The Evolution of the Canadian Pension Model Practical Lessons for Building World-class Pension Organizations © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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VII Executive Summary ..........................................................................................................................IX Section 1: Context Who this Report is for .........................................................................................................................1 Why Study the Canadian Pension Model? ....................................................................................1 Defining the Canadian Pension Model ............................................................................................2 The Canadian Retirement System ................................................................................................3 Section 2: Origins of the Canadian Pension Model Ontario’s Public Pension Reforms and Ontario Teachers’ Pension Plan ................................. 7 Reforming the Canada Pension Plan and the Establishment of CPPIB ..................................9 What Accounts for the Emergence of the Canadian Model? .................................................10 Section 3: Fund Case Studies Overview .............................................................................................................................................13 AIMCo Case Study ............................................................................................................................ 15 Independent governance and multiclient asset manager ................................................................. 16 Attracting top talent ........................................................................................................................................ 18 CDPQ Case Study .............................................................................................................................19 Dual mandate .......................................................................................................................................................21 Infrastructure investing at CDPQ ...............................................................................................................22 CDPQ Infra ............................................................................................................................................................22 Lessons from the global financial crisis ....................................................................................................23 HOOPP Case Study ..........................................................................................................................24 History and evolution .......................................................................................................................................24 Governance model .............................................................................................................................................24 Liability-driven investing .................................................................................................................................26 Current outlook ...................................................................................................................................................28 OPTrust Case Study ........................................................................................................................ 28 An evolving governance model .................................................................................................................... 30 Investment strategy: From asset allocation to risk allocation ......................................................32 Section 4: Framework for the Evolution of Pension Organizations Framework .........................................................................................................................................37 Phase 1: Pre-reform entity ............................................................................................................................ 38 Phase 2: A solid foundation .......................................................................................................................... 38 Phase 3: Independent, professional entity with strong governance ............................................ 38 TABLE OF CONTENTS | V Phase 4: Mature, sophisticated entity ..................................................................................................... 39 Navigating the Evolution of a Pension Organization ............................................................... 39 Section 5: Practical Lessons Learned from the Canadian Experience Overview ............................................................................................................................................ 43 Governance .........................................................................................................................................44 Governance principle 1: Independence .......................................................................................................44 Governance principle 2: Leadership ........................................................................................................... 46 Governance principle 3: Accountability and transparency ...............................................................47 People and Organization ................................................................................................................ 48 People and organization principle 1: Top talent and integrity ......................................................... 48 People and organization principle 2: Competitive pay .......................................................................49 Investments ...................................................................................................................................... 50 Investment principle 1: Comparative advantage ................................................................................. 50 Investment principle 2: In-house management ....................................................................................51 Investment principle 3: Geographic and asset-class diversification .............................................52 Investment principle 4: Risk and liabilities management ..................................................................54 Administration ................................................................................................................................. 55 Administration principle 1: Client-focused orientation .......................................................................55 Administration principle 2: Modern technology ................................................................................... 56 Administration principle 3: High-quality communications and education ................................57 Plan Design and Funding ................................................................................................................ 58 Plan design and funding principle 1: Sponsors with scale and mission alignment ................ 58 Plan design and funding principle 2: Realistic assumptions .......................................................... 60 Plan design and funding principle 3: Risk sharing and prudent funding ................................... 61 Regulatory and Public Policy Environment ................................................................................ 62 Regulatory and public policy principle 1: Trust and autonomy .......................................................62 Regulatory and public policy principle 2: Robust regulatory regime ........................................... 63 Regulatory and public policy principle 3: Good governance .......................................................... 64 Section 6: The Future of the Canadian Model: Challenges and Opportunities Ahead Challenge 1: Lower expected returns and interest rates ....................................................................67