In the midst of overhauling the UK’s retirement system UK Chancellor Rachel Reeves recently made what has become a common pilgrimage for global pensions: a trip to Canada to learn from some of the country’s distinguished pension schemes.
Today, Canada’s top 8 public pension funds control over CAD $2 trillion in assets, attract elite investment talent, and deliver impressive returns. Most funds are now in surplus, with the aggregate funding ratio among the nation’s pensions boasting an impressive 105.8%.
The Maple 8’s success has turned the country into a go-to destination for pension reformers seeking a blueprint for stronger, more sustainable systems. CalSTRS, for instance, credits its cost-saving “Collaborative Model” to lessons from Canadian funds. Many other pensions, too, have sought inspiration from the country’s successful pension designs.
Yet just 20-30 years ago, Canada’s pension system looked vastly different. Many plans were unsophisticated, heavily invested in domestic government bonds, and operated on a pay-as-you-go basis. Confronted with funding shortfalls and underperformance, pension stakeholders collaborated with the government to implement sweeping reforms — paving the way for what is now known as the “Canadian Model.”
Built on independent governance, professional in-house investment management, top-tier talent recruitment, and broad diversification across asset classes and geographies, this approach has become the envy of pensions globally.
Peter Drucker’s 1976 book, The Unseen Revolution: How Pension Fund Socialism Came to America, resonated with key figures in Canada’s pension sector. Its call for an innovative pension design to address an aging baby boomer population caught the eye of Ontario Treasurer Robert Nixon — just as the province faced a pivotal moment in its pension system’s evolution.
Facing poor investment performance and widening funding gaps, Nixon feared that, if left unaddressed, these issues could impose a severe financial burden on the government. Inspired by Drucker’s work, he launched a task force to explore ways to strengthen public sector pension management. The task force reports embraced and recommended several key principles outlined by Drucker, including:
Nixon, alongside Ontario policymakers and union leaders, ultimately used these findings to spearhead the passage of the Teachers’ Pension Act and creation of the Ontario Teachers’ Pension Plan (OTPP), OPTrust, and the Ontario Pension Board.
A similar shift occurred a few years later when the Canada Pension Plan underwent reforms to bolster sustainability through higher contribution rates. Central to these changes was the creation of a separate investment entity, the CPP Investment Board, established under the 1997 CPP Investment Board Act — legislation that mirrored key aspects of the Ontario Teachers’ Pension Plan model.
Today, Canada’s pension funds have widely embraced this strategy built on independent governance, significant private market investments, in-house management, and competitive talent recruitment and compensation.
Independent governance is a cornerstone of the Canadian Model, frequently cited by CEOs and CIOs of the Maple 8 as integral to its success. This governance model allows pensions to operate at arm’s length from political influence, functioning as high-performing, business-like entities focused on long-term objectives.
However, maintaining this depoliticized structure depends on a foundation of trust, upheld by stringent standards of transparency, robust reporting, and accountability — a standard that the country’s schemes have done a good job of successfully meeting. For the fourth consecutive year, the country topped the Global Pension Transparency Benchmark rankings.
Canadian pension funds were also ahead of the curve in shifting allocations to alternative investments — a move many others have only recently embraced. Starting in the 1990s and early 2000s, Canadian pension funds emerged as early adopters of private equity, infrastructure, and venture capital, allocating significantly more to these asset classes than their global counterparts, with in-house management emerging to play a significant role. This strategy has been a key driver of outperformance — CPP, for example, credits its private equity program to driving 52% of its fund returns over the past five years.
Further, the early adoption of these asset classes has positioned Maple among the most sophisticated institutional investors in private markets today. Recognizing the value lost from being at the end of the value chain captured by upstream players in private market strategies, these funds have taken a very forward-thinking approach to their private equity programs by incorporating significant direct and co-investing strategies alongside their fund partnerships to capture a greater proportion of the upstream value creation and earn greater returns.
By partnering with leading investment managers, the schemes have prioritized building long-term, strategic relationships with their fund partners to access their cutting edge expertise across sectors and attractive co-investments opportunities. Many of these pensions also maintain separate direct investment portfolios, supported by in-house teams of operating partners and investment professionals who play a hands-on role in evaluating assets and driving post-investment value creation.
