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Amanda Voegeli, CFA: Insights from Canadian Pension Plans
00:26:36
Mike Wallberg, CFA, welcomes Amanda Voegeli, CFA, President and Managing Partner of Southlea Group, to discuss the unique landscape of Canadian public sector pension plans. The conversation dives into the competitive challenges these plans face in...
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- [00:00]
A
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B
Foreign welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Wahlberg and I'm joined today by Amanda Vogli, CFA Managing Partner of compensation consultancy Southly Group. Prior to co founding Southly, Amanda spent 25 years growing the Canadian rewards practice at Willis Towers Watson. Now, Canada is known for having large sophisticated public sector pension plans like Ontario Teachers, omers, psp, hoopp and so on. The biggest example of course is the Canada Pension Plan investment board or CPP. They look after about $675 billion. That's Canadian dollars in their case. They follow a centralized active total fund management strategy that employs teams pursuing private equity and real assets in addition to active equities, factor investing and credit. Now that's a lot of people running a lot of money as a public entity. Many listeners, myself included, have probably wondered over the years how these plans compete for talent with the Blackstones and Carlisle groups and Goldman Sachs and Morgan Stanley's of the world. Do they pay competitively and how do they attract and retain the best people? Southly recently published a study that focuses on just these questions and we'll hear from Amanda today on what they found. Welcome to the show, Amanda.
- [01:49]
A
Thanks Mike. Pleasure to be here.
- [01:51]
B
So before we get to the survey, I wonder if you could talk first, please, Amanda, about the Canadian pension model. There are obviously some massive plans in the US and elsewhere in the world, but how is Canada different in how it approaches pension management and its people?
- [02:06]
A
Well Mike, it's been fascinating to work in this industry and as you did the introduction, as a reminder, I'm a compensation advisor. I'm an independent advisor to many, many companies that do lots of things. But asset management is one of Southly Group specializations in terms of giving advice around the quantum of pay like you talked about, what is competitive in terms of attracting the right talent with the skill sets. But also we design the incentive plans to make sure that they're aligned with the mission, vision, values, you know, performance objectives of each entity. So when you ask about the competitiveness of the pay levels in Canadian pension plan systems, I do actually think that our compensation structures here in Canada are the Secret sauce because we've been able to pay very competitively for top notch investment talent whereas many other jurisdictions, the US in particular, our close cousin here, they have not been, they haven't sort of gotten their head around the idea of paying significant amounts of money for managing assets, despite how important that is. Because the nature of these plans just you know, administering and housing pension assets, people don't naturally think of the investors as having a pay for performance need, if you know what I mean. Like if you're going to pay people a lot of money, they better perform. And the whole objective of the pension plans is actually to protect the assets and to ensure that the required rate of return on a large amount of money is captured, maintained and focused on. So that's quite different than a blackrock where there is an expectation of superior performance and then superior pay.
- [03:49]
B
And I guess one of the key differences that stands out for me in reading the report as well is just the, the sheer scale of what's done internally there. I think this, the stat that you had There was the Maple 8. So the 8 largest of the big pension plans in Canada here manage 80% of their investments internally. Which I imagine is quite different from a number of the large plans in.
- [04:07]
A
The U.S. yeah, that's right. Canada. These plans have taken it on as building significant investment houses with the investment expertise internally. And that's, it's all circular. Right. So in order to do that and ensure that we have the best talent giving us the internal advice, we have to pay them at least what they would have been paid to work in some of the competitor organizations in Canada. It's the largest banks or some of these blackrock Blackstones, same thing. These, these people do have the opportunity to go and work there if they have the proven results.
- [04:41]
B
Right. And I guess they're the only examples or the exceptions I guess to that outside of here. I mean they must exist everywhere. But some of the, some of the bigger Ivy leagues, I mean obviously the Yale Endowment, Harvard and that they, they, they, they do follow this I guess similarly.
- [04:57]
A
Similarly, you know, Harvard is probably the biggest fund in the US and they have a few people that they pay really well to oversee because it is a skill also to hire and fire manager. But my understanding of the, their approach is less people, less in house investing and less complexity to the way in which they pay people. Also very great results though. So you can model it either way. Their investment performance results are top notch also.
