The problem with pension fund capitalism

By Livi Gerbase and Jason Ward 

It is no surprise to anyone that the world’s economy is becoming increasingly concentrated and financialised, with a handful of corporations and individuals calling the shots as most people and businesses fall behind.

One example of the takeover of the economy by finance capital is the rapid expansion of Canada’s public pension funds, which invest the retirement savings of millions of Canadian workers in key infrastructure and other assets around the world.

The biggest of these public pension funds is the Canada Pension Plan Investment Board (CPP Investments), which is the default pension plan for 22 million Canadians outside of Quebec and holds almost USD 500 billion in assets worldwide.

Smaller funds, such as the Ontario Municipal Employees Retirement System (OMERS) and Caisse de dépôt et placement du Québec (CDPQ), are also huge global players with billions of dollars in assets. Canada’s public pension plans are relatively young and currently accumulating capital far faster than they are paying out retirement benefits.

Pension funds are not new – they have been present for most of the 20th century – and they play an important social role as populations get older. However, recently these funds have become key players in the global economy: twenty-two of them hold US$56 trillion in assets worldwide, 90 per cent of which is from the US, the UK, Japan, Australia, the Netherlands, Canada, and Switzerland.

The investment portfolios of Canada’s pension funds have moved away from a focus on treasury bonds and other low-risk assets towards private-equity investments in various forms of infrastructure. These offer strong rates of return with what is claimed to be a low risk profile, because the demand for infrastructure is guaranteed.

The focus is on real estate, in which rent and capital gains are the main form of profit, and public services such as water, energy, and sanitation, where profit is made from the consumers of basic public services. Canadian public pension funds are increasingly investing in “social infrastructure” which is largely publicly funded, like elder and childcare.

These “low-risk-high-reward” investments come with a price, even if it is not visible to Canadians. As companies and services are privatized, workers are increasingly moved out of permanent jobs and onto insecure short-term contracts and governments lose control over their citizens’ access to basic human rights. Much of this investment is pure rent-seeking, which does not increase capacity or improve services.

 

Investments via tax havens

On top of that, armies of skilled accountants and lawyers find ways to aggressively avoid taxes around the world by exploiting loopholes and shifting profits to tax havens.

Take Brookfield, a global asset manager which is funded by Canadian and US public pension funds and frequently partners with sovereign wealth funds. In 2017 Brookfield had an effective tax rate of only 6.7 per cent, one of the lowest of all Canadian corporations and much lower than the official 28% Canada corporate tax rate (after federal tax abatement).

As CICTAR has shown, Brookfield has a vast network of holding companies in the tax haven of Bermuda and appears to have used it to pay minimal taxes on its investments around the world. Brookfield also pays a low tax rate in Canada.

In another report about Brookfield, CICTAR showed how the asset manager and its co-investors acquired control of Isagen, one of Colombia’s largest energy companies, in 2016. Since the takeover Isagen has drastically reduced its capital expenditures and paid out more dividends, profiting from the energy crises that hit the country in 2021. Isagen also appears to be reducing its tax payments in Colombia by paying interest in large loans from Brookfield subsidiaries in Bermuda.

(Editor’s note: Brookfield’s responses to these points can be read in CICTAR’s reports.)

 

The Orpea scandal

Orpea is Europe’s largest nursing home operator (which has now rebranded itself as emeis) and for a decade its dominant shareholder was Canada’s CPP Investments, which had two seats on its board. During this time Orpea expanded rapidly, based on unsustainable debt, with a greater focus on profiting from real estate.

In 2022, a scandal revealed Orpea’s catastrophic treatment of elderly residents and care workers, with rationed food and toiletries and horrible working conditions for the workers. CICTAR and French trade unions revealed that Orpea had subsidiaries in the tax havens of Luxembourg and the British Virgin Islands, which were largely hidden from the company’s own investors and the public and used to buy and sell property assets.

Following the scandal Orpea could not meet its debt obligations, which siphoned money from front-line care, and was ultimately bailed out by a consortium led by a French government investment fund. The French authorities are investigating allegations of fraud and corruption in the company’s affairs.

The Orpea scandal was a seismic event in France and sent shockwaves through the long-term care sector across Europe. Despite its two board seats, including one on Orpea’s audit committee, CPP Investments had done nothing to prevent the scandal. Once it began to unfold, the public pension fund’s only public response was to sell its shares in Orpea at rock-bottom prices, losing more than C$500 million in workers’ retirement savings. The fund claims to be a responsible long-term investor and has a strong set of guiding principles with high ethical standards, but this debacle revealed serious shortcomings and invites questions about its broader investment approach.

Another clear investment failure by Canadian pension funds is the horrific situation of Thames Water in the UK. OMERS bought into the privatised water company in 2017, after years of profit extraction by the previous investors, and had to write off the remaining value of its investment in the troubled utility in 2024. Thames Water has continued to pump huge volumes of human waste into the UK’s biggest river and is now trying to avoid financial collapse and possible renationalisation.

There are many other disturbing examples of investments in water, agricultural land, transport infrastructure, private prisons and public services by Canadian public pension funds.

Through the technicalities of financial accounts, it is possible to understand the impact of the financialization of public services. However, Canada’s requirements for financial reporting are far below existing standards in many jurisdictions, including many tax havens like Luxembourg, the Netherlands, and Ireland.

The European Union requires any company with at least 50 people and €5 million in annual revenue to disclose financial results and undergo annual audits. In Canada, companies not listed on stock markets don’t have to disclose and a company which is also listed in the United States only has to disclose there, not in Canada.

This means that most companies controlled by public pension funds through private equity-style investments don’t disclose any financial information on operations, and the pension funds themselves only publish consolidated reports on their activities all around the world, with limited disclosures.

 

What should be done?

While pension funds are legally obliged to seek reasonable rates of return on their investments, they also claim to be socially responsible long-term investors. The public pension funds' pursuit of short-term profit extraction from public services and infrastructure is neither ethical nor sustainable.

Unions, civil society organizations, and Canadians who benefit from these pensions must hold the public pension funds accountable for their activities in Canada and internationally, especially in the Global South.

All private companies in Canada which receive significant funding from public pension funds and other public bodies should be required to produce clear, consistent, and transparent public reports on how this funding is used, and to disclose their ownership and corporate structures.

Canadian governments, at federal and provincial levels, must consider broader reforms to mandate tax transparency and responsible business practices in all public pension funds, Crown corporations, and other entities under their control.

There also needs to be North-South solidarity, like when Canadian Union of Public Employees (CUPE), Canada’s biggest union, opposed the purchase of Iguá Saneamento, a sanitation company in Brazil, by two Canadian pension funds. Through coordination with Brazilian unions, CUPE pressured the pension funds by creating a “Keep our pensions out of privatization” toolkit for workers.

Even though the privatization went through in this case, it showed the potential strength of union solidarity and can be an inspiration for other Canadian unions and workers and social movements around the world.

It’s time for workers to end the use of their money for short-term unsustainable profit extraction through privatization and genuinely invest in a long-term sustainable and equitable future for the planet and its peoples everywhere. Investment managers, even those in public pension funds, won’t make these fundamental changes on their own. Public pressure must be applied for a major course correction.

 

Livi Gerbase is a Researcher at the Centre for Corporate Tax Accountability and Research (CICTAR). Jason Ward is CICTAR’s Principal Analyst.