In the high-stakes world of international investment management, Yu Ben Meng is a notably high flier. Entrusted with US$360 billion to manage on behalf of 1.6 million government employees and retirees, he was nothing if not imaginative in his asset allocation. Among the untold thousands of transactions conducted by Meng’s team were over 170 investments in Chinese companies making products with military or security uses. These reportedly include “Chinese warships, Chinese naval bases, and a company that builds surveillance technology used to track the Uighur Muslims.”
This eventually became a problem. For while nobody in China questioned Meng’s investment acumen, he isn’t actually investing on behalf of Chinese workers. Nor is he located in China; he isn’t even a Chinese national. Meng is Chief Investment Officer for the California Public Employees’ Retirement System (Cal-PERS), and a naturalized U.S. citizen. In February, U.S. Congressman Jim Banks alleged Meng had been recruited under China’s once-obscure but increasingly notorious “Thousand Talents Program” and that under his direction Cal-PERS had invested US$3.1 billion in 172 Chinese companies, some of which have been blacklisted by the U.S. government.
The Meng case is an extreme example of a phenomenon that many experts – including prominent voices in Canada – want to see more of: the “depoliticization” of pension management. Politicians, so this line of thinking goes, by nature only make politicized decisions. Investing, however, should be based on strictly non-political considerations. In addition to maximizing plain old investment returns, these considerations might include boosting economic growth, promoting local companies, following scientific advice, safeguarding the best interests of Canadians, helping vulnerable groups, or saving the planet. And the only people who can be entrusted with such a mighty mission are non-elected professionals and experts who, once appointed, are immune to political pressure or decision-making. They should be, in other words, pristinely unaccountable.
It might be tempting to shrug off the Meng case as another grotesque curiosity from the U.S. with no relevance to Canadians. It is worth a closer look, however. Not only because the Chinese regime has busily extended its influence throughout Canadian society as well as America. That is a gigantic issue in its own right.
The other issue is the campaign to insulate from public scrutiny appointed officials who wield large sums of money in the public interest. One result of these efforts, paradoxically, is to inject even more politics into everyday decisions that, over time, will greatly affect people’s lives. Only this type of politics is conducted quietly and out of the public eye.
There’s been substantial talk in Alberta, for example, about establishing a provincially-run pension plan to supplant the Canada Pension Plan (CPP) for Alberta workers. Through the Alberta Investment Management Corporation (AIMCo), the province already wields a vast pool of investment capital on behalf of current and retired public employees (as well as Alberta’s once-mighty Heritage Savings Trust Fund). AIMCo’s assets under management pre-Covid were estimated at approximately $120 billion. It is also slated to take over the provincial teachers’ pension plan, adding another $16 billion. If Alberta provincialized the CPP, AIMCo would grow bigger still.
This has prompted some voices to call for AIMCo to be released from the political fetters that ostensibly make it vulnerable to manipulation. A recent column in the Financial Post by Kevin Carmichael made this claim, and there was no shortage of experts who agreed with Carmichael’s thrust. “The No. 1 issue would be political interference,” said Charles St-Arnaud, chief economist at Alberta Central, a back office service provider for the province’s credit unions, of the proposal to expand AIMCo. Michel Magnan, who specializes in corporate governance at Montreal’s Concordia University, concurred. “History shows you just have to minimize political interference,” he said.
The preferred model is apparently the Caisse de dépôt et placement de Quebec. The Caisse’s mandate is to “promote growth”, and Carmichael larded on examples of recent moves the fund has made to promote the fortunes of agile and interesting Quebec-based companies. Alberta would be well-advised to emulate this approach, for similarly exciting things could await AIMCo once it was unleashed.
AIMCo, Carmichael suggested, could seize the opportunity to consider “whether we’d all be better off if some of the mandatory pension contributions of Albertans who got rich off $100 [per-barrel]-oil were marshalled to help end the province’s dependency on a carbon-based economy by getting behind promising local companies.” Why, he himself has met local entrepreneurs “who lack only capital to become global players themselves”! He acknowledged that a pension management policy aimed at destroying Alberta’s number-one industry might anger “libertarian think-tanks” (which remained unnamed). Otherwise, he seemingly envisioned only sunlit (and presumably breezy) uplands upon which enlightened professionals shepherded Albertans towards full employment in a diversified economy powered entirely by Mother Nature.
