The rise of pension-fund capitalism in British Columbia
In this 1994 article, I explained how the labour movement, then led by Ken Georgetti, was reimagining how to use retirement savings to stimulate the B.C. economy
Photo by Mika Baumeister/Unsplash
By Charlie Smith
Ken Georgetti was on a drive through the Kootenays in 1985 when he finally realized how much economic clout he could have as a union leader. His travelling companion was Bill Clark, then the veteran president of the Telecommunications Workers Union, a man whom Georgetti describes as his mentor in the use of workers’ pension funds. As they crisscrossed southeastern B.C. in a rented car, travelling to telephone workers’ rallies, Clark spent more than two hours explaining to his protégé how pension funds had the power to create thousands of union jobs and transform the B.C. economy.
“I said to Kenny, ‘We’ve got the ability, if we use our heads, to take care of our brothers and sisters from the day they start working and join a union until the day they’re buried,’ ” recalled Clark.
At the time, Clark told Georgetti that it was foolish to allow hundreds of millions of dollars in B.C. pension funds to be transferred without a thought to eastern Canadian money managers every year. Clark accused these experts of simply turning around and investing the funds on Bay Street or Wall Street—sometimes in the same corporations that were buying B.C. firms, other times in outfits that were competing with B.C. companies. In other words, he said, B.C. workers’ own money was being used to put them out of a job. But Clark suggested that this could change if B.C. union officials used their influence to ensure that some of this pension money remained at home to be invested within the province.
That conversation between Clark and Georgetti marked a turning point in the evolution of pension-fund capitalism in B.C. After Georgetti returned home to Trail, Clark started sending him reading material about the possible uses of pension money. Within months, Georgetti, then president of Local 480 of the United Steelworkers of America, was demanding that his employer, Cominco Ltd., give his union a say in how their pension money was being invested. The following year, Georgetti was elected president of the B.C. Federation of Labour, with the support of conservative union leaders such as Bill Clark.
Three years later, Georgetti helped create VLC Properties Ltd., a Vancouver-based development company headed by Jack Poole and largely financed with union pension funds. This year, with Georgetti on the board of directors, VLC Properties Ltd. provoked a huge furor when it proposed including an enormous Las Vegas–style casino as part of the massive, $750-million Seaport Centre megaproject proposal. Clark and Georgetti also supported a controversial plan to use $1.1 billion in pension funds to create an idyllic new community called Bamberton on Vancouver Island. The developer hoped to win approval to build 4,900 homes on the site of an old cement plan beside Saanich Inlet. But last July, Municipal Affairs Minister Darlene Marzari put the project on hold pending three different environmental reviews.
Georgetti told the Georgia Straight that he is now spending up to two hours a day dealing with various business activities on behalf of the labour movement. That’s in addition to his usual responsibilities as president of the B.C. Federation of Labour. But on the eve of the federation’s annual convention, which will run from November 28 to December 2, some in the labour movement claim that their president should be spending less time in boardrooms and more time fighting for social and economic justice. “Georgetti is not getting paid to dabble in casinos or pension plans,” complained Jef Keighley, a national representative of the Canadian Auto Workers. “He’s being paid to run the business of the federation.”
For Georgetti, Bamberton and Seaport Centre are just the beginning of his grand plan to use pension funds to help British Columbians regain control over their economy. Today, he estimates that less than five percent of all B.C. pension money is invested in B.C. He hopes that within the next two decades, the labour movement will be able to use its influence to ensure that up to 15 or 20 percent of these funds is injected directly into the provincial economy.
“The objective is to repatriate pension capital that otherwise would be invested in jurisdictions all over the world and try to get it invested in B.C. [for] the purposes of creating jobs in construction and in housing and in creating long-term investment,” said Georgetti. “We’re trying to break the cycle of this fiscal roulette that money managers and financiers keep playing with capital, where its ultimate goal is to just seek a return and not seek productive things for the economy or to create jobs.”
Union representatives sit on boards of trustees of the largest private-sector pension funds in B.C., and Georgetti and other union leaders say these trustees should persuade fund managers to invest more of the workers’ assets in “ethical” enterprises, preferably within Canada. “Good money managers will do what they’re told,” said Georgetti. “In my view, they haven’t done an adequate job on the ethical side, and we’re going to now force them to do an adequate job.”
Georgetti believes that investing in “ethical” companies can also yield a strong rate of return because they tend to have happier workers who end up producing superior results. But his critics say this investment strategy could come at a grave cost to the future of workers’ pensions. “The last person that should be directing the placement of money is some union leader,” said Bob Hoye, a Vancouver investment strategist who advises financial institutions around the world. “This is absolute madness.”
