Canada’s pension system has long been praised for its robust returns and resilience, particularly within the face of volatile markets. A key aspect contributing to this success is the inducement frameworks Canadian pension funds use to draw and retain top investment talent. In this post, we examine how Canada’s largest pension funds have structured their compensation plans to deliver exceptional results while navigating market fluctuations and ensuring long-term sustainability. The insights here come from Southleas 2024 Asset Management Opinion poll.
The Canadian model provides a framework for asset managers worldwide. Large Canadian pension funds manage the vast majority of their assets internally, with the most important eight (the Maple 8) managing 80% of their investments internally.
Key components of Canadian pension plan incentive structures
Incentive designs are the “secret sauce” to the success of Canada’s pension plan system. The incentive designs utilized by these organizations follow a layered approach to be certain that individual, divisional, and overall organizational goals are aligned. Common components of those incentive frameworks include:
- Company metrics: These typically include performance metrics tied to overall return on investment, but in addition keep in mind broader business goals akin to talent development and customer satisfaction.
- Division/asset class metrics: By aligning incentive structures with the outcomes of specific asset classes, retirement plans can ensure teams are focused on achieving their individual goals while contributing to the organization’s broader goals.
- Individual performance: Retirement plans also evaluate individual performance based on each the “what” (e.g., results) and the “how” (e.g., leadership and values). This holistic approach ensures that incentives for the best behavior are created in any respect levels of the organization.
In addition, each absolute and relative performance metrics are used to make sure compensation is according to market expectations and benchmarks. This balanced approach encourages investment teams to deliver not only by way of returns, but in addition in relation to broader market conditions.
Adapting to market volatility
Recent years have highlighted the necessity for flexibility in incentive design. As market volatility has turn out to be the brand new normal, Canadian pension plans have adjusted their frameworks to stay competitive while ensuring they keep their top talent.
For example, relative total fund returns are sometimes used to measure performance. This benchmark helps pension plans not only generate returns but in addition outperform the market. However, given the variability in market performance, more sophisticated models are used to evaluate relative returns to be certain that the benchmarks chosen are appropriate and reflect the corporate’s specific investment strategy.
Another vital adjustment was the increasing concentrate on risk metrics. Pension funds are actually integrating additional risk measures into their incentive plans, going beyond easy return measures. These risk-adjusted metrics, often assessed in consultation with the Chief Risk Officer, be certain that inappropriate risk-taking is penalized and stable, long-term performance is rewarded.
Expand performance horizons
Canadian pension funds have also adjusted their incentive structures by extending profit periods. In the past, many plans operated with performance windows of three to 4 years, but more recently these time horizons have been prolonged to 5 and even seven years. This longer-term approach higher aligns with pension funds’ long-term objectives, smooths the impact of short-term market downturns and ensures compensation results reflect sustainable performance.
Judgment-based incentives vs. quantitative metrics
To move away from rigid, formulaic compensation structures, many pension funds are actually incorporating a component of discretion into their incentive decisions. This shift allows for greater flexibility in compensation outcomes, particularly in volatile market conditions where strictly quantitative approaches can produce biased results. By enabling informed judgment, pension plans can be certain that compensation decisions higher reflect each the financial and operational circumstances of the organization.
Compensation is trending downward
Southlea’s 2024 Asset Management Compensation Survey highlights a notable trend: Actual compensation levels for Canadian pension plan employees fell about 6% year-over-year, with senior employees seeing even larger declines. This is essentially as a result of difficult market conditions, with senior executives whose compensation is more closely aligned to long-term incentives being probably the most affected.
| All employees | Senior executives | Young talent | |
| All investment asset classes | -6% | -11% | -3% |
| Private asset class | -7% | -15% | -3% |
| Public asset class | -6% | -14% | -1% |
Private asset classes akin to private equity and real estate saw among the largest year-over-year declines in compensation, reflecting difficult conditions in 2023. However, it’s important to notice that these trends are usually not limited to a single pension fund, but are consistent across the asset management industry. Looking at specific private asset classes, these senior executives saw their salaries decline more in private equity and real estate in comparison with natural resources/infrastructure, reflecting difficult market conditions in 2023. Below are the actual year-over-year declines in executive pay for the next private asset classes:
- Private equity: -28%
- Real estate: -14%
- Natural resources/infrastructure: -3%
A more balanced labor market
Changes in labor market dynamics will also be observed within the Canadian pension sector. The labor market is more balanced between employers and employees than within the recent past, fluctuation has fallen significantly and offer acceptance rates have risen significantly.
At the median, overall turnover fell by around 25% to eight.9% and the voluntary turnover rate fell by around 45% to five.4%. This significant decline reflects general market conditions. Many corporations across the market have slowed their hiring in comparison with previous years after they had hired large numbers of employees, especially after the COVID hiring freezes.
When investment job openings, it was interesting to notice that while time to supply acceptance and time to begin increased 12 months over 12 months, median acceptance rates increased from 95% to 100%. This suggests that although these investment positions take longer to fill, trying to find these positions leads to greater success in hiring a candidate. It’s also value noting that the variety of positions filled by internal candidates increased by 5% year-over-year (21% to 26%), and external hiring rates and the usage of external recruiters decreased.
Key to remove
The secret to the returns of Canadian pension plans lies of their ability to draw top talent, rigorously design compensation frameworks and adapt to market conditions. By balancing risk and reward, extending performance horizons and enabling judgment-based incentive outcomes, these pension funds have created a resilient and competitive compensation system that continues to deliver outstanding results. As global markets proceed to evolve, other asset managers may look to Canadian pension plans for inspiration in developing their very own compensation strategies.