On its face, it is entirely reasonable to eliminate political interference from investment practices. Where politics and money meet, corruption in the form of bribery, graft and influence-peddling often follow. History is rife with examples – starting in our nation with the Canadian Pacific Railway. Nobody wants a public pension manager to be vulnerable to, say, pressure from a cabinet minister whose brother’s start-up company has this wonderful technology that just needs a few million in capital to become a global sensation. This sort of impropriety is what many people probably imagine when they think of “political interference”.
Less crass but equally damaging – and unfortunately all-too common in Canada – are public funds being used to rescue tottering industrial plants in depressed regions, thus imperilling the investments of thousands of retirees, wasting tax dollars and/or saddling future taxpayers with debt. The history of Alberta’s Treasury Branches (now ATB Financial), though not a pension organization, illustrates this phenomenon, as such practices drove it to the very brink of failure in the late 80s and early 90s. Put in those terms, the desire to depoliticize is understandable and even laudable. Quebec’s Caisse was subject to this sort of political interference until it was granted “full independence” in 2015.
This is all great in principle, but it tends to fall apart during execution. First, it is asking rather a lot of human nature to expect investment managers with hundreds of billions of dollars essentially at their fingertips, who also tend to jet around to international conferences abuzz with the latest politically correct investment fads, to eschew political views of their own and remain utterly immune to political considerations in their asset allocation. The real issue, then, is whether those predilections become visible and are correctible.
There are also times when external oversight by elected politicians is not just desirable, but vital. Last week, for example, the trade publication Institutional Investor broke the story of “AIMCo’s $3 Billion Volatility Trading Blunder” (subsequently picked up by Canadian media). An AIMCo strategy meant to insulate its investments from wild fluctuations apparently had the opposite effect during the Covid market meltdown in March.
“AIMCo provides virtually no public details about the program, which a portfolio manager named David Triska takes credit for building at least in part,” the article states. AIMCo refused comment on the report. Staggering losses of this sort caused by complex and esoteric investment programs, coupled with secrecy and defensiveness when facts come to light, cry out for greater political oversight rather than moving to even less accountability.
There’s also evidence that independence from political interference doesn’t take politics out of the equation. The Canada Pension Plan Investment Board (CPPIB), which manages the current surplus of CPP contributions to subsidize future pension payouts (the CPP is not, in fact, a true pension plan but a pay-as-you-go income transfer), is not immune. Over the past 20 years, as this C2C Journal article outlined, the CPPIB has grown from a lean staff of five spending a total of $3.7 million per year to a 1,500-employee leviathan costing $3.2 billion annually. Its returns have become mediocre, possibly in part because of its politically driven investments. In 2018, federal environment and climate change minister Catherine McKenna tweeted that the CPP’s investment of more than $3 billion in renewable energy “is something that Canadians can be proud of.”
Recently, the CPPIB’s CEO promised to continue to invest in fossil fuel energy. “There’s still a role for carbon-based fuels for the foreseeable future,” said Mark Machin at a Chamber of Commerce event in Calgary in mid-March. While that was somewhat reassuring, the fact Machin felt the need to defend such investments at a public forum hints at the pressure he’s under to divest the CPPIB’s oil and natural gas holdings in order to help hurry along the world’s “energy transition.”
Politics, in other words, is always likely to be part of the mix. The real question is whether elected politicians and, through them, the voting public are to have any say in these decisions. Even now Alberta is being admonished – in advance of having done anything – to insulate its pension management apparatus from political oversight or control.
But any call for Alberta to break its dependence’ on oil and gas is itself ideological in nature. Setting aside the massive size, complexity, risks and spillover effects of any “transition” away from fossil fuels, forcing such a policy on a manager of public funds can only be understood as a political act. If it were good economics, it would be happening already. But it isn’t, and so it has to be accomplished by other means. Handing this job to well-compensated investment pros who no longer answer to elected MLAs doesn’t make it non-political.
