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In 1998, the total asset base of Canadian employer-sponsored pension funds was well over $500 billion (trusteed, not including CPP/QPP). This reflects a better-than-doubling of total assets from $204 billion in 1990. Pension asset growth is due to increasing public equity exposure and continuing "restructuring" whereby public sector funds become trusteed and/or expand their capital market participation.

In 1998, employer-sponsored pension funds were the second largest capital pool in Canada after the banks (over $1.2 trillion). Total pension assets should exceed $600 billion by 2000 or shortly thereafter.

The largest twenty pension funds reflect 57 percent of total assets, the ten largest, 44 percent and the top three (Ontario Teachers Pension Plan Board (PPB), the Government and Public Employees Retirement Plan of Quebec and the Ontario Municipal Employees Retirement System (OMERS)), 28 percent (1997).

The above data suggest the increasing investment power of Canada’s public sector pension funds. This is also seen in more money management institutions like the $64 Caisse de dépôt et placement du Québec. For example, public sector funds in Alberta and British Columbia (BC) have been comparably aggregated for investment purposes under (respectively) the $33 billion Investment Management Division (IMD) of the Alberta Treasury and the $52 billion Office of the Chief Investment Officer (OCIO) of the BC government.

In a short time, pension funds have become major receptacles of national savings on which Canada relies to finance job-creating, productive investment. Also, qualities of pension funds, such as long time horizons, dispose them to patient investing that fosters economic change through new business formations, small business growth and emerging high technology industries. On the other hand, activity such as term lending and venture financing imply high costs and risks that can impede pension participation.

The CLMPC (now the Canadian Labour and Business Centre) investigated the role of pension funds in two key private capital markets - institutional venture capital and the middle market - as well as the low-capitalization end of public securities exchanges. The CLMPC also looked at pension participation in real estate and infrastructure investing.

Pension participation in Canada’s $8 billion venture capital market is limited. In fact, outside of BC and Quebec, it is reduced from levels achieved in the 1980s. In 1997, pension funds contributed 16 percent of total new capital commitments. By contrast, pension funds in the United States have been responsible for close to 50 percent of venture capital supply. In Australia, the level is 62 percent.

1997 was a turning-point in pension participation as new capital commitments climbed from the previous average of 5 percent per year in the 1990s. Market veterans such as the Caisse de dépôt, the Hospitals of Ontario Pension Plan (HOOPP) and OMERS have been joined by such new entrants as BC funds (OCIO) and Ontario Teachers PPB. Unlike the 1980s, much new pension participation emphasizes neglected, higher-risk activity, such as seedings, start-ups and early stage developments.

The CLMPC estimates that current pension supply to venture investing totaled $900 million to $1 billion in 1998 (or approximately 0.2 percent of total assets).

Canada’s middle market (i.e., merchant banking that meets demand from medium-sized and larger firms in traditional manufacturing and service sectors, many of which are restructuring or facing severe competitive pressures) grew significantly in the 1990s. Large public sector pension funds have been especially formative in this development. This includes the in-house private placement programs of the Caisse de dépôt, OMERS and Ontario Teachers PPB, while HOOPP, Alberta funds (IMD) and BC funds (OCIO) are top suppliers of limited partnerships.

Pension participation takes the form of non-venture equity, mezzanine financing and intermediate/long-term loans extended to business "events" of all kinds (e.g., expansions, mergers and acquisitions, leveraged buy-outs (LBOs)). Some funds prefer size-able deals (i.e., $50-100 million and above), while others invest at the market’s lower end (i.e., below $50 million) and in niche activity (e.g., mezzanine financing, certain "events", such as LBOs).

The CLMPC estimates that current pension supply to Canadian middle market investing totaled $4-5 billion in 1998 (or approximately 1.0 percent of total assets).

Investing in small-cap stocks (i.e., less than $1 billion) permits newly-listed firms to continue growing on public exchanges. In the United States, this process has led to changes in the industrial mix of blue chips – in 1998, one-fifth of the Standard and Poor’s 500 consisted of knowledge-based and technology-intensive firms. The latter comprise 10 percent of Canada’s TSE 300.

As pension investment in domestic public equity has increased (from 31 percent in 1986 to 38 percent in 1996), so too has asset exposure to $90 billion-plus (Nesbitt Burns) small-caps, despite higher costs and risks (relative to large-caps). Lack of data precludes an estimate. This is an important area considering that pension funds own 40 percent of TSE equity (1996). CLMPC research found that, in the 1990s, much broadly-based pension demand for small-caps was unmet due to too few pooling vehicles and specialty managers.

