Our Insights

Why pension governance matters

The four components underlying Canada's pension plan success

In the 1980s, Canadian pension plans were invested largely or even entirely in domestic government bonds funded primarily on a pay-as-you-go basis. They did not have independent governance structures and were administered in "an outdated and error-prone fashion".1 Fast forward to today and Canada is regarded as a global leader in the pensions space.

Characterized by an independent governance structure, professional investment management, broad diversification across asset classes and geographies, and a strong regulatory framework, Canadian pensions have undergone a significant transformation over the last four decades. The country's pragmatic approach offers excellent lessons for other countries to emulate with the model having added an estimated CAD 4.2 billion of value annually over the past 10 years.2

Independent pension governance structures help ensure proper funding

Key insights

  • Canada's contemporary pension model, which includes an independent governance structure, professional investment management, broad diversification across asset classes and geographies, and a strong regulatory framework, is now emulated by top-tier plans around the globe
  • The strength of the Canadian pension model means that plans are able to recruit and retain global talent, particularly in the area of investment management, which is carried out in-house for many plans
  • In order to support effective plan governance, the Canadian Association of Pension Supervisory Authorities (CAPSA) has established a set of principles to help plan administrators meet their governance responsibilities

“Perhaps the number one factor in the strength of the contemporary public pension model is the arm's-length relationship between governments and the pension plans," said Ryan Silva, Director, Head of Pension and Insurance at RBC Investor & Treasury Services. Compared to earlier decades, “this separation allows pension plans to operate within a framework that requires a high degree of accountability and independence".

Historically, pension funds in Canada had limited independence, both in governance and investment strategies. Until the mid-1980s, Canadian public pensions were mostly run by government employees and the plans themselves could only invest in a very narrow opportunity set, with some limited solely to government debentures.3

These restrictions ultimately caused plan sponsors and members to raise concerns about the long-term viability of the plans and governments, in turn, to initiate consultation and research on the state of pensions in Canada. Following consultation, in 1989 the Government of Ontario established the country's first arm's-length professional pension plan: the Ontario Teachers' Pension Plan (OTPP).4

One longer-term outcome of the professionalization of Canadian public pensions through the adoption of arm's-length governance structures has been that, unlike public pensions in the US, today most Canadian public pensions are either fully-funded or even overfunded.5

Looking southward, however, public pensions in the US typically include both politicians and union representatives. These groups may be reluctant to adopt prudent governance measures such as contribution increases or benefit reductions when warranted, instead opting to retain an unworkable status quo. As a result, US public pensions can face increasing plan liabilities with no easy route out.6

The miracle of the Canadian model has been the willingness of politicians and labour leaders to step aside

In contrast, both government and labour stakeholders in Canada have allowed professionals to take the lead in running pensions. “The miracle of the Canadian model," Canadian pensions expert Keith Ambachtsheer has said, “has been the willingness of politicians and labour leaders to step aside".7

Professional investment management attracts top talent

Many pensions in Canada rely on in-house teams for investment management, rather than using outside managers. This structure has been successful for Canadian plans in part because executive compensation practices have been exempted from public-sector compensation restrictions, meaning plans can use performance-based compensation elements.

Over the past several decades, Canadian pension organizations "have gone from being seen as relatively sleepy to being seen as highly desirable places to work, attractive because of their public mission, stimulating work, global orientation, and competitive pay".8

This more expansive compensation framework means that Canadian plans are able to compete globally for talent and correspondingly, Canadian plans typically perform well from a cost-efficiency standpoint compared to plans using external managers, especially when alternative investments are considered.

Plans are diversified and include alternative assets

Alternative investments
is another area where
Canadian plans shine

Alternative investments is another area where Canadian plans shine. As a rule, Canadian pension funds are diversified across geographies and asset classes, including significant investments in alternative assets, such as real estate, private equity, infrastructure, and private debt. Canadian plans' exposure to alternative assets, in particular, is significantly higher than other
plans around the world.9

Pensions are supported by a strong regulatory framework

“The final piece of the puzzle is the strong regulatory framework supporting pensions in Canada," commented Silva.

One example is the use of discount factors in establishing plan liabilities. In the US, public pensions can use the expected return on assets as the discount factor for costing future obligations.10 This is different from the rules for private US pensions and Canadian pensions, which normally use long-term government or corporate bond yields as the discount factor.11 As the expected return on bonds is lower than the expected return on other asset classes, including equities, using bond yields results in more conservative estimates of pension liabilities.