Today, more than 350,000 B.C. workers are members of private pension plans, which operate independent of the government-run Canada Pension Plan. Trustees have traditionally turned over funds in the private-sector plans to professional managers to invest in stocks, bonds, and, to a far lesser extent, real estate.
Hoye said private pension-fund trustees have only one responsibility: to generate a reasonable rate of return with a minimum of risk for the people who have already paid into the plan. He said trustees cannot legally have any other objectives.
The federal government now allows 20 percent of private pension funds to be invested in other countries. Hoye believes that smart pension-fund trustees and their fund managers will take advantage of this provision to spread the risk around the world. That would protect workers’ nest eggs if the Canadian economy experienced a sudden shock.
Georgetti, however, said it’s irresponsible for trustees to allow 20 percent of workers’ pension money to be invested abroad. “I’ll take a reasonable return to get jobs for my kids, training for kids, and economic opportunities for my country rather than three more [percentage] points in investing it in Johannesburg or Hong Kong, where exploitation is rampant,” he said.
Three more percentage points may not sound like much, but—given the size of these private pension plans—it could amount to billions of dollars. Thanks to the ageing of the baby-boom generation, trusteed pension plans have grown astronomically in Canada—increasing in value from $60 billion to $260 billion in just 12 years. That’s more than the combined total of pension money invested in RRSPs and Canadian insurance companies. In fact, Statistics Canada reported that trusteed pension plans constitute the second-largest pool of capital in the country, ranking behind only the major chartered banks.
Veteran Vancouver money manager Wayne Deans wouldn’t comment on Georgetti’s plans without specific details, but he can understand why B.C. union leaders might be feeling frustrated. “They’re getting absolutely fucked by their money managers and they know it. And you can quote me on that,” he told the Straight.
Deans claimed that B.C. pension-fund administrators are paying millions of dollars in annual fees to eastern money managers who have trouble even outperforming basic market indexes. A Toronto rating agency reported that for the four-year period ending September 30, the middle-ranking Canadian pension fund’s Canadian stock portfolio underperformed the Toronto Stock Exchange 300 Index by almost a third of a percentage point. Canadian pension-fund managers didn’t fare much better with their bond investments. After management fees were deducted, the middle-ranking pension fund’s four-year bond performance also underperformed the bellwether ScotiaMcLeod Universe Index.
Even Fortune slammed the money-management industry in a recent cover story, claiming that most of these professionals have done a dismal job. “I can understand [union leaders] looking at what they’re getting today and saying maybe there’s a better way,” said Deans.
Bill Clark first began thinking about a better way to invest pension funds back in the early 1970s after he was asked to prepare a report on that subject for his union council. In those days, most firms took sole responsibility for the workers’ pension plans, taking any surpluses and reinvesting them back in the company. But as these plans grew in size, more unions began demanding representation on volunteer boards of trustees that oversaw the management of these funds.
By the next decade, some Canadian pension funds began pooling tiny portions of their assets in various real-estate developments. Other private-sector pension funds built projects on their own, but the vast majority of money was still in stocks and bonds.
Around the same time, the B.C. economy was emerging from its worst slump in 40 years. By the mid-1980s, eastern Canadian and foreign-owned companies were descending on B.C. like vultures, buying controlling interest in scores of debt-soaked local enterprises. Big corporate names such as Woodward’s, MacMillan Bloedel, Crown Forest Industries, Yorkshire Trust, and the Bank of B.C. all fell under foreign or eastern Canadian ownership, sparking fears that B.C. was on its way to becoming little more than a branch plant for outside investors. For union leaders like Bill Clark, the biggest insult was that some of these outside takeovers were partially financed with B.C. pension money controlled from Toronto or Montreal.
In 1984, Clark got together with actuary Bruce Rollick, VanCity Credit Union board member David Levi, and B.C. Federation of Labour staff lawyer Patricia Lane, and together they devised a way of keeping some of this pension money in B.C. Their “Economic Alternative Plan” called upon the pension funds to turn over a small portion of their assets to a new investment pool. Its board of directors would follow seven investment guidelines. One rule was that no investments would be made in anti-union companies. Preference would also go to investments that combined profitability with socially desirable ends. Another priority would be investing in businesses that promoted long-term employment growth, worker ownership, and affirmative-action programs.