- [05:26]
B
Can you outline the scope and focus of your survey?
- [05:30]
A
Sure. So we developed the asset manager The South Asset Management Survey to compete with other large firms. I think you mentioned that I worked at Willis Towers Watson. There was a survey there. Another survey. Many of the readers or listeners of your podcast will be familiar with McLaughlin as a very good source. We did not develop our survey to replace McGoggin, we actually developed it to supplement McGlogan. So we gather insights and information directly from employers, not employees. So it's not a self benchmarked survey, which we don't like. There tends to be a lot of noise in those types of surveys. So we gather information on salaries and incentives from each entity. So for example, the Maple 8 CPP IB HR submits their data to us and we actually match the jobs from bottom to top. So an analyst all the way up to an executive Managing Director of Public equities as an example. And we're able to look at differences across asset classes in terms of there are different pay premiums as many people know. Private markets as an example, tends to pay more than public markets.
- [06:38]
B
So. So yeah, so maybe we could push in a little bit on, on the findings of the report. I'm not sure how much you can talk about the actual numbers, but what do you find in terms of what these guys are doing and, and what's working and maybe what they need to work on.
- [06:51]
A
So you know what's fascinating about this group of employers in Canada is that as I alluded to the incentive designs of these types of pension plans or endowment funds, their mission is one thing to get the 1 rate of return over time. So a lot of them have had this one cpp, one PSP culture, right? They don't want to have the have and have nots. We all know that investors generally get paid more than a non investor in an asset management type organization. If we're talking about support functions like HR or finance or it, they get paid pretty well. But the investors get leaps and bounds more even at equivalent so called levels within the organization. So the reason why I raised that is because what's interesting is I just said there are differences across asset classes like private equity, public equity, debt, et cetera. Usually the marketplace pays different levels for those outcomes. I think the CFA even puts out a publication that shows that the variability of pay depending on what focus you have, what the pension funds have done because of this one company, one organization mantra is they paid all their investors the same. So you can imagine what impact that is. So some of the roles that have the skill sets that don't have a market premium are actually paid pretty well, and those with a private equity infrastructure bent who could in theory go to private equity are not getting paid like private equity. They're getting paid more in line with an average investor. So what's happening is everyone's sort of being averaged into the middle. Don't get me wrong, they're paid very, very well, but consistently across the different asset classes on purpose. So they're not fighting with, fighting over the capital and they're not fighting over which, which group they sit in.
- [08:43]
B
That's interesting because I would imagine, I mean, by definition from what you just said then they're, they're able to attract very strong active management, public markets people because they're paying more than market. But maybe it's more difficult for them to, to bring in the private equity guys and, and so on.
- [09:00]
A
It's an ongoing conversation because of this issue. They call us once a year. It depends on which of the eight is interested in the topic. But they are trying to figure out if they need to have supplemental programs for private equity investors, which is because of this opportunity. It's true those types of investors have alternative opportunities of employment that have significant upside. So there may be more work to come on ensuring that there is sufficient differentiation for talent with different pay levels because of their skill sets.
- [09:33]
B
That's interesting. And one of the tables in your report, you talk about some wage deflation that's been happening. And as I look at the line items here, I see private asset classes and public asset classes are kind of in line. Right? They're down all employees 6 to 7% for private and public asset classes and all. Again, it's sort of an average of those two. And even across senior employees and juniors, they're down similarly. So I guess that would make sense. Within that, why don't we talk a little bit about that wage deflation that's happening there. Can you explain why you think that's happening? Are we in sort of an unbalanced market or balanced market? Like what's happening there?
