Can Canada's Pension Model Cure the UK Stock Market's Doom Loop?

The London Stock Exchange has, in recent years, been in a ‘doom loop’ featuring a substantial decline in the number of publicly traded companies, trading volumes and the value of the stock market as compared to Gross Domestic Product.  Britain’s pension funds stand out as an obvious potential contributing factor.  Over the past three decades, they have slashed their exposure to UK public company shares, meaning domestic pension funds have gone from being a bulwark of the London stock market to an afterthought.  To the extent that pension investment policy has contributed to the decline of the stock market in Britain, it follows that a revival of buying interest from this corner would meaningfully bolster UK equity markets.  In a recent paper, we consider pension reform proposals with a strongly Canadian flavour and argue that whatever their overall merits, implementation would do little to revive the UK stock market. 

Combining existing numerous pension schemes into fewer and larger entities is often identified as part of a mooted British pension sector reset that ostensibly will be good news for pension beneficiaries and plausibly could foster investment apt to bolster economic growth.  Rachel Reeves, the Chancellor of the Exchequer, has cited Canada’s ‘Maple 8’ favourably in this regard.  As befits a country often symbolised by way of a maple leaf, the Maple 8 are Canada’s eight largest public pension plans, which invest pension assets primarily on behalf of Canadian public sector workers.  The Maple 8’s praised features include professional in-house asset management, the deployment of substantial resources to develop internally managed portfolios and creative diversification of assets under management (AUM).

While the Maple 8 are collectively widely admired, it is doubtful whether borrowing from the Canadian pension ‘megafund’ approach would help to revive Britain’s equity markets.  One reason is the substantial differences between the Maple 8 and most UK pension plans. The Maple 8, as public sector pension schemes, do not provide an obvious model for pension arrangements by private sector employers.  Also, the Maple 8 are ‘funded’ in the sense that employer contributions are invested on behalf of beneficiaries, while public sector pension plans in the UK usually operate on an unfunded ‘pay-as-you-go’ basis which the taxpayer ultimately backs.  

In the UK, the Local Government Pension Scheme (LGPS), an umbrella organisation encompassing 86 pension schemes that invest pension contributions on behalf of local government employees, stands out as the primary exception to Britain’s unfunded public pension pattern. The Chancellor of the Exchequer has indicated that the government is minded to legislate to accelerate asset pooling by LGPS members.  A plausible end point for the LGPS would be the equivalent of a Maple 8-style pension ‘megafund.’  Whatever the upsides of a Canadian-style pension consolidation in this context, the UK stock market is unlikely to be a beneficiary.  

One way that adoption of the Canadian pension ‘megafund’ model with local government pension schemes could theoretically help to revive the UK stock market would be to prompt investment of a higher proportion of AUM in equities.  It is doubtful this would occur.  For the Maple 8, widening investment options is the name of the game, and they place particular emphasis on assets that, despite potential illiquidity concerns, increase portfolio efficiency and hedge against downside risks.  Infrastructure and private equity stand out as examples.  Repetition of this Maple 8 investment allocation pattern by UK pension funds could well foster a shift away from, not in favour of, listed equities.

Another way a move to the Maple 8 model could theoretically bolster UK equity markets would be that with equity assets held, a higher proportion would be invested in domestic public companies.  This seems highly unlikely.  With Canadian pension funds, the proportion of equity investments allocated to Canadian shares is very similar to the equivalent figure for UK pension funds with British equities.  Emulating the Maple 8 thus seems unlikely to introduce the sort of enhanced ‘home bias’ with public company shares that could help to jump-start UK equity markets.  Indeed, moving local government pensions toward a Maple 8 model where considerable emphasis is placed on diversification could well diminish rather than increase the proportion of equity assets invested in British public companies and thus might be a burden rather than a boon for the domestic stock market.

It may be sensible from a pension regulation perspective for the Maple 8 model to be influential with public sector pensions in the UK.  And the move perhaps would help finance vital domestic infrastructure investment.  As far as the British stock market is concerned, however, mimicking the Canadian pension ‘megafund’ model will not end the current doom loop.    

The authors’ paper can be found here.

Brian R. Cheffins is a Professor of Corporate Law at the University of Cambridge, Faculty of Law.

Bobby V. Reddy is a Professor of Corporate Law and Governance at the University of Cambridge, Faculty of Law.

Kim Willey is an Adjunct Professor at the University of Victoria, Faculty of Law.