Greater pension fiduciary interest in shareholder activism and corporate governance is very relevant to small-caps enterprises as they require a long-term focus that adds value to performance.

Real estate traditionally attracts some pension investment, though levels declined following the 1990s recession (from 6.7 percent of total large fund assets in 1993 to 4.2 in 1997). Most pension participation reflects commercial property-holding, and some development spending, in Canadian urban centres. Since 1993, there has been a financial revival in real estate that may encourage new asset allocations.

An increasing number of pension funds have targeted less-traditional real estate assets, such as affordable housing (owner-occupied and rental). This includes BC public sector funds (OCIO), the Caisse de dépôt and syndicates backed by multi-employer private sector funds (e.g., BC’s Greystone Properties).

Pension fiduciaries across North America are currently exploring infrastructure-public works as a new asset class. Pre-eminent in Canada is OMERs and its 1997-incepted CFMC Fund Management. These and other trends suggest Canadian pension funds may become an alternative source of financing for investment in neglected development in residential and non-residential real estate and infrastructure.

A heightened role for pension funds as financial agents of economic change, restructuring and job creation is impeded by inefficiencies associated with most markets for privately-placed debt and equity capital. Other barriers also exist. Based on research and interviews, the CLMPC compiled a list of fourteen barriers that was submitted as a survey to the membership of Pension Investment Association of Canada (PIAC) in 1998.

PIAC members gave nine barriers ratings of important or very important. Top barriers were: (1) Investing is Management-intensive, Costly (78 percent important/very important) (2) Too Few Qualified Specialists in Canada (73 percent important/very important) (3) Lack of Critical Market Data (69 percent important/very important) (4) Returns are Inadequate, Unreliable (66 percent important/very important) (5) Potential High Profile Failures, Liabilities (64 percent important/very important) (6) Measuring Long-term Performance is Difficult (64 percent important/very important) (7) Insufficient Trustee Support (61 percent important/very important). 68 percent of small PIAC members rated fund size as important or very important.

Following the survey, the CLMPC investigated strategic ways for overcoming barriers in the United States where there is extensive pension participation in the middle and venture capital markets. It found that development of marketplace infrastructure is vital to facilitating pension supply.

Among key strategic means and structures are (1) Introduction of "best practices" to pools, such as limited partnerships, more conducive to pension funds (2) Establishment of alternative pooling vehicles (e.g., fund-of-funds) (3) Establishment of asset-targeting strategies (e.g., economically-targeted investment (ETI) programs) (4) Development of investment specialists (5) Development of market-specific advisors and agents (e.g., gatekeepers) (6) Creation of private returns databases (7) Education of fiduciaries about private capital markets (8) Establishment of government-private sector partnerships.

Such initiatives address the cost and risk issues implicit in the top PIAC-rated barriers. In many cases, implementation of these in American capital markets has been pension-led.

The CLMPC concludes that most Canadian pension funds are unlikely to undertake support of new business formations, small business growth, emerging high technology industries and traditional industries in transition, et al, at least on a sustained basis, without introduction of comparable infrastructure to smaller and less-evolved Canadian markets.

As real estate and infrastructure investing have roots in private capital markets, pension participation in this realm must involve similar strategic approaches.

There is more pension-supplied assistance for new and developing small and medium-sized business (via various capital markets) at the regional level, due primarily to public sector funds, such as those in BC, Quebec and New Brunswick. With its Accés Capital network of pools, the Caisse de dépôt now targets specific communities within Quebec.

In co-operation with the CLMPC, the Ontario Public Service Employees Union (OPSEU) conducted a survey of labour trustees and advisory committee members in the twenty-three largest pension funds. This survey found growing labour interest in participating in pension governance (i.e., through joint trusteeship) and, specifically, investment decision-making. In general, labour trustees support pension investing that gives more priority to Canadian economic and job goals.

Using the OPSEU survey, the CLMPC estimates that approximately one-third of total pension assets is currently administered under some version of joint trusteeship.

The CLMPC found little evidence of pension investment screening according to ethical/social criteria (e.g., the environment, human rights, labour relations). Two important exceptions are HOOPP and the United Church of Canada Pension Fund.