- [10:14]
A
I would say that again, these, the Canadian pension plans were a bit of the darling if you go back about three years ago. Since the market volatility of the recent past three years, they were doing better than the average investor. Like on average they were turning out 7, 8, 9% annually. If you looked at their returns over the past like 10 or 12 years, the past three years have been a disaster for them. They were over geared to equity, the wrong kind of equity, or they were over geared to private equity. They actually are thinking about potentially getting rid of some of their private equity because it's too lumpy and it's too slow to follow the market. So they, they end up getting caught in that. So the reason why the pay levels are down in our analysis here is actually because of performance. So if you look at, if you were to look the pension plans for the last two years have had negative absolute returns, which is kind of unheard of. And so depending on, on what horizon you're averaging over, it obviously is going to have an impact to pay. So they're lucky that it only impact them like you were reading 13% when that's pretty terrible performance in the year. And again as a pension plan, the in year performance is not going to make or break a fund of $200 billion. But the trending of it, if they kept being negative for multiple years, then you know, frankly they shouldn't exist. But also their pay should be way down if the, if they had multiple years of negative returns.
- [11:43]
B
But to be clear, that's, that's specific asset classes that were negative, right? The headline numbers were up, right, the.
- [11:49]
A
Headline numbers were up, but not up as much as before and, and actually below their required rates of return. So they were less than say the 5% real that they need. And that's very bad for a pension bond. They are destroying value that otherwise could be positive.
- [12:06]
B
Let's push in a little bit on, on that Amanda, because I'm, it's for, for folks that follow the finance news up here in Canada this year it's been, there's been a few, a few different examples of this model being sort of looked at more carefully. CPP was the subject of a Global Mail article about six months ago that was quite critical of them because their, their returns. You know, the, the reporter looked back over the last, well I guess probably back since 2012 when they went to a really active in house strategy and was just saying, you know, if they had just gone to a regular passive index strategy they would have been $46 billion ahead of what they had done with their efforts internally and paying all these people to do this. But actually a colleague and I wrote an article for ACPM observer last month that focuses on a little bit on this. We talked about this. It was, it was, it was focused on complexity and we touched on CPP and we're a little bit in defense of that performance because if you'd gone back a year, they were actually ahead 47 billion based on the same metric. So it's, it's looking at short term levels of volatility when really the, the raison d'etre for these plans is to have a very long time horizon. And that's a long way to get into the question, which is what? What are the right benchmarks for something? An organization like this that has very long time horizons has a very specific defined liability stream that it's trying to match and it's not really trying to shoot the lights out every quarter or year. Given that background, how are they, or how should they be benchmarking their individual asset classes? Timeframe wise? Benchmark wise. Like how, how does that work?
- [13:49]
A
Yeah, great points. Agree completely. So there's two, maybe three main ways in which we believe are the right ways to incent these investors, given you just went through what their raison d'etre is. So one is like you alluded to, elongating the performance horizons. There are not very many investors that get to be paid based on how they've trended their performance. So we specifically and on purpose have updated the way in which the programs work to look at a trailing three to seven year outcome. So three to seven years returns, because again, we're looking for consistency of returns. It's the volatility on the returns is actually almost as important to the pensioners than the returns themselves. They need to have some security in there that they're not going to get yanked around. So that's the first reason. The second method of making sure that we've got the investors focused on the right objectives is we diversify what is being measured. So this is also unique to a pension plan. Again by design, we don't want them focused on any one given year. So we talked about using three to seven years as a trending mechanism. We also want them to think about total fund return. We actually care about that much more than asset class by asset class. So that's a bit unique as well. We care that the, you know, we trust the managers, the CEOs, the CIOs to make good portfolio decisions so that you meet the pension obligation, which is 5% real, as an example. So we look at absolute returns. That actually is an important indication of success suffered and apart from relative. So we use a bit of a portfolio approach ourselves to say what portion of the hundred percent of the incentive is focused on 5% real, an absolute benchmark, actually how much is based on beating the market like CPP got, you know, based it on the newspaper because they only beat it by 0.05% over that particular 10 year horizon. But like you said, if you look at any other 10 year horizon, they did pretty darn well over the last 10 years, 10 to 15 years. So it's a little bit unfair. But also as long as they're we're meeting the required rate of return, us CPP payers shouldn't be that worried about them beating the market or not.