In California, Meng was able to reportedly run wild – and even keep his job – precisely because California has reduced its political oversight to essentially zero. In a written reply to Congressman Banks who raised the concerns, Cal-PERS emphasized its officials are not appointed by the state’s governor and insisted its investment strategy is entirely apolitical, with individual transactions occurring automatically according to recognized market indexes.
For his part, Meng denies having been recruited to Cal-PERS under the Thousand Talents Program, which the U.S. government considers an espionage operation and which has triggered criminal indictments. After working for Cal-PERS for years, Meng is known to have worked for a Chinese state organization immediately before rejoining Cal-PERS to assume his current role. After the controversy erupted, he publicly declared himself a loyal American. It’s possible he was unfairly maligned in an age of heightened fear. This episode’s very ambiguity and unresolved nature cries out for a thorough public airing – such as before a legislative committee – as does AIMCo’s ill-fated, multi-billion-dollar anti-volatility program.
These are not isolated incidents. The even larger U.S. Federal Retirement Thrift Investment Board (FRTIB), which manages US$660 billion in supplemental RRSP-like investments for federal employees (including military personnel), is bizarrely investing in a host of Chinese companies that manufacture warships (including nuclear submarines), communications equipment, guided missiles, and espionage technology, some of which have been officially sanctioned by other arms of the U.S. government. The FRTIB, however, considers itself independent and thus beyond political control. As one outraged columnist declared, if these investments go ahead, “It would compel [U.S.] military personnel to invest in Chinese corporations that make weapons designed to kill them.” And if they are rolled back, it will only be due to good old-fashioned external political pressure.
While Canada can hope to be spared such egregious cases, there’s plenty of homegrown opportunity for tens of billions of dollars in misallocation of funds and waste. “Weaning” Alberta off oil and natural gas is a bit of helpful advice that, curiously, almost always emanates from the political left. Some of its branches have been waging a decade-long campaign to “landlock” Alberta’s oil just in case we don’t listen. Others are, of course, pushing green energy.
These are highly fashionable positions to take. So how long would it be before those professional, scientifically-guided, innovative pension managers envisioned by all the experts grew tempted to help things along? Wherever green energy schemes are attempted on a mass scale – Germany, Spain, the UK, Ontario, California – they require a complex and expensive array of investment and tax subsidies, grants, mandated rates, feed-in tariffs, homeowner and small business incentives, carbon exchanges, and many other measures. This invariably drives up energy costs and, in extreme cases, pushes millions of people into so-called “energy poverty”. Ontario’s costly experiment alone would, according to the province’s auditor-general, result in ratepayers paying $170 billion too much.
Those forced to pay more for green energy are, of course, the same working people who are forced to save for their retirement through those same government pension plans now investing in under-performing companies that can only avoid insolvency due to massive infusions of taxpayers’ or ratepayers’ money. The worker’s money, in other words, is swirling about in vaporous and confusing trails of mutual entanglement.
Decades down the road, these bad investments will come home to roost. Very likely with disastrous results. And all in furtherance of a political objective: to convince the public conventional energy sources are dirty and no longer needed, and that marginal green energy can somehow fill the gap at a less-than-ruinous cost. Insulated as they were from grubby politics, the “non-political” pension managers will never be held to account. And when the bill finally comes due, they’ll be long gone.
How to avoid such a scenario? Let’s start by dispensing with the commonly portrayed dichotomy of complete political control (with the associated threats of interference or even corruption) or none at all. We certainly don’t want politicians involved in day-to-day investment decisions. Neither do we want professional investors freed from the rigour of public oversight to pursue whatever virtuous-seeming indulgence or visionary social engineering happens along. But this is a false dichotomy.
Luckily, there is a third way – it’s just one that the “experts” and pundits conveniently ignore. In this sensible alternative, professional managers are given clear charters, performance standards and forums of accountability, including periodic reports to and hearings before the people who are ultimately answerable to voters, our frequently maligned elected politicians.
A clear mandate to pursue strong investment returns for current and future retirees without regard to political or cultural fads of any sort seems like a good start. If that means investing in an abundant set of resources worth trillions of dollars that provide reliable and cost-effective fuel for an eager world – and will do so for decades to come − then let’s have more of it. We can leave the green energy boondoggles to others.
George Koch is editor-in-chief of C2C Journal.