Defense investment framework gives pension funds a practical lens

The International Centre for Pension Management (ICPM) has released a sector-by-sector framework for pension funds, with the intent to bring capital closer to home and align government priorities, starting with defense.

The framework, which Sebastien Betermier and the ICPM call the “investable window framework”, maps pension fund mandates into a concrete set of parameters that determine whether an asset is worth pursuing.

It’s also meant to be a tool to move past the standoff between pension funds and governments. According to Betermier, executive director at ICPM, governments accuse funds of not contributing enough domestic capital while funds push back by citing fiduciary obligations and neither side budge.

“We’re getting this dialogue between deaf agents, so to speak, where the communication is not going through,” said Betermier. “We created this investable window framework, which is to take the fiduciary mandates of the funds and map it into a window, a very concrete set of investable parameters within which it makes sense for an investment. It falls inside what the funds are looking for. Once the investment falls inside that window, the funds naturally want to invest in it. You don't have to force them because they’re business driven and they will want to invest in it.”

Four filters that define the pension investable window

The framework rests on four pillars that are central to most pension funds’ objectives: risk-return, scale and liquidity, governance, and development stage.

Betermier explained that all four function as filters. If an asset clears all four, it sits inside the window and attracts capital on its own merits but if it falls outside, the conversation shifts from a binary yes or no to a practical question.

“What does it take to bring it inside the window? That then becomes your public policy tool,” he said.

Why defense moved to the center

According to ICPM, defense has moved from institutional investors’ periphery to being a central focus. One of the reasons for that, Betermier noted, is a breakdown in the geopolitical order. The unipolar stability that once prevailed, underwritten largely by the United States, has given way to a more fractured landscape.

Meanwhile, conflicts in Ukraine and Gaza, sovereignty pressures on Canada and Greenland, and escalating tensions between Russia and Europe have all pushed defense up the priority list.

Defense also sits high on the list of sectors where governments want pension fund participation.

From a risk-return perspective, defense carries real appeal, Betermier said, noting spending commitments stretch a decade or more, particularly under NATO pledges, and could generate steady, inflation-linked cash flows that closely mirror pension liabilities.

Innovation in dual-use technologies such as drones has also further widened the opportunity set, and he suggests that fund interest in the sector has risen.

Why defense is not conventional infrastructure

To that end, defense differs from conventional infrastructure in several ways. Traditional assets like bridges or hydroelectric facilities draw revenue from a broad customer base. In defense, governments are the sole buyer, which concentrates revenue risk in a single counterparty.

The capital expenditure profile also sets it apart. Building frigates or military helicopters demands heavy upfront spending with positive cash flows potentially five to ten years away, Betermier noted, a timing mismatch that makes funds more cautious than they would be with a typical infrastructure project.

Liquidity is also tighter. Betermier acknowledged the pool of potential buyers for defense infrastructure is narrow by design and national sovereignty restrictions can block foreign ownership, leaving funds with fewer exit options than they would have in a conventional asset class like airports or toll roads.

The friction points, however, are significant, Betermier said, noting defense suppliers are small and mid-sized firms that fall below the deal sizes pension funds target. Exclusion policies also remain rigid.

“One of the suggestions of the report is to get funds to review their own exclusion criteria, which in some cases tend to be very black and white,” said Betermier. “Even if you have some firms that are commercial firms but have some military component to it and it might be outside of the funds' mandates, part of that has to do with very clear sensitivity on human rights issues that are currently outside of the defense window because you have these exclusion criteria being built. They're being revisited as we speak right now, especially in Northern Europe.”

Member scrutiny adds another layer of complexity, said Betermier, noting pension fund members hold polarized views on ESG and defense, particularly when it comes to whether their pension savings should flow into weapons manufacturing.

“Right now, you have the belief of that this is for natural sovereignty, but then you have another issue, which is, well, these very same companies that are protecting your country might be selling off weapons to conflict areas around the world that I disapprove. And so if you're one of the funds, how do you deal with such polarization of views when you're dealing ultimately with investments in companies that build war weapons?” said Betermier, adding that pension boards don’t have an easy answer to that tension.

Elsewhere, government as sole customer can also be a double-edged proposition as it can anchor long-term revenue, but a change in administration can wipe out years of invested capital overnight.

Much of the frontier innovation in defense also sits at the early research stage, loaded with development risk that funds are not structured to absorb while the more realistic entry point lies elsewhere, said Betermier.

Governance before defense allocation

For Canadian funds considering defense exposure, Betermier believes the starting point is governance, not allocation. He underscored that boards need to revisit where defense sits within their portfolios and how members will receive that shift, pointing to countries like Norway that have moved through ethical reviews in months rather than years, with a process that has relied on member consultations, documented procedures, and transparent rationale.

Additionally, governments need to bring funds into the conversation earlier. Too often, Betermier argues, governments design projects on their own and seek capital after the fact, only to find the terms don’t match what funds need.

“Bringing the funds earlier in the co-creation process may actually result in some win-win opportunities here if there is proactivity both from the governments and from the funds,” he said.

Moving forward, defense won’t be the only topic in focus under the “investable window framework” as Betermier and co-author Arno Steenbeck, who previously co-led ICPM’s working group on domestic investment pressures, continue to work on a series of short, sector-specific papers.

Each one examines the frictions that keep assets outside the investable window, what governments elsewhere have done to address them, and what funds themselves should consider. The next one, Betermier noted, will be around affordable housing.

“There's no policy or any advocacy here. It’s setting up a framework which creates a common language between government and pension funds to start having that productive discussion and identify where the win-wins are and what are the conditions to leverage that pension fund capital and align it with government priorities,” said Betermier.