The $120 Billion Question

Is AIMCo a good money manager?

By Bob Ascah

The Alberta Investment Management Corporation (AIMCo) has lately come under intense criticism. The Kenney government’s changes to the Crown corporation’s mandate in 2019—the transfer, without prior notice, of several public pension funds to AIMCo—alarmed pension fund members who worried about ceding control of their pensions and were unsure about AIMCo itself. Then, in early 2020, AIMCo announced a loss of $2.1-billion resulting from a risky and poorly monitored investment strategy, blowing a big hole in its credibility. The announced departure of senior executives including CEO Kevin Uebelein raised further questions.

By now concern has spread far beyond public sector pension holders. All Albertans have a stake in AIMCo, whether as citizen-beneficiaries of the Heritage Fund or as pension plan members or as private or public sector employers who pay into WCB-Alberta’s Accident Fund. AIMCo has lost the public’s trust.

With the creation of Lougheed’s Heritage Savings Trust Fund in 1976, the provincial government’s need for investment managers came into sharp focus. The Heritage Fund would eventually be worth billions. In the early years it was managed by the investment division of Alberta Finance, along with public pensions. Legislation in the late 1990s reduced political influence in the management of these funds, and the public subsequently paid little attention to the investments. But internal management concerns remained, such as trouble attracting investment professionals and securing budgets necessary to upgrade technology.

A 2006 government report recommended the creation of an arm’s-length public agency whose board would have “appropriate accountabilities and authorities,” including responsibility for appointing the CEO, determining a risk management framework, establishing performance targets and “ensur[ing] an optimal organization design, including compensation.”

The Ed Stelmach government liked the idea and in August 2007 appointed a “blue chip” corporate board chaired by Bay Street executive Charlie Baillie. The board included two female financial executives from outside Alberta and several prominent local businessmen, including Daryl Katz. No direct representatives of the pension funds whose money AIMCo would be managing were appointed.

AIMCo launched on January 1, 2008, with public servants in Finance moving to the new public agency. Then-Finance Minister Lyle Oberg suggested the change might enhance investment performance by one-quarter to one-half per cent. This nebulous concept, known as “value-added” (or, the greater performance said to result from active investment management), remains the central metric in compensation practices in the investment industry.

After an international search, AIMCo’s board appointed Leo de Bever as the corporation’s first CEO—both a controversial and a conventional choice. He was conventional in that he had over 35 years’ experience in investment management, having been chief investment officer for the public Victorian Funds Management Corporation in Australia. He was controversial in that he would oversee investments for AIMCo in life insurance policies that became problematic. And in 2012 First Leaside Wealth Management in Ontario went bankrupt amid accusations from investors that de Bever’s affiliation with that firm—he was a director at Leaside at the same time he was CEO of AIMCo—had encouraged them to invest in it. Leo de Bever left AIMCo in 2015 and was replaced by another industry veteran, Kevin Uebelein.

AIMCo manages investments of approximately $120-billion for some 30 funds affiliated with the Alberta government. It manages these through “pools” including real estate, bonds, equities and infrastructure. The corporation’s largest clients are the Local Authorities Pension Plan ($50-billion; 275,000 members); Management Employees Pension Plan ($5-billion; 12,000 members), Universities Academic Pension Plan ($5.5-billion; 16,000 members) and Public Service Pension Plan ($15-billion; 89,000 members). AIMCo also manages various endowment funds and the $17-billion Heritage Fund.

Each individual pension plan board determines its own investment policies, return targets and risk tolerance. Each determines contribution rates to ensure its plan’s sustainability. Board members do not wish to be in a position of raising contributions. They rely on AIMCo’s investment managers to earn returns that meet or exceed the long-term rates of return necessary to keep plans viable. This is why investment performance is so critical and why last year’s $2.1-billion loss so concerned pension fund members.

AIMCo’s board of directors is appointed by the provincial cabinet. While directors have a legal duty to act in the best interests of the corporation, their appointment can be rescinded by cabinet at any time. The AIMCo legislation does not enshrine a legal responsibility for the board to consider the best interests of members of the pension funds (as both the ATB Financial Act and the Credit Union Act require when it comes to depositors), and the perspectives of fund members are not represented on the board. This isn’t the case elsewhere—at the British Columbia Investment Management Corporation, for example, of the seven-person board, four members represent public sector pension funds, with the trustees of four funds each appointing one director.

Prior to 2018, most AIMCo clients were required to use the corporation for investment management services: they could not “fire” AIMCo for any reason. Yet for the largest pension fund clients, neither AIMCo nor the Government of Alberta provides any guarantees of pension payments. In 2018 the Notley government introduced reforms aimed at shifting the power relationship between AIMCo and pension plans. AIMCo’s monopoly on managing assets was to be extinguished after five years, leaving plans the option to move some or all of their funds elsewhere. In late 2019 the UCP government passed legislation to reassert AIMCo’s de facto monopoly.