Generally, direct and co-invests consume a very significant portion of these funds private market programs. For example, direct investing consumes a dominant portion of OTPP’s venture growth arm, highlighted by key deals this year, including participation in Databricks’ Series I round, leading Instagrid’s Series C, and its first venture growth investment in India with Expressbees.
Another innovative approach to private markets employed by these funds is acquiring stakes in asset managers. Caisse de dépôt et placement du Québec (CDPQ), Ontario Municipal Employees Retirement System (OMERS), and OTPP have all acquired stakes in real estate platforms. CPP Investments’ acquisition of private credit firm Antares Capital marked a strategic move by the pension into mid-cap private credit — an area that would have been costly and inefficient to access through multiple GPs.
Maple 8’s innovative private market strategy has yielded significant benefits for these funds. For one, the combination of fund, co, and direct investing across private market asset classes has helped these pensions maximize the portfolio’s risk-return profile while driving down costs.
Additionally, partnering with fund managers on co-investments, direct investing, and acquiring GP stakes offers a valuable pathway to sharpen investment expertise across sectors. PSP’s 2024 annual report highlights the benefits of this approach, citing its 2015 stake in Amwins Group as a catalyst for continued investments in the specialty property and casualty insurance sector. By deepening their understanding of industry trends, these funds have positioned themselves to capitalize on opportunities across the entire value chain.
As direct asset owners, these funds also have greater control over value creation initiatives that align with their broader organizational goals. This has been particularly impactful in advancing decarbonization and ESG efforts, allowing them to apply their sustainability expertise to portfolio companies and drive meaningful progress toward climate targets.
A key driver of Canadian pension funds’ private market success is their ability to attract top talent with competitive compensation — an essential pillar of the Canadian Model. Unlike many public-sector entities, these funds offer pay structures that rival the private sector, allowing them to build in-house investment teams for complex asset classes like private equity and infrastructure. Compensation packages typically include performance-based incentives tied to investment returns or fund stability and are regularly benchmarked against industry standards.
This approach has made Canada’s pension compensation costs higher than those of comparable international pension schemes funds, and these high salaries for in-house investment professionals are often cited as a major hurdle for other countries attempting to replicate the model. For example, CPP CEO John Graham earned C$5.38 million in 2023 — a figure that far surpasses the highest salary at Border to Coast, one of the UK’s largest pension pools, where the highest salary paid was £489,000.
However, this investment in talent enables the active management strategies that drive outperformance. When weighed against the alternative — paying fees to external managers — competitive in-house compensation is still seeming to be a good investment for these pensions.
For instance, the Ontario Teachers’ Pension Plan attributes 78% of its value above benchmark to active management, with the vast majority of investments handled in-house, noting that this approach has actually enabled the scheme to keep its expense ratio low, at just 28 basis points. Similarly, in CPPs latest annual report, they noted that active management and their department’s investment selection led to an annualized incremental return of 2.0% net of expenses over the past five years.
Many pension funds have demonstrated that active management and competitive compensation do not necessarily lead to higher operating costs. Last year, PSP reported that its efforts to strengthen its talent pool and stay competitive in global markets ultimately lowered total operating costs, even as salary and employee benefit expenses rose.
Despite the Canadian pension model’s success, mounting pressures threaten its core principles. Increasing politicization poses one of the largest risks. Canada’s federal government has taken a more protectionist approach as of late, citing desires for pension funds to invest more domestically. The Alberta government’s recent decision to fire the entire board of Alberta Investment Management Corp (AIMCo) especially has raised concerns about political interference undermining the model’s independence.
While officials cited underperformance and rising costs as justification, AIMCo’s expenses were largely in line with Canada’s other major funds. Critics argue the real motive may have been the government’s opposition to AIMCo’s green energy transition strategy and desire for the fund to steer more investments into Alberta’s oil and gas sector.
In a recent paper On the Sustainability of the Canadian Model, PSP CIO Eduard van Gelderen, explored several other pressures facing the model. For one, he highlighted that transparency demands will only grow given the massive scale of these funds and the need to maintain public trust. Further, he noted that the rise of digitization and data-driven decision-making will also require funds to integrate new technologies, artificial intelligence, and advanced analytics to refine underwriting models and distinguish meaningful trends from market noise.
Learn why several of Canada’s Maple 8 Pensions use Chronograph to gain unprecedented visibility into their private market portfolios.
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