Is Canada’s Pension System the UK’s Best Blueprint for the Future?

On her inaugural international mission as the UK Chancellor, Rachel Reeves set her sights on an ambitious goal: to get British pension funds to take a page from Canada’s playbook. Meeting with eight of the UK’s largest retirement funds—the heavyweights in the global pension arena—she urged them to embrace the “Maple model” that has garnered international acclaim.

Her dream? To unlock a flood of investments into British infrastructure and budding enterprises, igniting economic growth and innovation across the nation.

However, the UK is racing to implement a system that took Canada three decades to perfect, all while facing its own domestic political challenges.

Since the early 1990s, Canada has emerged as a beacon of excellence in pension management, thanks to the pioneering Maple model. This framework blends strong governance with independent asset managers, employing large, skilled teams that actively select investments, alongside a robust commitment to private markets. The result? A staggering second-largest pension system in the world, as recognized by the OECD.

Canadians enjoy sustainable pensions through both public and supplementary schemes. For instance, teachers in Ontario can look forward to retiring in their late fifties with an average annual income of C$50,000 ($35,000) on top of their Canada Pension Plan benefits.

In stark contrast, the average annual payout from the UK’s local government pension scheme in 2023 hovered around £5,400, while the full state pension barely reached £11,500 annually.

But will adopting the three fundamental elements of the Maple model actually yield similar success for the UK’s local government pension scheme?

“Those three factors were incredibly compelling 30 years ago,” notes Rashay Jethalal, CEO of a Toronto-based consultancy. “But would implementing them today really have the same impact?”

Back in 1990, the Ontario Teachers’ Pension Plan faced a daunting funding crisis. With disappointing returns from state management, trustees took a bold step: they hired a savvy former insurance executive to treat the fund like a business.

He assembled a talented team of investment experts, ventured into private markets, and achieved staggering returns—reportedly around 20% annually from private equity investments, as highlighted by current CEO Jo Taylor.

This innovative approach became the gold standard adopted across Canada’s public sector funds, from the Canada Pension Plan Investment Board established in 1997 to the Alberta Investment Management Corporation, the youngest of the Maple 8, which launched in 2008.

Each of these funds offers defined benefit pensions, but they tailor their strategies to meet the unique needs of their members. The CPPIB, Canada’s largest fund, underpins the state pension, though the government covers most of the expenses. Meanwhile, pension plans in Quebec, British Columbia, and Alberta operate as asset managers overseeing multiple funds, while Ontario’s teachers, healthcare workers, and local government employees rely on dedicated companies for their pensions.

What unites them is a significant investment focus on private equity, real estate, and infrastructure. With international offices investing in critical projects from London’s ports to Brazil’s utilities and India’s transport networks, Canada’s pension funds play a vital role in global private markets. A notable share of their assets are international, partly due to the public ownership of many key infrastructure assets in Canada.

These infrastructure investments provide Canadian funds with assets that behave like bonds, enabling them to meet pension obligations while delivering superior returns.

Over the long haul, their risk-adjusted performance has outshone competitors “on every measure,” as noted by researchers at a benchmarking firm. Their in-house management structure has also allowed them to pursue private market strategies at roughly half the cost of rival funds that rely on external management.

However, with sprawling global portfolios come increased risks—investment, operational, and governance. Recent years have seen returns dip as soaring interest rates have impacted valuations, particularly in commercial real estate.

Both the Ontario Municipal Employees’ Retirement System and the Ontario Teachers’ Pension Plan reported returns of less than 5% for the year ending June, significantly lagging behind their long-term average of over 7%, largely due to high real estate exposure.

Simultaneously, some private investments have taken a downturn. In March of the previous year, Omers announced a “full writedown” of its 31.7% stake in the British water company Thames Water, previously valued at £700 million.

Adding to the turmoil, in November, three former employees of Caisse de dépôt et placement du Québec’s India office faced charges in the U.S. for allegedly colluding with Adani Green Energy to bribe Indian officials for lucrative solar contracts, leading to a cover-up attempt.

“The Maple 8 may have been a bit too optimistic,” suggests Oliver Gottschalg, founder of an analytics firm, pointing to the funds’ high private market exposure. “There are serious concerns about whether they can realistically maintain that level of investment.”

The model is also increasingly vulnerable to political pressures. While some funds, like the Healthcare of Ontario Pension Plan, have a strong domestic focus—over half their investments are in Canada—only about 12% of the Canada Pension Plan’s assets are invested in domestic markets.

Last year, over 90 Canadian corporate leaders signed an open letter urging the government to revise regulations governing pension funds, advocating for increased domestic investments—highlighting a dramatic decline from 28% allocation in Canadian equities in 2000 to just 4% in 2023.

Like the UK, Canada is exploring ways to redirect more pension assets into domestic avenues, grappling with sluggish productivity and lackluster business investments.

“The entire Maple 8 model relies on the ability to operate independently from the government,” explains Sebastian Betermier, finance professor at McGill University. “Recent evidence suggests increasing politicization, which is concerning.”

The pinnacle of government involvement was reached last November when the Albertan government unexpectedly dismissed the entire board of the Alberta Investment Management Corporation (Aimco). The aftermath saw former Prime Minister Stephen Harper appointed as chair, with the government citing “significant increases” in operational costs. Despite Aimco’s expenses rising to 0.66% of assets, a figure in line with Canada’s other large pension schemes, the decision raised eyebrows.

Canadian pension experts suggest that this move is part of a broader agenda to reshape Aimco, pivoting away from green investments toward boosting domestic oil and gas investments to stimulate the local economy.

“Officially, the rationale was cost overruns, but it didn’t add up. It’s heavily political and appears to be more about the Alberta government opposing Aimco’s green initiatives,” remarked Alexander Beath, a pension consultant.

The situation at Aimco has ignited concerns about whether public sector pension schemes can genuinely operate free from government influence.

“This sends a troubling message to Canada and beyond,” warned a former Aimco employee.

These firings could also deter top talent from returning to the organization, jeopardizing one of the key success factors for the pension sector in Canada.

In 2023, John Graham, CEO of the Canada Pension Plan, earned C$5.38 million, while the highest salary at Border to Coast, one of the UK’s largest pension pools managing over £50 billion, was a mere £489,000.

Ontario Teachers’ chief executive Jo Taylor acknowledged that while the Canadian model has been beneficial for pensioners, replicating it in the UK may not be straightforward.

“We’ve spent 35 years creating a robust investment business capable of navigating private markets, which we view as a significant advantage. In the UK, you’d essentially be starting from scratch,” he explained.

Michel Leduc, a senior managing director at CPPIB, added, “The landscape has become more complex. The unpredictability is concerning. Creating the necessary infrastructure today would be quite the challenge.”