Canadian public pension funds lose hundreds of billions of dollars in potential returns due to active management, according to a new analysis by former federal finance minister Joe Oliver. By switching to low-cost index ETFs, pensioners could see accumulated returns increase by hundreds of billions over a decade, while executives would face significant pay cuts.
The Cost of Active Management
Oliver argues that fund managers who actively trade assets generate returns significantly below what passive index funds achieve. He cites the Canada Pension Plan Investment Board (CPPIB), which had a 10-year annual return of 8.8 per cent, far below the S&P 500's 14.5 per cent and the S&P World Index's 11.22 per cent. Quebec's Caisse de Dépôt returned 7.2 per cent, and the Ontario Teachers' Pension Fund returned 6.8 per cent.
If CPPIB had matched the S&P 500's performance, it would have accumulated over half a trillion dollars more in assets over the past decade. Even a two-percentage-point annual gap would have added more than $150 billion.
Executive Compensation vs. Pensioner Returns
The direct costs of active management are steep. CPPIB employs over 2,000 people, with total expenses of $5.4 billion—100 times higher than 20 years ago, while assets only grew eight-fold. The top five executives earned an average of $5.4 million each last year. In contrast, Vanguard's S&P 500 ETF has a 0.03 per cent expense ratio, which would cost just $238 million for CPPIB's assets under management.
Oliver notes that pension fund executives have a personal incentive to maintain active management: higher pay. "Few of us are given this choice, but those who are choose personal enrichment," he writes.
International Comparisons
The Norwegian Sovereign Wealth Fund, which follows a largely passive approach, achieved a 10.1 per cent public equity return—1.3 percentage points higher than CPPIB. Yet its CEO earns about $1.5 million, compared to $5-6 million for Canadian fund CEOs, despite overseeing $2.2 trillion in assets.
Oliver acknowledges that pension portfolios cannot be entirely passive due to liability matching and diversification needs. Public equities represent only 29 per cent of CPPIB's assets. However, he argues that active management of public equities has consistently underperformed, and the lack of disclosed long-term returns for private assets makes it difficult to assess true value added.
"Pension funds invariably claim they've outperformed their internally constructed benchmark portfolios, but they do not disclose long-term returns for major asset classes such as private equity," Oliver says.
Policy Implications
Oliver calls on governments to consider the public policy implications of active management. If managers primarily invested passively, governments would question their value-added and reduce compensation. "Most money managers convince themselves they can beat the averages," he adds, but the numbers show otherwise.