- [16:10]
B
So another area that you pushed in on as well, Amanda, was just spreading out the, the level of focus that, that you're assessing an individual on it because obviously they have individual performance, but they're part of a division, they're part of the overall organization. So can you, can you explain what goes into that?
- [16:29]
A
Yeah, absolutely. And again it's as you alluded to on purpose by design to diversify against any particular measurement of successful performance. And as you also talked about the asset class performance is important, but it's not the main driver of pay anymore. We've got a bucket called corporate and that's about total fund returns and other corporate objectives. We've got a middle bucket called division or department that usually has an asset class metric, often relative to a benchmark, but also considering other things. So you can consider the risk that they're taking, the environment that they're operating in. But that middle bucket called division or asset class often has a fair amount of discretion or judgment involved in it. It is less formulaic. It's not like if you beat this benchmark by 100 beeps, you get paid two times. And then finally we have a component usually which is pretty significantly weighted that is also called individual performance. And that also you have to come up with regular objectives that we all do in our day to day jobs on, you know, what am I doing this year to move the needle forward? So it kind of gives you the idea that multiple buckets of performance help to diversify away any particular outcome under one overly formulaic outcome.
- [17:48]
B
So would you say that the wage depletion that we're seeing there and again for listeners it's sort of 6 to 7% for all employees, but there is a higher wage discount being taken by senior employees sort of in the mid teens. What do you think is the driver of that? Can you talk a little bit about the sort of the market right now for senior and junior employees and is that, is that specific to this market that you're looking at or do you see that in other sectors?
- [18:13]
A
I would say that consistent with broader trends around turnover rates, it's another indicator of how much pressure you're going to feel on compensation rates. So inflation is one everyone talks about. So we can all talk about that inflation was outrageous sort of three years ago. And by the way, it doesn't go if inflation was 5%. You don't get 5% on your salary increase. They're related, but they are not equivalent. Salary budgets are based on supply and demand for talent, not inflation. And so that's part of it. It's obviously higher correlated if it's higher than so are salary budgets. But I would say the reason why I'm giving that example is the inflation rates are way down in most jurisdictions. So that makes makes the trending down on salary budgets. But also these turnover rates, people are not moving jobs anymore. They're way down to pre pandemic rates. So I do not anticipate there being a frenzy around any kind of investor rules in the next year or two. It's just normal. Whereas we had some frenzies over the last couple of years, I think it's going to be quite flat.
- [19:24]
B
So another big pension plan that's been in the news specifically in the last month here in Canada is AIMCO 160 billion manager in Alberta that Minister of Finance recently fired the whole board hired a couple of them back, fired the CIO, CEO, a number of others, senior execs and they. One of the things that, I mean it seems like reading a few stories on it that there are a number of drivers for the changes that are happening over there. But one of the things that keeps getting cited is that they're too expensive. Can you talk a bit about what's going on at aimcomb from your view?
- [19:57]
A
Yes. So many things to say about that. One is the quotes that they put in the paper were a bit head scratching because literally the two sentences that were written side by side in multiple articles was they returned on average 7% and they meant on average for the past like 10 years as we just talked about. If you ask me, that's pretty darn good. Consistently on average producing 7%. The returns have actually been pretty good based on the way they excited that. Then they talk about costs and they're not wrong. The, the costs on paper as disclosed to everybody have been increasing over time. This is a result of what you and I also talked about is insourcing good talent to run different types of investment strategies. So all of the Canadian pension plans started with Publix. They added infrastructure, they added private equity, they added private debt. As you build it that way, it becomes increasingly expensive if you're going to try and hire those people that make those big dollars and also the global markets These pension plans have investors around the world, so that again is not a cheap endeavor to open offices in Hong Kong and in London. So you can imagine that if, if that is your strategy to have investors in house and be a global investor getting access to the biggest, best private equity deals, it's going to be expensive. So that they're not the only ones though. It's just that they're. The government of Alberta reacted negatively to those escalating costs. So the second comment I would make about the AIMCO situation and commentary is rightly or wrongfully, the aggregate cost of running these Canadian pension plans, if you look at the basis points of cost are tiny. They're tiny because of the massive amounts of AUM they have, you know, that they're investing. So no matter how much they spend, it's still less than playing paying blackrock. So I just feel like I don't know where that was going because it's true there was an escalation of costs but on an absolute basis and unfortunately there, I don't know what the right way to look at the cost base is when you have such significant assets at play.