The change also handed more funds to AIMCo. Bill 22 swept the Alberta Teachers’ Retirement Fund ($18-billion; 83,000 members) and the Workers’ Compensation Board’s ($12-billion; 188,000 employers) funds to AIMCo, effective December 31, 2021. This change caught the ATRF and WCB totally by surprise. The government said the move would create “efficiencies.” While this rationale isn’t without some merit, subsequent problems at AIMCo  quickly undermined it.

Reaction to Bill 22 was swift and universally negative. Jason Schilling, president of the Alberta Teachers’ Association, described the decision as a “hijacking of teacher’s pensions” and said the union would consider legal action. The ATA later announced that the teachers’ pension fund had outperformed AIMCo every year since 2012, and that it would be worth $1.3-billion less if it had been managed by AIMCo over that time. Gil McGowan, president of the Alberta Federation of Labour, was even more blunt, describing the change as “tantamount to theft.” Both groups said they suspect the UCP government wants to control how their pension funds are invested.

In an attempt to assuage concerns, CEO Uebelein wrote in a December 2019 Edmonton Journal op-ed that it was “absolutely clear” the government had “no say” over where or how AIMCo invests. This led to obvious questions about AIMCo board members being appointed by cabinet and the government’s ability to influence the board’s CEO appointments.

More criticism came in late December 2020, after Finance Minister Travis Toews signed ministerial orders expanding AIMCo’s control over the formerly independent pension funds. The orders imposed agreements that give AIMCo de facto vetoes over the funds’ boards’ changes to investment policy. The ATA said the ATRF board would face serious limitations in determining its own policy. Added the AFL’s McGowan: “It’s like a customer going to an auto dealership and saying ‘I want to buy a red car,’ and the dealership saying ‘Here’s your blue truck.’”

All Albertans should now be carefully watching the Kenney government’s pursuit of assets currently managed by the Canada Pension Plan (CPP). In May 2020 the UCP’s “Fair Deal Panel” recommended that this province “develop a comprehensive plan to create an Alberta Pension Plan and withdraw from the Canada Pension Plan,” in which event AIMCo would begin managing Alberta workers’ portion of CPP assets—roughly $40-billion. Soon many Albertans’ pensions—work-related and the one available as a right of citizenship—could be managed entirely by AIMCo.

Suspicion is rife that the Kenney government wants AIMCo to invest in Alberta’s sagging energy industry, which is experiencing low oil prices and prominent divestment campaigns by the likes of Norway’s government pension fund, New York City’s pension fund, HSBC (the world’s sixth biggest bank) and BlackRock (the world’s largest money manager). After the premier’s well-publicized trips to financial capitals yielded nothing—and particularly after Teck’s decision in February 2020 to pull out of its Frontier oil sands project—Kenney and his advisers have probably realized significant foreign capital is not returning to Alberta’s oilpatch.

AIMCo’s recent investments in local oil and gas companies—especially its role in overseeing the Alberta Growth mandate—have simultaneously reinforced concerns about the corporation’s compromised independence and created concerns about its less than stellar investment performance.

An April 2020 report from Progress Alberta titled “Alberta’s Failed Oil and Gas Bailout” found that AIMCo “has invested more than $1.1-billion in conventional oil and gas junior and intermediate producers and oilfield service companies.” It points out that Trident Exploration, which received $60-million from AIMCo, went bankrupt in 2019. Another company, Perpetual Energy, lost 99 per cent of its value following AIMCo’s investment.

AIMCo incurred huge losses—$2.1-billion—using a strategy one expert called “amateurish” and “a beginner’s mistake.”

The Notley government had directed AIMCo to allocate 3 per cent of the Heritage Fund’s assets to deserving Alberta companies, which it did from 2015 to 2019. The criteria were wide open: jobs, diversification, innovation etc. However, about two-thirds of the investments were in oil and gas companies and servicing companies, the majority struggling due to the collapse of commodity prices. No official accounting of the losses or expected losses of this $500-million portfolio has been given. But Progress Alberta’s report notes that “every publicly traded company that AIMCo has invested in under [the] invest local directive… has seen its share price fall since its investment.” The UCP officially ended the mandate in 2019—but Kenney’s subsequent $1.5-billion public “investment” in Keystone XL underlined an ongoing desperation to underwrite the energy sector.

Still more damage to AIMCo’s credibility lay ahead. In late April 2020, media reported AIMCo had incurred huge losses—roughly $2.1-billion—through a volatility trading strategy. Institutional Investor quoted a volatile-market specialist who called AIMCo’s strategy “amateurish” and “a beginner’s mistake.” The magazine added “the scale of the losses, and decision to shut down the program at its deepest nadir, suggest a grave lapse in oversight and governance.”

