‘Not your government’s money’: AIMCo ‘reset’ raises concern over political influence

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If there was any doubt Danielle Smith’s United Conservative Party government wanted a firmer hand in the direction of the nearly $170-billion Alberta Investment Management Corp., that evaporated on Wednesday.

In a news release, somewhat buried by the appointment of former Prime Minister Stephen Harper as AIMCo’s new chair, the Alberta government announced that one seat on the 11-member board will be reserved for the deputy minister of treasury board and finance. It won’t be a paid position: the high-ranking bureaucrat will be there “to ensure more consistent communications between AIMCo and Alberta’s government,” the release said.

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While the arrival of Harper and the new board seat have given the government the “reset” it sought following the purge of the Crown corporation’s entire board and chief executive earlier in the month, they are also raising questions about just how much sway the government will have over the investment manager, whose mandate spells out that day-to-day investment decisions are to be made “free from any influence or direction from the government of Alberta.”

“I’m worried about the increased number of political appointments on the board,” said Sebastien Betermier, an associate professor of Finance at McGill University and executive director of the International Centre for Pension Management. “This will potentially undermine the fund’s ability to operate at an arm’s length from government, which is a critical element of the Canadian model.”

In media interviews, Alberta Finance Minister Nate Horner pledged to make only minor tweaks to AIMCo’s mandate and to avoid exerting political pressure. He also said Harper’s stature, having run the country for nine years, would make it difficult for anyone to tell him what to do.

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However, sources close to AIMCo have said that it was clear for months that the government wanted more control.

One of Harper’s first jobs is expected to be to try to reassure stakeholders — including investing partners and the teachers, judges and police officers who rely on AIMCo to manage their pension funds — that the Alberta investment manager won’t stray too far from Canada’s globally recognized pension model, which, with rare exceptions, puts risk-adjusted returns ahead of all other considerations.

Against this backdrop, he will also have to oversee a search for a new CEO who can juggle running the large Crown corporation while satisfying the government’s plans to grow the $25-billion Alberta Heritage Savings Trust Fund, which AIMCo manages.

“A large and sophisticated investment organization like AIMCo is complex to manage and involves large and elaborate transactions, especially when it comes to derivatives and private market deals,” Betermier said. “I often like to think of large pension funds as supertankers,” he added, noting their size and the multifaceted operations that make them challenging to steer.

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One reassuring development this week, he said, was that three of the 10 jettisoned directors returned to the board Wednesday. They include Jim Keohane, a pension fund veteran who retired as CEO of the successful Healthcare of Ontario Pension Plan (HOOPP) in 2020.

“The prospect of an entirely new board was terrifying,” Betermier said. “Continuity at the helm (is needed) to ensure the ship travels fast and safely.”

The machinations at AIMCo over the past couple of weeks have drawn attention both within Canada and globally, where the country’s largest pensions, known informally as the Maple 8, are closely watched and their strategies are often emulated.

“We are not going to know the extent of government interference (or) influence for a couple of years,” said Jim Leech, a former CEO of the Ontario Teachers’ Pension Plan Board, which was a pioneer of the Maple 8 model of direct investment and internal management of globally diverse public and private assets.

“However,” he said, “the out-of-the-blue purge of board and management … and the appointment of the DM (deputy minister) to the board has sent all the wrong signals to employees, potential partners, AIMCo clients and the financial markets.”

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Leech also pointed to conflicting narratives about the wholesale boardroom and executive change — ousted interim chair Kenneth Kroner sent a letter to the government disputing their public statements about costs and returns — and he predicted that it will take several years for the fund to regain the confidence of the markets.

“That process will only start with the appointment of a legitimate CEO and the release of a new strategy, appropriate for the clients,” Leech said.

He noted that this isn’t the first time Alberta’s government has installed a senior bureaucrat on AIMCo’s board to keep an eye on things and that the previous experiment, in 2007 and 2008, didn’t last long.

“There was an outcry from the board and management and others in the financial community that that was a big mistake,” he said. “So (the) government removed him.”

Back then, AIMCo, an arm’s-length Crown corporation, had just been created, with investment management operations and $70 billion in assets spun out from within Alberta’s finance department. By that time, however, Ontario Teachers’ and the Canada Pension Plan Investment Board, already seasoned investors in private and alternative asset classes such as real estate and infrastructure, had demonstrated that operating independently of political whims could generate steady long-term returns.

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Leech sees AIMCo’s latest moves as a regression and a threat to the Canadian pension model. Other pension and governance experts say the board appointments announced so far could lead to significant changes at AIMCo, even if pressure isn’t applied explicitly.