The 15-page proposal ended with an elaborate flow chart showing how this pooled trust of local pension funds could end up owning a real-estate corporation, small businesses, corporations, and oil, gas, and mining properties. At the time, Vancouver lawyer Hamish Cameron advised the group, but he said it soon became clear that there would be constant conflicts of interest if the labour movement started investing pension funds in this way. “They’d want to invest in a high-tech company, and it was nonunion or anti-union. Or they’d want to invest in a high-tech company and its direct competitor was B.C. Tel, which employs 10,000 union workers,” recalled Cameron.
Those conflicts prevented the plan from catching on, but it still laid the foundation for one of Clark’s boldest moves. Before Expo 86 opened, he lined up several B.C. pension plans and, along with fellow union leader Roy Gauthier of the B.C. & Yukon Building Trades Council, he prepared a proposal to buy the north shore of False Creek. Their goal was to use union labour and workers’ pension money to develop housing on the Expo site.
After the world’s fair ended, the two union leaders enlisted the support of Vancouver mayor Mike Harcourt. They held a press conference, which generated even more interest in the idea, but the Bill Vander Zalm government soon scotched their plans. “We approached the provincial government, and they sort of said ‘F.O.’ in no uncertain terms,” recalled Rollick, who advised the group. “They weren’t going to sell that land to any pinko union guys.”
The Telecommunications Workers Union pension plan continued investing in other real-estate projects, generating a handsome rate of return for its members. Clark said that even today he would like to see B.C. pension funds get together and put one percent of their assets into a venture-capital fund for start-up businesses and high-technology initiatives. For the most part, however, he is focusing his attention on real estate. He believes that B.C. pension funds should set aside 15 percent of their assets to invest within the province, with up to seven percent targeted toward the actual ownership of real estate. The rest, he said, could be used to finance mortgages.
Now retired from the union, Clark still keeps busy on the investment committee of the pension plan–financed Mortgage Fund One, which has lent $50 million to finance various real-estate developments that use union labour. The other committee members are banker Paul Wagler and lawyer Jim Matkin. Gordon Allan, a part-owner of ACM Advisors Ltd., which manages the fund, said his goal is to increase the fund’s portfolio to $150 million by 1996.
Clark is happy to see his economic theories finally being put to use in B.C., but he doesn’t claim credit for devising the concept of investing pension money at home. He learned about it from reading books by Peter Drucker, a professor at California’s Claremont Graduate School of Business, and from seeing what happened with pension funds in Scandinavia. Drucker, the author of 27 books, has written that “the rise of pension funds as dominant owners and lenders represents one of the most startling power shifts in economic history”.
His groundbreaking 1976 book, The Unseen Revolution: How Pension Fund Socialism Came to America, pointed out that workers, through their pension plans, were living up to Karl Marx’s dictum and coming to own the nation’s means of production. By 1992, these pension plans owned half of the share capital and most of the fixed debts of the largest businesses in the United States.
In his 1993 book Post-Capitalist Society, Drucker expressed fears about looters getting their hands on portions of these vast pools of pension money. He suggested that it would take a few nasty scandals before society became aware of this danger. Here in B.C., RCMP recently charged two officials with Local 1 of the Bricklayers and Masons Union with theft, fraud, and breach of trust in connection with the alleged disappearance of $189,000 in pension and welfare trust-fund accounts.
Drucker’s foremost concern is that a pension fund won’t always act in the best interests of the people who contributed to the plan. “Equally great is the danger that special-interest groups, such as labor unions, will use their political power to divert pension fund money to subsidize themselves—usually under the fraudulent pretext of making pension fund money serve ‘socially constructive purposes’,” wrote Drucker. “Pension funds are the savings of today’s employees. They must not serve anything or anyone except the financial future of the present employees. This is the greatest ‘social purpose’ they can have.”
Georgetti said he has a great deal of respect for Drucker, but he disagreed on this particular point. “I think the difference between us—as a movement in the left—and the right wing is in the margins,” he said. “We’re prepared to take a reasonable return to do something good, whereas someone else will say I can turn a blind eye to the damage this might cause to the environment or individuals in order to maximize three more points. That’s what I call fiscal roulette.”
The B.C. Federation of Labour president told the Straight that all union leaders should take an active interest in their members’ pension plans to ensure they’re being prudently managed. That reduces the risk of management looting these funds, as happened recently in the United Kingdom with publisher Robert Maxwell’s empire. “I don’t think it’s responsible to create that big a block of money and give it to people who don’t have regard for that—to let them have access to it unchecked,” said Georgetti.
