Introduction
In Parts 1 and 2 of this series I examined the weaknesses in AIMCo’s reporting on its investments. With the recent news about the firing of AIMCo’s board, CEO, the CEO’s chief of staff, the Chief Legal Officer, and the head of human resources, it is incumbent for the government to clearly demonstrate that it has no intention of bringing AIMCo more closely under the direction of politicians. One measure the government could adopt is to appoint representatives of the major pension plans to the AIMCo board. That representation would mean those sitting on the board would have some “skin in the game;” that is their clients’ interests would be better aligned with AIMCo’s interest. The recent appointment of Alberta’s deputy finance minister gives some say in AIMCo’s operations as the GOA’s Heritage Fund and other government endowments are currently managed by AIMCo.
This post will look at the pros and cons of transparency and disclosure. I define transparency as a value embedded in the organization which invites outside observers to have confidence the organization will be held publicly accountable for its actions. Disclosure refers to a process and set of rules that guide the dissemination of internal information to the public. Taken together and to overuse a metaphor, the transparent organization welcomes sunshine in from outside to disinfect the corners and crevices that need disinfecting. A healthy organizational environment is one which encourages full transparency and provides full, plan and true disclosure to its clients and the public without “spin,” so characteristic of governments and large corporations.
Why organizations keep secrets
Governments can legitimately have secrets and require enforcement through laws such as the Official Secrets Act. The lack of disclosure and transparency is especially important in areas of national security and at times of declared war. Secrecy is central to intelligence and police agencies when infiltrating enemy states or organized crime. However, too much secrecy, taken too far, leads, inevitably to authoritarian power structures which are unaccountable except to themselves.
Investment management performed in a public context like the management of the Heritage Fund or pension funds on behalf of beneficiaries may have secrets, whether proprietary trading models or if the client has legitimate reasons to keep information private from its beneficiaries. However, these cases should be exceptions to the rule and not broadly cast. There also may be legitimate concerns regarding information about individual beneficiaries and staff. Here the policies for sharing or withholding information should be available to staff and beneficiaries.
In some cases, governments have deliberately widened disclosure of salaries, benefits and severance of executives which is an exception to the general rule that this information is private and normally withheld (“sunshine laws”). In addition, there is freedom of information and protection of privacy information. Freedom of information laws have been widely adopted both at federal and provincial levels. Last year, investigations by The Globe and Mail have demonstrated the failed promise of these sunshine laws that were hoped to increase government transparency. Alberta regrettably has been one of the worst performers. (Links may be subject to a paywall.)
Securities regulation is another area where public policy objectives support generalized disclosure to investors about corporations which sell securities to the public. In the case of AIMCo, these laws of general application allow members of the public to see a full list of U.S. equity holdings as required under the U.S. Securities and Exchange Act. It is a requirement under section 13 of the Act for investment managers to file form 13F to provide such information. In Canada, the Canadian Securities Administrators (CSA) do not require such extensive disclosure. What is required is a listing of the 10 largest holdings in a portfolio and percentage of the total assets. However, CSA rules or policies are not enforceable against provincial government or agencies who can adopt voluntarily the rules applying to private sector fund managers.
Coming change at the federal level
Very recently a proposed regulation under the Pension Benefits Standards Regulations, 1985 is now under consideration. The proposed regulation would require pension funds with more than $500-million in assets to provide information regarding the distribution of plan investments by jurisdiction and “by asset class by jurisdiction to OSFI (Office of the Superintendent of Financial Institutions) in a standard format that will be made publicly available.” The proposed regulation would only affect 50 federally regulated pension funds and would not apply to provincially-regulated plans like the Local Authorities Pension Plan.
Although the scope of the disclosure is not known as the Office of the Superintendent of Financial Institutions will provide a disclosure format to enable comparisons and enable experts to better understand and assess the quality of various investment portfolios. Many large public sector plans, most notably the Canada Pension Plan Investment Board (CPPIB) and Quebec’s Caisse de depot et placement, publicly disclose investment information by jurisdiction and/or asset class, but this is not a harmonized approach.