- [22:09]
B
Yeah, I mean that's exactly the point. And I wonder whether that total cost accounting was actually what was happening there because yeah, if you're running a sub advisor model, you know, a billion dollars, an equity mandate, you're, you're probably paying like 15, 20 basis points if that. Right. So it's not exactly, and that's numbers, it adds up to a lot of money that could fund a team. So and I think that that's probably was part of the, the, the mandate or the sort of, the rationale I guess in setting some of these up that when you get that size that, that it's probably cheaper to actually do it in house even if it looks expensive on paper.
- [22:47]
A
Exactly.
- [22:47]
B
And the one other stat that I saw, and this is, sorry, this is quoting another benchmarking study but it, one of the articles just said that they were their costs ranked in the lowest third compared to peers in 2022 with expenses 23% lower than average. So who knows what the truth is there. But it's, it's interesting that it's. Yeah, it's definitely in the crosshairs of, of, of a lot of people right now in terms of whether this model is working or not. So I wonder if you have any overall advice that you'd have for asset management. This is a very broad question. Apologies, but any advice you'd have for asset management firms out there, whether they're in house or pensions or otherwise in terms of building motivated and retaining those teams?
- [23:28]
A
Yeah, absolutely. Of course, where we always start is making sure we understand what is the objective, what is the business objective of the organization. And under asset management, it could be a variety of things, but we really do focus on in our line of business anyway, getting to know the organization, what are its objectives, what is its talent play, what is its culture and mission values. All of those things come into play in terms of articulating the most appropriate incentive plan. And it is supposed to be an incentive plan. What are we incenting people to do? Usually when you put dollar signs attached to programs, people pay attention to them. So it is important you take a step back and look at, you know, your own incentive plan. Is this paying for what we want people to do and behave? Sounds straightforward, but you would be surprised. This is a whole industry to have compensation advisors because it's not as simple as it sounds.
- [24:25]
B
So we're down to our final two part question here, Amanda, and that is what was your first job in the industry? And if you could go back and take yourself for coffee on your first day, what key piece of advice would you offer yourself?
- [24:37]
A
That's a good question. Well, my, my first real job was actually in this, doing this. So I have been doing this for 27 years. And I did start at a private company called Towers Perrin, which then grew over and over again, transacted a million times to Willis Towers. Watson is what it was called giant global publicly traded company when I left. And it was full circle because now I own my own private company doing the same thing. So that was kind of me. What would I tell myself back then about the industry? Maybe a refiner question or just about the job. Is it about the job?
- [25:17]
B
Yeah, about the industry, about your career, about your life. Like what would you wish you, what do you wish you knew then that you know now about how to pursue your career, how to, how to live a meaningful life, however you want to take it.
- [25:30]
A
Well, I guess I would have told my earlier self who was the analyst at the organization that this was going to be an interesting and valuable and fulfilling career to do. Compensation advisory. And for me, I have my CFA designation. It was actually one of the things that I focused on when I finished my business degree because I felt like I did need to have the credentials to talk to the senior executives that I deal with on a day to day basis because we often are hired by the CEOs or the CFOs. We're hired by the boards of these large companies that are sophisticated. And like I said, we always start with the business. So really having a grasp of the business and how we can actually make a difference in designing incentives, I don't think I understood that. I didn't have the context, the perspective as a junior analyst to understand that what we're doing is really quite fun and quite meaningful and can be impactful.
- [26:28]
B
I've been speaking today with Amanda Vogli, co founder and managing partner of compensation consultancy Southlead and author of the recent Enterprising Investor blog post, retaining Top Investment Lessons Learned by Large Canadian Pension Plans. Thanks for joining me today, Amanda.
- [26:43]
A
Absolutely. Thank you.
- [26:44]
B
I'm Mike Wahlberg, and this is me, the Enterprising Investor.