This issue of the proper use of pension funds could emerge at the upcoming convention of the B.C. Federation of Labour in Vancouver. “We fully support the concept of ethical investment,” said Jef Keighley of the Canadian Auto Workers. “However, the problem is that you’ve got fairly loose definitions of what constitutes ethical. A casino is obviously the single most controversial example of that.”
Keighley told the Straight that a number of motions opposing gambling will be presented at the convention. He claimed that there has even been discussion among unnamed individuals about running a candidate against Georgetti for the presidency of the B.C. Fed. Some of Georgetti’s other critics, including former Vancouver city councillor Jonathan Baker, grumble about pension money going into a real-estate development company headed by Jack Poole, a prominent Liberal whose Daon Development Ltd. ran into financial problems in the early 1980s. Eventually, Poole moved on to become the CEO of B.C.E. Developments, which experienced difficulties with its U.S. real-estate portfolio in the latter half of the 1980s.
However, pension-plan investors seem pleased with Poole’s performance at VLC Properties Ltd. Even Keighley is impressed with many of its projects. Five VLC cranes now dominate the skyline beside the Joyce Street SkyTrain station, where the company is proceeding with a $500-million housing development in four stages. Because the pension-fund owners are putting the money up front, VLC Properties Ltd. won’t have to borrow a penny to build the project. However, last summer the Kitsilano News obtained a B.C. government document saying VLC’s expected rate of return was, in the words of one official, a “low to inadequate return when compared to alternative institutional real estate investments”. In the end, VLC will create 3,200 housing units, including 600 rentals, which were designed after discussions with area residents.
“We sat down with the community and they designed the project the way they wanted it. They’re putting a policing office in there,” said Georgetti. “We’re trying to shape a vision here and say, ‘Look, you can do it this way and make a profit.’ ”
South of the border, there have been enormous abuses involving union pension funds. But Georgetti still remains an optimist about the possible benefits of investing pension money ethically, even when the conversation turns to how VLC Properties Ltd. ended up in partnership with Las Vegas casino mogul Steve Wynn. Wynn, chairman of Mirage Resorts Inc., obtained most of his own financing over the years from disgraced Beverly Hills junk-bond dealer Michael Milken. Earlier this year, Vancouver reporter Russ Francis revealed that Mirage Resorts Inc. refused to employ people who were considered excessively overweight or men who wore earrings.
Georgetti said that VLC Properties Ltd. thoroughly investigated Wynn before deciding to take him on as a partner in the Seaport Centre proposal. The B.C. Fed president and Nick Worhaug, president of Local 40 of the Hotel Restaurant Culinary Employees & Bartenders Union, also visited Wynn’s Las Vegas operations and talked to his employees. “Mr. Wynn was told ‘If you’re going to do a joint project with us, you’re going to have to follow our ethics and our morals.’ He looked at our [investment rules] and said he could live with them, that wouldn’t be a problem,” said Georgetti.
The VLC Properties Ltd.–Mirage Resorts Inc. joint venture likely won’t proceed under an NDP government, now that Premier Harcourt has said he won’t allow any Las Vegas–style casinos in B.C. But Georgetti still has other ideas for using workers’ pension money to improve the B.C. economy. One of his favourites is something he calls “BOT”, which is an abbreviation for using pension funds to build, operate, then transfer back ownership of capital projects to the government. Naturally, all of this would be accomplished with union labour.
“You build a bridge. You finance it and you operate it. And the government makes up the shortfall, because bridges don’t make a profit,” he explained, furnishing an example of how BOT would work. “Then, when it’s paid for, you transfer it back to the people. The pension fund gets its reasonable rate of return...and the government gets an asset.”
Georgetti said if the government financed projects this way using workers’ pension funds, there would be far less need to borrow money on foreign money markets. That would cut the government’s risk of having to pay more money back to foreigners every time the Canadian dollar took a tumble.
Investment strategist Bob Hoye thinks it absurd to invest pension funds in this way. He noted that in the past, the government frequently took public employees’ pension funds and invested them at below-market interest rates in provincial bonds. Politicians could do this because the people who managed the pension money usually worked in the Ministry of Finance. Those low-interest bonds financed many of W.A.C. Bennett’s biggest capital projects. Georgetti said he knows all about those lousy investments, and the labour movement is too sophisticated to repeat that error in the future.
One thing is clear, however. Different pension plans yield far different results for their members. The vast majority of private pension plans are fully funded, which means, at the moment, that they don’t have to raise contribution levels or cut benefits in order to cover future expenses. This year, however, the IWA–Forest Industry Pension Plan had to receive a $45-million lump-sum payment from management as part of this year’s collective agreement to cover its unfunded liability. The union has lost many members in recent years, meaning there were fewer contributions coming in to cover the amount of pension money going out.