Why transparency is needed at AIMCo
Although there are some valid reasons for limiting disclosure, international practice is moving towards broad based and detailed disclosures. The premier case is disclosure of the Norwegian State Pension Fund with nearly USD $2-trillion in assets. The Norway fund invests all its assets outside Norway in 71 countries with investments in 8,763 companies. CalPERS is another large fund (USD $530.52-billion) with very broad disclosure. For Alberta in 2011, the Finance department released a 103-page list of its investments ranging from common shares, corporate and government bonds, real estate, private dent and equity, infrastructure partnerships, and timberland.
Transparency acts as a disinfectant because its processes enable organizational misbehaviour to be more easily uncovered and addressed. This process is necessary in the pension sphere because high paid investment professionals are managing other persons’ retirement fortunes and consequences of systematic mismanagement impact hundreds of thousands of plan participants and annuitants. The VOLTs misstep and the CEO and board’s reaction were particularly inept because they failed to comprehend the emotional impact and long-term financial implications for the people they were serving.
Another reason for greater transparency is the over-dependence that pension boards have on the information provided by AIMCo. Pension boards and their staffs rely on the information provided by AIMCo to enable them to carry out their fiduciary duties to members of the plan. In the matter pf the VOLTs losses the pension boards are seeking to recover losses from AIMCo and the Government of Alberta. Since the boards decided to pursue this claim, the boards must believe they have a case to convince the arbitrator that they did not approve, or know of, the VOLTs trading strategy.
At the public meeting of the Heritage Fund Standing Committee on 30 November 2023, questions were raised about AIMCo’s investments in companies supporting Israel’s war efforts in Gaza. Questioners were relying on information filed with the Securities and Exchange Commission (SEC) on Form 13F referenced above. The public meeting which is an underappreciated annual event in terms of accountability allows members of the public to raise uncomfortable questions (HS-22, 30 November 2023) about the lack of disclosure and the standard response of diversified portfolio construction and ESG investing (Environmental, social and governance).
| At the current time, many of the provincial pension plans are in a surplus position. LAPP’s surplus at 31 December 2023 was 131 per cent; the Management Employees’ Pension Plan’s surplus is 125 per cent, Alberta Teachers’ Retirement Fund’s surplus is 101 per cent; and the surplus’s for the Public Sector Pension Plan is 133 per cent and Special Forces’ Pension Fund are about 100 per cent funded. These surpluses will enable the pension fund boards to either reduce premiums or get a holiday from contributions. This result may be interpreted that AIMCo is doing an adequate job. |
Cause for optimism?
There may be some hope in improvements to public reporting. At the public meeting on 6 November 2024 of the Standing Committee on the Heritage Fund, I pressed AIMCo and Treasury Board and Finance for more disclosure.
Evan Siddall, AIMCo’s CEO who was deposed less that 24 hours after this testimony, noted:
we are endeavouring to make our disclosure more consistent with the others. We are constrained, as some other investment managers – the Caisse de dépôt, for example, has I think nine clients – again, by what our clients request of us. It’s typically not, Dr. Ascah, a fund requirement that we not disclose. Listing companies is usually fine. Listing the value of the investment in that company is often more difficult and proprietary or thought to be proprietary (HS-80, 6 November 2024).
However, TBF was less open to widening disclosure requirements preferring with the current level of disclosure. Mr. Thompson, observed there were commercially sensitive reasons, particularly in the private space. He added the ministry was always looking to improve disclosure and communications with the public (HS-80, 30 November).
Later to a written question about political interference, Stephen Thompson, the Acting Assistant Deputy Minister stated on behalf of the ministry that:
I will say that there is no political involvement when it comes to setting the investment goals and targets of the heritage fund. It is enshrined in the legislation that the minister is responsible, but the allocation decisions have been delegated to finance professionals at the department, and we communicate those to the finance professionals at our investment manager, AIMCo. So I can assure our Albertan in writing in that there is no political interference in the investment of funds (HS-81, 6 November 2024).
This statement was the evening before the board’s firing and the firing of Siddall and three other AIMCo executives. Only in the future will the public know if this statement holds any water.
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