The Canadian economy is expected to lag behind its American counterpart this year, as noted by analysts from the Royal Bank of Canada. The country has experienced a significant slowdown in productivity compared to the US. While pension funds play a crucial role in bolstering the economy, their ability to stimulate growth through domestic investments remains limited. Charles Emond, CEO of Quebec’s pension fund, highlighted that while pension funds can invest more locally, they need viable projects to support such investments. The current economic climate, marked by high interest rates and liquidity constraints, poses challenges for these funds, especially given their substantial exposure to private markets.

Pension funds in Canada have been grappling with one of the most challenging economic environments since the 2008 financial crisis. Elevated interest rates have strained liquidity and impacted returns. Some of the largest pension funds, known as the Maple Eight, are reassessing their strategies, particularly their heavy reliance on private markets, which constitute about 60% of their portfolios. This reevaluation comes at a time when there is growing pressure from both the government and business leaders to increase domestic investments. However, finding suitable projects within Canada has become increasingly difficult, making it harder for pension funds to allocate capital effectively.

The Ontario Teachers’ Pension Plan pioneered a new model in the early 1990s, focusing on independence and long-term investments. This approach was later adopted by other Canadian pension funds, including the Canada Pension Plan Investment Board. These institutions are now led by seasoned investment professionals who have built robust internal teams dedicated to risk management and finance. Despite this, cracks are beginning to show in the so-called "Maple Model." Alberta’s decision to oust its pension fund’s leadership late last year due to rising costs and underwhelming returns sent shockwaves through the industry. The government’s move to install former Prime Minister Stephen Harper as the head of the board and Ray Gilmour as interim CEO signals a heightened level of scrutiny over pension fund operations.

The push for more domestic investments has gained momentum, with over 100 Canadian business leaders signing an open letter urging the finance minister to amend rules governing pension funds to encourage them to invest more in Canada. Some argue that requiring a minimum level of domestic investment could help address the funding gap faced by small publicly traded firms. However, others believe that the focus should be on making Canada more attractive for investments rather than mandating specific allocations. The Caisse de Depot et Placement du Quebec serves as a model for how pension funds can support local businesses without compromising performance. As of December 31, 2022, nearly $93 billion of its total assets were invested in Quebec, with plans to reach $100 billion by next year.

As Canadian pension funds face increasing pressure to shift their investments back home, they are also reconsidering their unique strategy of managing a large portion of their assets internally. This approach, which sets them apart from many other public entities overseeing retirement income, involves building up staff to lead deals directly. While this has granted them access to coveted global investments, it has also led to some setbacks, including allegations of bribery and mismanagement. Going forward, pension funds may look to invest more in public markets and rely on external managers for private equity investments, especially as liquidity becomes a priority with the impending retirement of baby boomers. The Alberta government’s intervention in its pension fund raises concerns about the independence of these institutions, emphasizing the need for a balanced approach to achieving long-term objectives.

Despite the challenges, Canadian pension funds remain committed to fostering economic growth through strategic investments. Balancing the need for competitive returns with the pressure to support local industries will be critical in ensuring the continued success of these institutions. The evolving landscape underscores the importance of adaptability and resilience in navigating the complexities of global and domestic markets.