“The developments over the past two weeks have shown an increased politicization of the process and this is a real concern,” Betermier said.

Simply having eyes on AIMCo’s operations from inside the boardroom today — overseen by the government’s top pick as chair  — could redirect the investment management organization to focus more on Alberta. Before the boardroom and executive purge, sources familiar with events at AIMCo said the organization’s international expansion — with offices opened in Singapore and New York over the past couple of years to hunt for private and co-investment deals in the United States and Asia — was a sore point for the Alberta government, which prioritized not only lower costs but also investment in the province.

One area of focus for the new board and management will certainly be on the home front: the Alberta government’s Heritage Savings Trust Fund, which represents about $25 billion of AIMCo’s $169 billion in assets under management.

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Despite its small size within the larger AIMCo portfolio, the Heritage Fund was front and centre in Wednesday’s announcement of Harper’s appointment.

“Our ambitious goal of building the Heritage Savings Trust Fund to more than $250 billion in the next 25 years requires strong governance oversight, which he will provide,” Smith said in the news release.

Alberta’s Heritage Fund was created in 1976 to invest proceeds from Alberta’s nonrenewable resources, with a long-term goal of saving for a time when those resources have been depleted. But Smith’s comments about the fund since she was elected in 2022 suggest she is considering using it to invest in projects her government finds worthy but which are having difficulty getting funding. This could include the oil and gas sector.

In a video clip of a Calgary Chamber of Commerce appearance posted to X (formerly Twitter) in the fall of 2023, she talked about the dual investment mandate the Caisse de Dépôt et placement du Québec, which includes an emphasis on both risk-adjusted returns and economic development. Then she suggested Alberta’s Heritage Fund could take a slightly different approach, more like a sovereign wealth fund, which could then be used to “de-risk” projects that were having difficulty securing financing elsewhere.

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Such comments did not sit well Gil McGowan, president of Alberta’s Federation of Labour (AFL), particularly after the AIMCo board and CEO were sacked. In a post on the AFL’s website on Nov. 8, McGowan said Smith’s past comments, including some before she became the leader of the United Conservative Party and was elected premier, made the AIMCo shakeup disconcerting for those whose retirement funds are dependent on its performance.

“Workers with money in pensions need to know they are secure. They remember Danielle Smith musing about using pension funds to prop up oil and gas companies that couldn’t otherwise get financing,” he said. “They remember Danielle Smith musing about setting up a sovereign wealth fund, but she hasn’t been clear where the money would come from. Albertans are jittery. Rightly so.”

Smith and others in her government have also praised the model of Norway’s successful Government Pension Fund Global, which was established in the 1990s as a long-term savings and investment vehicle for the proceeds of oil discovered in the North Sea. That one is a head-scratcher to some, though, because the Norway fund is prohibited from investing at home, a strategy used as a hedge to avoid overexposing beneficiaries to their national economy.

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Sources say the Alberta government was consulting with AIMCo before the massive boardroom and executive shakeup about ways to boost the size of the Heritage Fund, such as through increasing investments in private, less-liquid and higher-yielding alternative assets over the long term. But at the same time, the government appeared to be looking outside AIMCo.

The Calgary Herald reported in May that Smith’s government had retained a firm called BERG Capital Management, an investment consultant for pensions and sovereign wealth funds that changed its name to PNYX Group, to do a “deep dive” on the Heritage Fund. Then, this month, after the UCP government passed an order-in-council approving the incorporation of a provincial corporation for the purpose of managing and investing all or a portion of Crown assets, Smith told the Herald that “a hybrid investment strategy” is possible, with pension funds invested in a very conservative way while the Heritage Savings Trust Fund would be invested to grow ten-fold by 2050.

Whether that would all take place under the AIMCo umbrella remains to be seen. A plan for the Heritage Fund is expected to be rolled out by Alberta Finance Minister Nate Horner by the end of the year.

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While her recent comments about AIMCo-managed investments have been confined to the Heritage Fund, a source with close ties to pension manager lamented that AIMCo’s clients outside government and the unions that represent workers who rely on the organization for their retirements didn’t seem to pushing to protect its independence from government.

Some of that pushback appears to be happening now, though. On Wednesday, the leaders of nine of Alberta’s largest unions representing hundreds of thousands of workers and retirees, wrote a letter to Smith demanding their own representatives on AIMCo’s board.

“This is not your government’s money,” the letter said. “It is the retirement savings of nearly 500,000 working and retired Albertans.”

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