Myth—the CPP is a low-cost pension plan
As the debate about the Canada Pension Plan persists, with finance minsters meeting next week in Vancouver to discuss possible CPP expansion, a misleading argument made in favour of expansion is that the CPP is a low-cost public pension plan. It’s often assumed that there are economies of scale for large pension plans, whereby the ratio of costs-to-assets declines as the value of assets under management grows. A series of Fraser Institute studies have put this assumption to the test.
The first study documents that just looking at the costs of the investment arm of the CPP ignores all the costs the federal and provincial governments absorb in administering the plan. When all the investment and administrative expenses are accounted for, the CPP’s total costs have doubled over the past decade to over one per cent of its assets.
A second study found that the CPP actually had the highest costs compared with the five largest public-sector pension plans in Ontario. The costs of the CPP were nearly triple the lowest cost plan, largely because of the rising costs of the CPP’s increasingly complex investment strategy adopted in 2008. The head of Ontario’s lowest-cost plan estimates there were no cost efficiencies to be had beyond $75 billion of assets (the lowest cost plan kept all its investment activities in-house, which is cheaper than outsourcing). The CPP now has assets of $269 billion.
It will not be known for years or even decades whether the rising cost of the CPP can be justified by a higher rate of return. In the current environment of ultra-low interest rates and high asset prices in most countries, the rate of return of most investment strategies looks flattering. It remains to be seen how these strategies will perform as conditions start to normalize, a process already underway in the United States.
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’s 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 pension plans because of the complexity of implementing their investment strategies.
The implications should be sobering for proponents of expanding the CPP.