our economy. Or so they tell us. And “they” are not just the architects of the Great Reset whose plans, we noted last week, offer a strange mix of cosmic ambition and predictable futility. But “they” also includes those who keep insisting, against all evidence, that there are vast commercial opportunities in this new economy. If that were true it would mean we don’t need sweeping government intervention, just the same old profit motive and efficient capital markets. Unfortunately neither profits nor efficient capital markets seem to enter the picture. Yahoo! Finance just noted that “The chief executive officers of eight Canadian pension funds, collectively representing about $1.6 trillion in assets under management, are calling for a green recovery from the COVID-19 economic slump.” But every single one of those massive funds is… a government agency gambling with other people’s money. Every one.
We’re talking state capitalism not the private kind because the CEOs who signed the letter in question run “AIMCo, BCI, Caisse de dépôt et placement du Québec, CPP Investments, HOOPP, OMERS, Ontario Teachers’ Pension Plan, and PSP Investments.” All stuffed with public-sector money and insulated by government guarantees from the cost of any failed investment in magic beans. Unlike, say, taxpayers.
In case some of those pension funds are not familiar to you, HOOPP is the “Healthcare of Ontario Pension Plan (HOOPP)” whose website boasts that “As one of Canada’s largest defined benefit pension plans, we are dedicated to providing retirement security to more than 380,000 healthcare workers in Ontario.” As for AIMCo, aka “Alberta Investment Management Corporation”, its website touts first “New Commitments to Diversity & Inclusion” then “Investors Collaborate on Climate Change Mitigation”. Not return on equity. So you’re not astonished to learn from their 2019 Annual Report that they call themselves “Alberta’s investment manager” and that their shareholder, in the singular, is… “the Government of Alberta”. Or that they are “a non-profit, crown corporation responsible for investing on behalf of most of Alberta’s public sector employees and, through the Heritage Fund, on behalf of all Albertans.”
Shall we continue? Let’s. Sure enough, BCI is the “British Columbia Investment Management Corporation” aka “The Investment Manager of Choice for British Columbia’s Public Sector”. Obviously the Caisse de depot is a branch of the Quebec government. It claims its clients are “41 depositor groups. Most are pension plans and public and parapublic insurance plans which, together, pay out benefits to more than two million Quebecers each year.” But of course its real client is the government of Quebec, which appoints the Board of Directors and mandates the Caisse to generate money for the government’s pension plans “while at the same time contributing to Quebec’s economic development” in, you understand, an independent manner.
Where are we? Ah yes, CPP Investments, whose name speaks for itself, though we might add that it is “one of the world’s largest investors in private equity”. So it is not your grandfather’s capitalism we’re seeing here.
Then there’s OMERS, the Ontario Municipal Employees Retirement System, a branch of the Ontario government that, Wikipedia notes, “has become one of the largest institutional investors in Canada”. And as its own website notes, it runs a “defined benefit pension plan” so if the market returns aren’t there, well, the government will come to the rescue with however many billions are needed.
We don’t have to tell you that the Ontario Teachers’ Pension Plan is another of these parastatal behemoths. But we should mention that PSP Investments is… yes… the “Public Sector Pension Investment Board”, a branch of the federal government that is also “one of Canada’s largest pension investment managers” and once again oversees defined-benefit plans.
We dwell on the “defined-benefit” aspect here because it is vital to understand that these outfits are free to gamble with other people’s money for two vital reasons. First, by law their beneficiaries get paid whether the investments work out or not. And second and related, they are free from the sort of scrutiny normal investment firms face from clients concerned about losing their savings if the fund bets heavily on trendy exotic ideas because their clients are not those whose pensions they manage but governments that can just raise taxes, borrow against other people’s assets or, for the federal government, print the stuff to make up for any failure to find a pot of gold at the end of the green rainbow.
This consideration deserves emphasis because when you hear “institutional investors” you might well be inclined to think, well, if sober money managers taking care of Canadians’ hard-won savings are into this stuff it must not be trendy or exotic. Green must be blue chip. But no. It’s just more of the public-sector song and dance you pay for whether you like it or not.
Except for one nasty thing: The bigger they are the harder they fall. Especially now, with public sector balance sheets a soggy red mess, if one or more of these major holders of often badly underfunded public-sector pension assets should bet the wind farm on something that goes thud, as alternative energy generally does, it may not be possible for the government or governments in question to find the tens or hundreds of billions of dollars needed to make up the losses. (The CPP, the Chief Actuary of Canada has said, must earn a real rate of return of 4% for 75 years to cover projected payouts. Good luck with that mate. And as Andrew Coyne has been tireless in exposing, what was once a small outfit pursuing a “Wealthy Barber” plan of passive investment with 164 employees and administrative costs of $118 million has since 2006 become a bloated behemoth whose 1,661-strong host of managers costing $3.3 billion a year pursue risky ventures around the world. So they’re riding the gravy train even if we’re not.)
There is this meme out there that big companies are extra-right-wing entities that send lavish cheques to deniers and oppose regulation. But it’s not true. Like GM, which just switched from Trump’s position on California’s strict new emissions to Biden’s, many are smooth operators convinced they can game the system. They may find, as carmakers in Europe are already finding, that feeding the crocodile in the hope of being eaten last is just exactly as bad an idea as it sounds. But in any case private companies no longer dominate financial markets. Public and parapublic entities do.
As a result, the only meaningful shareholder revolt possible here is that of citizens. And just imagine trying to make OMERS’ investment strategy a key election issue. But it matters, because that CEOs’ letter is full of trendy verbiage like “The pandemic and other tragic events of 2020 have revealed pre-existing business strengths and shortcomings with respect to social inequity, including systemic racism and environmental threats.” And so all your chips, as a taxpayer and as a retired or even current public employee, are on the notion that a Great Reset is a fiscal winner.