The British Columbia Labourers’ Pension Fund is in a similar situation, thanks in part to a 33-percent decrease in the number of employees over a two-year period. In 1993, the plan’s total assets fell from $90.9 million to $78.8 million. Of that, $68.2 million was tied up in real estate. The Labourers’ pension plan was also an original investor in VLC Properties Ltd. Nobody from the Labourers’ pension-plan office was available for comment, but documents obtained by the Straight reveal a $63.7-million unfunded liability for the period ending April 30, 1993. The plan’s consolidated financial statements, which are filed with the B.C. Pension Standards Branch, stated that for the years 1992 and 1993, “revenue from contributions and investment income has not been sufficient to meet operating and pension expenditures”.
Meanwhile, many other pension plans are expanding their investments in real estate. For the past five years, major Ontario pension plans have been snapping up vast amounts of Lower Mainland commercial property, including stakes in Waterfront Centre, Granville Square, Bentall V, and City Square. Even the B.C. Public Service pension plan, managed through the Ministry of Finance, has been quietly snooping out Vancouver real-estate investments on behalf of government employees.
Earlier this year, UBC commerce professors Rob Heinkel and Stan Hamilton recommended in their book The Role of Real Estate in a Pension Portfolio that pension plans significantly increase their property holdings as a percentage of their overall portfolios. Trusteed pension plans now hold less than four percent of their portfolios in real estate. The authors suggested that most of these plans could safely increase that to between five and 15 percent. Real estate, they said, offers protection against inflation and a fall in the bond market.
Heinkel, a trustee with UBC’s $560-million faculty pension plan, told the Straight that the professors had a mere $2 million to $3 million invested in real estate, which was less than one-half of one percent of the whole plan. On November 21, his fellow trustees agreed to increase that to almost 10 percent of the total portfolio—which means increasing the real-estate component to $50 million.
That alarmed Jack Lessinger, a professor emeritus of real estate and urban development at the University of Washington and the author of Penturbia: Where Real Estate Will Boom After the Crash of Suburbia. Lessinger told the Straight he believes almost all forms of real estate are shaky investments at this particular time. Over the long term, he’s quite certain that real-estate prices will fall in every North American urban centre, although he believes values will eventually rise in most rural and semirural areas.
A Vancouver portfolio manager who didn’t want to be identified was also concerned to hear about pension-fund trustees making major real-estate investments right now. Although he’s not as pessimistic as Lessinger about Vancouver’s long-term future in real estate, this financial specialist said he still wonders about the trustees’ expertise when it comes time to pick an investment. He cited the experience of several Canadian trust and insurance companies, including Confederation Life, which lost billions of dollars on real estate when they incorrectly guessed that inflation would never go away. “Look what happened to them now,” he said. “They’re all sucking air.”
Heinkel emphasized that real estate is a very long-term investment, so it isn’t necessarily purchased with an eye to making immediate returns. Besides, he said, UBC’s trustees may only allocate 10 percent of the portfolio to this area, a figure that couldn’t even come close to bankrupting the plan. Under new provincial pension legislation being phased in over five years, no pension plan will be allowed to invest more than 25 percent of its portfolio in real estate.
Ken Georgetti and Bill Clark say they don’t support investing anywhere near that percentage of workers’ pension funds in real estate. Actuary Bruce Rollick pointed out that the Telecommunications Workers Union plan has less than 10 percent of its portfolio invested in real estate.
“One of the things that I’ve found over the years is that these union leaders are quite often more capable of making decisions than the management people,” said Rollick. “They’re not the raving socialists that management makes them out to be. Some of them are harder-nosed capitalists than they are.”
But even hard-nosed capitalists have been known to fail on occasion. Especially in Canada, which has produced more than its share of world-class financial debacles. From Canary Wharf in London, England, to the Marine Building in downtown Vancouver, the economic landscape is littered with properties once owned by the likes of the Reichmann family, Confederation Life, or Robert Campeau.
For the union movement, bringing B.C. pension funds home offers new hope for gaining control over an economy that has been rocked by the same global forces that brought down many of the 1980s tycoons. Critics respond that investment policies tied too closely to parochial objectives pose an added risk to people’s retirement savings.
Billionaire investment tycoon Warren Buffet once said that if you’re in a poker game and you’re having trouble figuring out who the sucker is, then you’re the sucker. The game has just begun here in B.C. with pension funds. It’ll still be a while before we know whether there are any suckers sitting at this table.