Canada’s pension funds are beating peers globally in investment performance and are stronger at hedging against liability risks, according to research from McGill University and CEM Benchmarking.

Their success is partly explained by the fact they are more likely to manage their assets in-house, McGill researchers Sebastien Betermier and Quentin Spehner, along with CEM’s Alexander Beath and Chris Flynn, wrote in a July paper. The authors’ findings are based on a study of pensions, endowments, and sovereign wealth funds globally between 2004 and 2018.

Large Canadian funds in particular outperformed in all measures of the study, which analyzed returns, asset allocation strategies, and cost structures. The authors defined large funds as those managing more than $10 billion in assets in 2018. “Not only did they generate greater returns for each unit of volatility risk, but they also did a superior job hedging their pension liability risks,” the authors wrote.

“The ability to deliver both high return performance and insurance against liability risks is notable because hedging is typically perceived as a cost.” While the Canadian model has yet to be fully tested by the Covid-19 pandemic, the researchers said the strong performance of the country’s pension plans over the past decades kept them well-funded even as they faced the challenge of falling interest rates and rising life expectancy. U.S. corporate funds, meanwhile, are relatively expensive to run as they outsource a majority of their investments, according to the paper.

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