The response from the board and the CEO was hardly reassuring. “Markets behaved in a manner never before seen and the result was a very unfortunate loss,” wrote Uebelein in a press release. Mea culpas and promises to perform better failed to satisfy pension plan contributors already challenged by COVID-19, wage and job losses and a government hostile to the public sector. Two AIMCo staff associated with the volatility strategy were let go. Other executive departures followed, including Uebelein, who announced in November 2020 that he’d be leaving AIMCo before his contract expired, in June 2021.

Finance Minister Travis Toews was strangely silent throughout the affair, leaving communications to Uebelein. The corporation’s board, seemingly caught off-guard, commissioned a report to itself. The report pointed the finger at AIMCo management and staff, identifying problems such as “culture,” a lack of collaboration between risk and investment professionals, and imprecise strategy clearance protocols.

A government that had acted swiftly to remove Albertans from countless other public bodies—before their terms had expired, and despite an absence of scandals—removed not one member from AIMCo’s board. When board chair Richard Bird’s term ended in July 2020, Toews chose as his replacement Mark Wiseman, a former CEO of the CPP Investment fund—and a man who’d left his most recent position, at BlackRock, after violating company rules about relationships at work (which conduct BlackRock’s CEO called “deeply disappointing”).

The new chair will oversee AIMCo’s ongoing expansion. “There’s no doubt as we look at the merit, opportunities and perhaps risks of an Alberta pension plan, should the province go in that direction,” Toews said at the time of Wiseman’s appointment, “we will certainly need strong leadership.”

After the governance changes and the series of bad investments, the nub of the issue remains unresolved. Is AIMCo a good money manager?

Investment management is a complicated business that requires trust between the client and the manager. But the bottom line is that excellent investment management entails consistent, long-term delivery of financial returns to support pensions or endowments.

Differences sometimes exist between a client’s risk tolerance and the risks taken by their investment manager. At AIMCo, however, these differences can persist for years because of clients’ inability to shift investments to another fund manager. The potential for mistrust and conflict is thus considerable: a monopolistic investment manager not required to do as clients’ desire.

Meanwhile, AIMCo’s investment performance has been insufficient to overcome these concerns. In a 2016 study conducted for the University of Alberta’s Institute for Public Economics, “Alberta Investment Management Corporation: An Examination of a Corporatization Project,” I concluded that AIMCo’s performance, when compared with other major Canadian public pension managers, has been mediocre at best. In an extension to my study, in late 2020, I compared AIMCo’s 11-year performance against BC Investment Management Corporation and Quebec’s Caisse de dépôt et placement. Of the major public pension plans, these two entities are closest in terms of size, clients and mandate. Over the 11 years, the average of AIMCo’s annual value-add was 0.43 per cent, BCMIC’s was 1.02 per cent, and the Caisse’s was 0.53 per cent. This suggests that AIMCo is adding value but lags behind comparable institutional investors. While any study of value-added is fraught with issues regarding the quality of benchmarks, these studies clearly suggest AIMCo’s performance has not been exceptional.

Such mediocre performance inevitably raises questions about the compensation paid to AIMCo staff (the corporation had 450 employees as of 2018) and executives. Since 2008, when AIMCo began operations, average compensation at the corporation rose from about $115,000 to over $260,000 by 2017. It fell to $210,000 by 2019, still almost double the average staff compensation at the time of AIMCo’s launch. The aggregate compensation of the top five officers of AIMCo grew from $7.2-million in 2008 to $10.4-million in 2019, or by 44 per cent. (By comparison, average weekly earnings across Alberta, 2008–2019, grew by only 26 per cent.)

Why do investment professionals command salaries many times those of other highly skilled workers—higher, even, than the salary of deputy ministers or the premier? When you speak with investment professionals, their answer is always that the market highly values their skills and determines their compensation. And, to be sure, an examination of individual and aggregated data shows AIMCo salaries are not out of whack with the market.

Another answer would be that investment professionals have become the new priesthood, an offshoot from the economics profession. Here, math-proficient believers in rational expectations attempt to exploit minute pricing anomalies in a mythical free marketplace. Their beliefs discount or ignore the role of human emotions such as fear and greed. And yet, even after the egregious sins of this priesthood during the 2008 financial crisis, investors continue to endure portfolio managers routinely being paid millions, even from the public purse.

This disconnect from reality stems from the neoliberal belief in the sanctity of free markets, combined with an inconsistent application of their own rules. We have a tradition in Alberta of “free enterprise” governments telling independent pension clients who they must invest with, while exerting influence over a nominally “independent” AIMCo board.

To ensure that it’s public investment manager truly acts in the public interest, the Alberta government needs to change the constitution of AIMCo’s board by mandating the appointment of qualified representatives nominated from the clients whose money they manage. At a minimum, pension holders must be represented on the board of this public agency. Our government should also adhere to its stated free market principles and give public pension holders the ability to shop for a different investment manager. Both changes would be big steps toward holding AIMCo accountable.

Bob Ascah served as director of the Institute for Public Economics at the University of Alberta, 2008–2013.




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