CPP is not ‘low cost’
A recent meeting of Canada’s finance ministers rightly put the brakes on the federal government’s proposal to expand the Canada Pension Plan (CPP). After all, the evidence shows such reform is unnecessary and in fact counterproductive.
But as the broader debate over government-mandated pensions persists, proponents of CPP expansion continue to trumpet the CPP’s alleged high efficiency and low cost. Their argument goes something like this: the CPP is low cost because of economies of scale, whereby the ratio of costs to assets declines as the value of assets under management grows. Therefore, expansion makes sense from an efficiency point of view.
A recent Fraser Institute study tests this claim by comparing the total investment and administrative costs of the CPP with those of five large public-sector pension plans based in Ontario (all headquartered in downtown Toronto). The claim that CPP is “low cost” is not supported by the evidence.
The analysis of these large pension plans, which range in asset values from $17 billion to $269 billion, finds that the plan with the most assets—the CPP—is the most costly (measured as a percentage of assets) on average over the period 2009 to 2014.
Specifically, the CPP with $269 billion in assets had the highest average cost-to-asset ratio at 1.07 per cent during that time frame. The next largest plan, the Ontario Teachers’ Pension Plan with $154 billion in assets, was the fourth costliest with an average cost ratio of 0.63 per cent. Meanwhile, the Ontario Pension Board, one of the smallest plans covered with $22 billion in assets, had one of the lowest average costs at 0.49 per cent. The Healthcare of Ontario Pension Plan (HOOPP) had the lowest average cost ratio, despite its middling size, with $61 billion of assets.
The evidence shows larger public pension plans do not have a clear cost advantage over smaller ones. The CPP’s reputation for low costs is coloured by incomplete comparisons that do not account for all related costs. Its investment arm, the Canada Pen¬sion Plan Investment Board (CPPIB), only reports expenses related to its investments since the costs of administering pensions are borne by the plan members and charged by the government of Canada. The five other public pension plans, however, include expenses related to both the administration of pensions and their investment strategies. It is this “apples to oranges” comparison that drives the CPP’s low-cost reputation.
To the contrary, costs for larger public pension plans may actually increase as the plan’s assets grow due to the complexity of implementing investment strategies and the consequent need to seek counsel from external experts. These more aggressive investment strategies, which the CPPIB has pursued in recent years, raise costs and do not have a proven track record over the long term.
The implications are sobering for proponents of more and larger public pension plans. Despite its reputation, the cost of the CPP is actually above the average for comparable plans based in Ontario, for both total costs and expenses related to making investments. There is little evidence to support the claim that there are economies of scale to operating large public pension plans for either total costs or those related only to making investments. Indeed, there may even be diseconomies of scale for larger public pen¬sion plans because of the complexity of imple¬menting their investment strategies.