With the need to provide for participants presenting greater challenges each year, U.S. sponsors of defined benefit plans—both public and corporate—are seeking fresh ideas and strategies for institutional investing from beyond American borders.

And many are looking to Canada.

According to “The Cerulli EdgeU.S. Edition, April 2017,” Canadian DB plans are providing inspiration to both those types of U.S. DB plans in three main ways.

Chris Mason, senior analyst at Cerulli, says in the report, “Large Canadian DB plans typically exhibit three distinct characteristics: an emphasis on cost savings, a well-diversified investment portfolio and a large appetite for illiquid alternative investments.”

Mason adds, “As with institutions around the world, U.S. pension plans, particularly public plans, are taking a few pages where they can from the Canadian model.”

And despite the disparity between the two types of plans—public and corporate—each is finding takeaways from Canadian plans—despite the fact that Canadian plans as an aggregate are smaller.

The report says that while U.S. DB corporate and public plans held approximately $6 trillion in assets as of 2015, the approximately 9,800 registered DB plans in Canada represented assets of only $1.02 trillion over the same time period.

Despite the differences, including size, between U.S. plans and the “Canadian model,” there’s plenty to learn from our northern neighbors.

Cerulli defines the Canadian model as “a pension plan with a strong emphasis on cost mitigation, a well-diversified investment portfolio across several asset classes and geographies and a large appetite for illiquid alternative investments.”

And there’s one big difference between U.S. and Canadian plans: how they compensate investment professionals who manage public plan assets.

According to Cerulli, “In Canada, compensation levels are similar to those in the U.S. private sector, whereas in the United States, compensation for public DB managers is much lower.”

And aside from the size difference between U.S. and Canadian DB plans, the Canadian DB space is much more concentrated among the largest plan sponsors, the report finds.

Data from Pensions & Investments and Statistics Canada indicates that the top-10 Canadian DB plans accounted for just 45 percent of the entire market as of 2015.

However, in the U.S., the concentration among the top 10 plans was only 22 percent, when removing the effect of federal DB assets.

As a result, and in spite of its smaller overall market size, Canada has very large and sophisticated institutional investors, including both the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan.

As of September 2016, the CPPIB’s assets totaled nearly $300 billion, comparable to the California Public Employee Retirement System (CalPERS).

While not all U.S. plans can take advantage of aspects of the Canadian model—they must be large enough to take advantage of cost efficiencies and investment opportunities related to scale—megaplan sponsors can, among other strategies, allow plans to undertake a large percentage of the investing in house, thus saving on third-party management fees.

While Cerulli says, “It is likely that the vast majority of institutional investors in the United States lack the necessary size and sophistication to pursue the Canadian Model,” it adds that it’s “important for managers to understand the various approaches that exist worldwide,” as well as the importance of strategic partnerships that can “present meaningful opportunities for institutional managers.”

Instant Insights /

3 things pension plan sponsors can learn from Canada's model

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