Teachers’ success is no lottery

If you’re a retired teacher living in Ontario, Canada, there’s every chance that you own the National Lottery operator Camelot as well as Burton’s Biscuit Company, the maker of Jammie Dodgers and Wagon Wheels, not to mention stakes in Bristol and Birmingham airports.

In fact, you’re probably partly responsible for C$140bn (£76bn) of assets as a member of the Ontario Teachers’ Pension Plan, which not only controls the savings of 307,000 retired and active teachers in the province but has also become one of the biggest investors in Britain and across the world.

Teachers’ can trace its roots back to 1917 but underwent a dramatic overhaul in 1990 when the government of Ontario decided to spin off the scheme as a standalone unit. The former Bank of Canada governor Gerald Bouey was named as its first chairman and he recruited the businessman Claude Lamoureux to run the scheme like a business – in contrast to many other pension schemes across the world, which use third parties to manage their money.

Almost 25 years on, the move has paid off. According to its last annual report, Teachers’ has a C$5.1bn surplus, having made average annual returns of 10.2 per cent since being set up.

“The formation of Teachers’ was truly innovative and other plans in Canada have followed suit,” says Jo Taylor, who heads the scheme’s London office in Mayfair. “We are led by Ron Mock [president and chief executive] and have members of the provincial government on the board as well as members of the teaching union. However, the understanding is that investment decisions are delegated to the investment team, which is super important in allowing us to make money for our members.

“I think one of the biggest keys to our success has been the willingness to pay attractive rates of compensation to investment teams, who over the years have joined us and spent our money wisely.”

Teachers’ footprint now extends far beyond its Ontario roots, with offices in Chile, Hong Kong and New York.

The Mayfair office was set up in 2007 and has been the launchpad for investments both here and across Europe. Although Teachers’ may be best known for its £389m takeover of Camelot in 2010, other assets under its control have included Northumbrian Water as well as the airports and Acorn Care and Education, a provider for vulnerable young people, which it still owns. Further afield its assets include the Norwegian clothing brand Helly Hansen and Canada’s Maple Financial Group – investments it allows to flourish with very little interference.

“We generally back growth companies with good management teams, rather than turnarounds or higher-risk propositions,” Mr Taylor adds. “The reason for that is that we are a mature plan and want to accumulate good assets that can grow over a long period. As we often point out, there are teachers working in Ontario now who will be collecting their pensions in 2083.

“The last two investments we made in the UK were Busy Bees [the day-care nursery business] and Burton’s. Both of those companies are planning overseas expansion with specific territories in mind. Busy Bees is more Asia-focused and Burton’s is in continental Europe and North America. They’re both also looking at takeover opportunities. For Busy Bees it’s likely to be bolt-ons, although they’re also looking at larger overseas opportunities to expand into. In the case of Burton’s, they’re looking to take part in wider consolidation activity.”

Another area in Teachers’ sights is infrastructure, with Mr Taylor having already expressed an interest in investing in Britain’s controversial HS2 rail network between London and the North of England. Teachers’ and its fellow Canadian pension fund Borealis acquired a 30-year concession to own and operate HS1 in 2010 and are watching developments closely. Mr Taylor says: “We have already demonstrated that we can be a good infrastructure partner. We were involved in HS1 and bought what is a kind of infrastructure asset in Camelot.

“Birmingham and Bristol airports also show that we can operate these longer-term licences.”

Looking ahead, he says Teacher’s is interested in UK consumer businesses as well as those operating in the financial services sector and other areas like education.

But the success of Teachers’ also shines a harsh spotlight on the UK’s pensions system, which has been in crisis for years with deficits of billions in final salary schemes. Although there have been recent signs of innovation, with the City financier Edmund Truell chairing the London Pensions Fund Authority, it begs the question: have we missed a trick by not copying the Teachers’ model?

Mark Wood, chief executive of the consultancy JLT Employee Benefits, says: “The majority [of UK pension funds] find delegating stock selection more effective. Significant scale is required to build a sophisticated in-house investment capability, and outsourcing investment allows pension funds to diversify risk and maintain the right risk/return profile.”

Mr Taylor agrees: “I don’t have the answer but ... a lot of pension funds in the UK have smaller investment teams and those teams tend to sub-contract out their work. The problem with that is you lose a bit of control over what you invest in. We can afford to employ a significant team that can invest in different geographies ... it’s a daunting task to ask that of a smaller UK pension fund.”