US versus Canadian Models
The "Canadian Model" of public pension funds is characterized by effective governance, sustainable funding, and innovative investment strategies. U.S. pension trustees should grasp both the similarities and differences between U.S. and Canadian systems to explore potential reforms in the U.S.
Before Canadian reforms initiated in the late 1980s, there were already considerations for reform in the U.S., albeit in small steps. Achieving long-term sustainability for U.S. public pension plans may require a more extensive approach than has been seen so far.
Key topics of discussion include:
A brief history of Canadian pension reforms.
The joint sponsorship legal structure.
Governance models.
Plan design differences.
Investment organizations.
Asset allocation strategies.
Outcomes comparison.
While U.S. public pension plans generally face funding deficits, many Canadian plans are fully funded, often maintaining surpluses due to strategic reforms initiated in Canada. These reforms have led to a responsible funding structure, allowing pension plans to cover up to 80% of benefits through contributions compared to just over 50% in the U.S.
Canadian pension plans typically have a bicameral governance model, which includes joint sponsorship by employers and employees. Plans operate with more autonomy and fewer regulatory constraints compared to U.S. plans, aiming for holistic funding and strategic asset allocation.
Investment organizations in Canada, structured as publicly owned corporations, emphasize internal management and substantial allocations to private assets, achieving lower investment costs and better alignment of assets with liabilities. The Canadian approach is also notable for lower discount rates and a more cautious investment philosophy focused on generating stable cash flows.
Overall, Canadian pension plans exhibit superior funded status and cash flow profiles compared to their U.S. counterparts. The experience and lessons from the Canada Model offer valuable insights for U.S. pension trustees and plan sponsors, suggesting that reforms could be necessary to ensure long-term sustainability in the U.S. pension system. For more details, a supporting study provides an in-depth quantitative comparison of the two countries' pension systems.