Big pension plans have something that small pension plans need, says the head of one of Canada’s largest public pension plans.
It’s the capacity to do due diligence, Michael Nobrega, president and CEO of OMERS to the Conference Board of Canada’s annual pension summit in Toronto on Monday.
In reviewing the global financial crisis, he argued that institutional investors failed their fiduciary duties. “By 2007, sub-prime loans were a U.S. $1.5 trillion global market for investors seeking high returns with little or no concern for risk,” he said. “None of this excuses fiduciaries, that is, institutional investors and their agents, who lost other people’s money because they chose not to do proper risk due diligence.”
OMERS sidestepped the subprime carnage. “Our six-member credit management and derivatives team approves all products before they can be traded; sometimes the team has candid confrontations with portfolio managers mesmerized by investment returns.”
The OMERS team looked at collateralized debt obligations, and what “they owned by way of collateral and often found nothing tangible.” Similarly with asset-backed commercial paper, they were concerned that there was no legal definition of a “major market disruption.”
“There was nothing brilliant in this analysis,” Nobrega said. “Our people were simply doing their day-to-day jobs.”
But few pension funds can afford that level of due diligence. “This extensive oversight and risk management calls for significant professional resources,” he argued. “That means pension funds need critical mass so that they can afford to hire professionals with the requisite skills and actively manage the assets.”
Nobrega wants OMERS to follow a path now opened to Ontario Teachers Pension Plan: to manage assets for other pension plans. It has the expertise, and managing more assets would improve OMERS footprint. The $44 billion plan “cannot compete against the global giants as a small player. Nor can other plans,” Nobrega said.
Nobrega cites former York University president, Harry Arthurs, who recently led the Ontario Expert Commission on Pensions. Arthurs said “Plan size may be a greater determinant of a member’s pension than plan design. Large plans will generally perform better than small ones.”
Nobrega wants Ontario to create super-funds on the scale of Teachers, which runs $87 billion in assets. He considers $100 billion to $200 billion to be the optimal size of a super-fund.
OMERS, he notes, has a diversified portfolio, with good results from infrastructure and real estate investments. Private market investments represent almost 40% of the plan’s portfolio and have returned 18% annually over the past five years. And OMERS has two specialized asset management companies Oxford Properties Group for real estate and Borealis Infrastructure.
However, OMERS is involved in ever-larger deals that involve taking on co-investors. A larger asset base would allow OMERS instead to make follow-on investments, or, in future, to buy out its partners.
In any case, he argues that small plans would be better served by having access to a super-fund, which would save them from having to purchase standard investment products at higher costs.
“Critical mass matters because we all operate in a global marketplace,” he cautioned. Earning acceptable risk-adjusted returns requires deep experience and expertise to deal with products.”
(04/21/09)