When other asset classes with higher return assumptions are used to set discount rates, the long-term plan liabilities are effectively lowered, despite the broad challenge posed by an environment of low-interest rates. These higher return assumptions can result in public plans adopting riskier portfolio composition and strategies to address any funding shortfalls, as both politicians and labour representatives are unwilling to resolve shortfalls by increasing contributions or reducing plan benefits.12

In addition to more conservative discount rate assumptions, Canada's top pensions have also adopted a “shared risk" model that utilizes conditional inflation protection in an effort to balance risk between active and retired plan members. The structure allows for pensions to increase contribution rates or cut benefits by removing inflation protection, providing pensions with greater flexibility to address deficits. Combined with a lower discount rate, Canadian pension liability projections are more grounded and attainable than their counterparts in the US.13

“Taken together, these four elements of pension plan governance in Canada are strong contributors to the success of this model," said Silva. “Canadian pensions are renowned for their independent governance, professional investment management, asset diversification, and robust regulatory context. The work that Canadian pension leadership has undertaken to bring Canadian pensions to this point is amply reflected in the strength of Canadian pensions now and, looking forward, for the future."


Canada's 11 principles for pension plan governance

CAPSA has established a set of 11 principles for pension plan governance, designed to “help plan administrators meet their governance responsibilities." These principles, which build on an earlier version first introduced in 2004, "appear to represent a 'gold standard' of best practices that plan administrators should strive to achieve, and are often considered to be the standards by which a court would assess plan administrators' performance".14 The principles are:

Principle 1: Fiduciary responsibility

The plan administrator has fiduciary responsibilities to plan members and beneficiaries. The plan administrator may also have responsibilities to other stakeholders.

Principle 2: Governance framework

The plan administrator should establish and document a governance framework for the administration of the plan.

Principle 3: Roles and responsibilities

The plan administrator should clearly describe and document the roles, responsibilities, and accountabilities of all participants in the pension plan governance process.

Principle 4: Performance monitoring

The plan administrator should establish and document performance measures to monitor the performance of participants in the governance and administration of the plan.

Principle 5: Knowledge and skills

The plan administrator, directly or with delegates, has a duty to apply the knowledge and skills needed to meet the plan administrator's responsibilities.

Principle 6: Governance information

The plan administrator should establish and document a process to obtain and provide to governance participants appropriate information to meet fiduciary and other responsibilities.

Principle 7: Risk management

The plan administrator should establish and document a framework and ongoing processes, appropriate to the pension plan, to identify and manage the plan's risks.

Principle 8: Oversight and compliance

The plan administrator should establish and document appropriate processes to ensure compliance with the legislative requirements and pension plan documents.

Principle 9: Transparency and accountability

The plan administrator should establish and document a communication process with the aim to be transparent and accountable to plan members, beneficiaries, and other stakeholders.

Principle 10: Code of conduct and conflict of interest

The plan administrator should establish and document a code of conduct, incorporating a policy to manage conflicts of interest.

Principle 11: Governance review

The plan administrator should establish and document a process for the regular review of the pension plan's governance framework and processes.



  1. World Bank & Common Wealth, “The Evolution of the Canadian Pension Model: Practical Lessons for Building World-Class Pension Organizations" (September 2017), page xi.
  2. Top 1000 Funds, “The Value of the Canadian Model" (August 8, 2017)
  3. Ibid. World Bank & Common Wealth, page 25.
  4. Ibid. World Bank & Common Wealth, page 8.
  5. American Legislative Exchange Council (ALEC), “Unaccountable and Unaffordable: Unfunded Public Pension Liabilities Exceed $6 Trillion" (December 2017)
  6. Craig Foltin, CPA, DBA; Dale Flesher, CPA, CGFM; Gary Previts, CPA; and Mary Stone, CPA, "Public Pension Underfunding," Strategic Finance Magazine (September 1, 2018)
  7. Interview with Keith Ambachtsheer in World Bank & Common Wealth, page 45.
  8. Ibid. World Bank & Common Wealth, page 48.
  9. Boston Consulting Group, “Measuring the Impact of Canadian Pension Funds" (October 2015)
  10. Lisa Schilling, "U.S. Pension Plan Discount Rate Comparison 2009-2014," published by the Society of Actuaries at soa.org (September 2016)
  11. See, for example, Ontario Teachers' Pension Plan, "Discount Rate"
  12. See, for example, Public Pension Underfunding.
  13. Ibid. World Bank & Common Wealth, page 62.
  14. Peggy A. McCallum, "Canada's Pension Regulators Are Getting Serious About Good Governance of Pension Plans" (April 27, 2016)