Combining public sector pension funds could raise a capital pool of about $25 billion–three times larger than any one province’s fund today. This could finance investments, whether as venture capital, private equity, or infrastructure, that benefit pensioners and the Atlantic economy

So why all the resistance?

Before leaving office in 1997, then New Brunswick premier Frank McKenna had a modest proposal for his Atlantic Canadian brethren: let’s combine our public service pension funds. McKenna’s idea was to merge the management of all the funds to build a larger pool of capital and use some of the money to fund local investments, spurring economic growth. The idea went nowhere, but neither did it disappear completely.

“The combined size of the public service pensions would rank around sixth largest in Canada, and B.C. manages about the same size of fund as we would if our pension funds were combined,” says McKenna. “We need to bulk up.” Now the deputy chair of Toronto–Dominion Bank, McKenna frequently makes the proposal in speeches around the region, and people both inside and outside the government are intrigued by the idea.

The merger of the Atlantic provinces’ public sector pension funds would form a pool of capital of about $25 billion—about three times larger than any individual province’s fund today. In theory it would be cheaper to run one big pension agency than four small ones, meaning the participating teachers and civil servants could potentially end up with more money in their pensions. The savings could be significant. For example, Nova Scotia’s pension fund currently pays $16 million a year in fees to fund managers in Toronto. And savings would also add up, since pensions are long-term investments.

A larger pool of capital means a regional pension fund could make investments in the local economy, whether as venture capital, private equity, or infrastructure, all benefitting pensioners and the Atlantic economy. “All you have to do is look at the large pension funds in the other provinces to see what big pools of money can do,” says Bill Denyar, the president and CEO of the Atlantic Provinces Chamber of Commerce.

For example, Denyar maintains that an enlarged fund could invest in the Lower Churchill electrical power projects in Labrador, a perfect investment for pension plans because it can provide secure returns for decades. The provincial pension funds are too small to make a meaningful investment because the amount of capital needed for Lower Churchill is so immense.

The creation of a large pan-regional pension fund would be in keeping with the global phenomenon where large pension funds become forces to reckon with in the private sector. This point was driven home in 2007 when the Ontario Teachers’ Pension Plan, which has $108.5 billion in assets, led the buying team purchasing telecom giant BCE Inc. for $52.2 billion. Though an Atlantic Canadian fund would be smaller than Ontario Teachers’, the deal indicates the firepower a big pension fund packs on the investment front.

Another reason the idea of a merged fund is appealing is it could make badly needed investments in infrastructure in the Atlantic region. “The public pensions of Nova Scotia—and even better, of Atlantic Canada—should be allocating small allotment of their investments to our region,’’ says Jamie Baillie, the CEO of Credit Union Atlantic in Halifax and a one-time chief of staff to former Nova Scotia premier John Hamm. Even without a merged Atlantic Canadian fund, says Baillie, governments should be looking at channelling a bit of pension money into regional infrastructure for the benefit of pension holders and the overall economy. Governments are facing such capital constraints, and have such a demand for infrastructure development, that they are looking at new ways of financing infrastructure projects.

The logical solution would be to sell some assets. A sterling candidate is the Halifax–Dartmouth Bridge Commission pension fund, the proceeds of which could fund projects such as hospitals and schools.

Is Baillie asking the pension funds to subsidize government? Not at all. Infrastructure is a perfect investment for pension funds, which must generate returns over a long period of time and need dependable cash flow to pay people who have retired. A good infrastructure project—a bridge with a toll booth or a power-generation plant—will produce those returns. “On the investment side, it is something very attractive for investment funds,” says John Sinclair, the president and CEO of the New Brunswick Investment Management Corp. (NBIMC), the pension corporation McKenna set up during his government.

Currently it’s difficult for pension funds to make these sorts of investments, says Sinclair, because federal and provincial governments in Canada haven’t yet developed an attractive framework for such investments. So it will require not only that pension funds look for these investments but that governments change their thinking and legislation to allow pension investment in public projects.

Each province could make these sorts of investments on their own, but no one provincial fund is large enough to do anything substantial. If a $25-billion pension fund put even 1% of its assets into infrastructure, this would mean a $250-million investment, which could be increased by borrowing money to back the projects.

“There’s a certain critical mass that’s needed,” says Toon Nagtegaal, the founder of Wave Venture Partners in Lunenburg, N.S., and a former executive board member of the Germany–based European Venture Capital Association. “Any province by itself is not big enough.”

Michael Arbow, the head of capital markets at the New Brunswick Securities Commission, notes that $1-billion investments happen several times daily in the global economy. Large pools of capital are needed in order to make a mark. Steven Wolff, who earlier this year became CEO of the Nova Scotia PensionAgency, notes that pension funds don’t have to be merged to set up a regional infrastructure collaboration fund. Instead, all that’s needed is for the four existing funds to pool a small part of their assets in a new fund that could make infrastructure investments.

The economic benefits would extend beyond infrastructure, as the pension funds could also invest in other forms of alternative investments, including private equity and venture capital. Nagtegaal says that pension funds around the world prudently channel 3% to 4% of assets into alternative investments, adding that it’s wise to invest outside the Atlantic region because more profit can be made if assets are spread out.

Generally, the provinces can see merit in the merger proposal. Nova Scotia Finance Minister Michael Baker says he would like to discuss the matter at a meeting of regional finance ministers. He promises that nothing would be done without talking to public sector unions and the province’s pension administrators. Alan Silliker, the manager of investments for the Prince Edward Island Master Trust, agrees: “In general, we’d have to see what information there is on it and what proposal comes forward.”

While the concept of a regional pension fund is intriguing, the practicalities of actually merging the funds are far trickier. On one hand Wolff, the head of the Nova Scotia agency, notes that the complexity of various funds within each province makes the prospect of merging them daunting. Even in the private sector, merged pension funds have suffered as managers have focused more on combining businesses than managing funds.

Aside from all this, any merger proposal would have to suggest who would manage the merged fund and where it would be based. The proponents of a merged fund say the easiest way would be to rely on the only regional public pension fund that manages funds internally: the NBIMC. The other three provinces assign private investment managers outside Atlantic Canada to manage their pension money. “The most logical thing to do is to give the NBIMC the mandate to manage the regional pension assets,” says Nagtegaal. While NBIMC’s Sinclair won’t reveal whether he believes his institution should take on pension management for other provinces, he will say that it has the capacity to add funds.

Others note the NBIMC has a better track record than some other funds, so pension holders would benefit if the New Brunswick organization took over management. NBIMC funds have 10-year annual returns of 8.3% to 8.5%, whereas the overall figure for the Nova Scotia pension funds is about 7.3%. That leaves one problem: if New Brunswick manages the funds, would the other provinces see this as disadvantageous? The respondents said unanimously that this shouldn’t be a factor in the discussions.

“There’s a whole new generation of Atlantic Canadian businesspeople who want to move beyond those sorts of local, parochial concerns,” says Credit Union Atlantic’s Baillie. Nagtegaal is even more blunt: “This mentality of ‘It’s OK to be miserable as long as your neighbour’s not better off’ is just killing us. We’re too small to do four things cleverly all the time."