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“It all starts with governance. When Ontario Teachers’ was set up, the first thing they did was make clear the responsibilities of the plan sponsor-and of the people investing the assets. It was a 50/50 risk-sharing model, between the government and the teachers. This was, and is, not a traditional model. But it works, because it creates a positive, dynamic tension. You have the sponsor, and you have the pension board. The sponsor is responsible for contribution levels. The plan, under the guidance of the board, invests those funds, administers them, and determines their value.
The board structure also sets us apart from more traditional-and American-funds. The government appoints four members; the sponsor appoints four members. One is jointly appointed-the chair. The difference is that they are all independent and professional-they are pretty much all lawyers or financial people.
When the board was set up, it delegated a huge amount to the CEO, with few limits. That’s also very different from the US. I, as CEO, and the staff don’t go to the board to get approval for each manager selection. It approves, most importantly, the annual investment plan-allocation and risk, or rather, risk and allocation, in that order. Management makes almost 99% of all decisions, not the board. We had a board meeting today. The topic could have been about the little details of how to run the businesses we own, but the board, to its credit, really leaves those things to the management of the individual businesses. That’s governance.
The first thing said by the first board chairman was this:‘This will be run like a business.’ We are not going to try to compete if we can’t be, and get, the best: the best people, the best investments, the best partnerships.We compete for talent with the world’s largest financial institutions; we compete with, and alongside, the world’s best private equity shops for investments. We wouldn’t do it if we couldn’t say that.
We’re a creation of the 1990s, and most of Canada copied this model. It’s easier to start from scratch than rebuild a broken system-another key difference [from] the US. We didn’t, and don’t, have all the vested interests. And it’s an evolution that has lasted 23 years. It doesn’t happen overnight. We blazed a trail, but we’ve done a lot of learning from the battle scars. Lessons were learned along the way.
The four things I think I’m proudest of: First, we have a reinforcing culture here. It rewards innovation. Second, it’s quite academic, quite pedagogical, which makes sense-this is a teachers’ pension plan. Third, we do not have a star mentality. This is very different from the banks. Fourth, we’ve built a global reputation.
My role here started with Teachers’ Private Capital. My job was to take it global. It was, let’s say, a nascent platform when I started. I went from that role to the CEO role in 2007, and it has been lots of fun. It has been about extending, slightly changing, and reinforcing the broad global brand. Now, non-industry people know who we are.
Innovation allowed us to be first movers. That’s a reason for why we’ve had such strong returns. Look at Cadillac Fairview [the fund’s commercial real estate arm]: That allowed us to move first in real estate. We were the first to get into derivatives, swaps, infrastructure, and private equity on our own-and I don’t mean just the first Canadians.
My role has to been to institutionalize this place-in a good way. Before, it was growing really quickly, just so quickly. I view my time here as managing this growth, and setting the next guy or girl up for explosive growth again-setting the processes and infrastructure in place for them. What I inherited was a startup that went huge.
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Who are Ontario Teachers’ peers? Whom do I respect? Those are two different questions… Canada Pension Plan Investment Board, of course-I’m old, good friends with Mark Wiseman. Also, on the investment side: Singapore’s GIC and Temasek, and the Dutch guys. I have a lot of respect for others, too-Norges Bank, for one. I can’t imagine what it’s like to manage a trillion dollars. Sadly, in the US, the governance is an anchor. Temasek and GIC don’t have that anchor, and it shows. Oh, the Aussies, as well-they’re also very good.
Here’s the other story, and this is why there is no quick fix: Getting to a place where you can own companies directly takes years. In the early 1990s, we decided to get into private equity, but in Canada, at the time, there wasn’t a TorQuest Partners [a Toronto-based private equity firm]; there weren’t a lot of firms involved in the space. As a result, the CIO at the time believed it was better to do it ourselves. Then we discovered that we could actually do it well. We started in Canada and then went international. First we took little steps: We’d take 20% control of a company, for example, then a controlling stake, and now we’re willing to take 100%. It’s an evolution.
Are we concerned about owning companies in our own backyard, as some funds are worried about? Not in your own yard, some might say. We don’t really say that.
But of course we do have concerns. I think we run a good organization, yet we still fight funding challenges and have for decades. Why? We get outsized investment returns, and yet sometimes it’s like running on a treadmill-it just gets faster and faster and faster. We aren’t immune to the challenges faced by pension plans everywhere. Ours is a very mature plan: 107 of our retirees are over 100. We have a $5 billion deficit right now-at a real discount rate of 2.75%. Every 1% change in this discount rate is worth $30 billion, so keep that in mind.
As I step aside, I still retain an interest in this industry. There are simply huge issues at stake here. The trend, here and globally, has been that companies want to give up defined benefits for defined contributions-and it’s a polarized discussion. It’s the ‘taxpayer versus the gold-plated pension plan’ to some. And the solution-like lemmings-has been to kill defined benefit. It’s one of the dumbest things ever, from a societal perspective.
‘Make every worker a day-trader’ is what they’re saying. That said, the traditional model became perverted. There is a middle ground: a hybrid, where certain levels are guaranteed, with the possibilities of added benefits if returns are good-that makes sense.
It’s misinformed to say the taxpayer is paying. That’s not true. For us, if the fund today was worth $1, 12 cents came from the taxpayer, 11 cents from teachers, and 77 cents came from investment returns. If workers end up on welfare, that costs the taxpayer the whole dollar.”