CPP costs triple due to investment fees: Fraser Institute

Canadian investors are often warned about management and transaction fees that can eat into their investment returns, while being encouraged to look for products with lower fees.

But what about investments Canadians count on but can’t control, such as the Canada Pension Plan (CPP)?

A new report from the Fraser Institute says the CPP’s investment costs have more than tripled between 2006 and 2012 as a result of “hidden” transaction and external management fees as part of its newer “active” investing approach.

“[The] CPP is not as low-cost as they want you to believe,” said Philip Cross, former chief economic analyst for Statistics Canada and co-author of the study with Joel Emes titled, Accounting for the True Cost of the Canada Pension Plan.

The report says the total cost of running the CPP increased to $2 billion in 2012-13, up from $600 million in 2006-07.

However, it notes the CPP Investment Board (CPPIB) reported operating expenses in 2012-13 as being $490 million.

The Fraser Institute says the CPPIB budget doesn’t include external consultant management fees, transaction fees associated with acquiring assets and costs incurred by four federal government departments.

“Many of the costs of large, government-managed pension plans like CPP are hidden,” Cross claims.

It breaks down the $2-billion budget for 2012-13 as follows:

• $490 million on operations;

• $782 million on external management fees;

• $177 million on transaction fees

• $586 million in federal government administrative costs for collecting contributions and paying benefits.

“The CPP Investment Board now spends almost twice as much on management fees and transaction costs as it does on actual operations,” Cross states, calling for “greater transparency and a full accounting of all costs.”

“Every dollar spent on running the CPP is one less dollar available for Canadians who contribute a portion of their paycheques to the plan,” Cross states. “So it’s vital that the CPP is as efficient and as transparent possible.”

In an email statement, the CPPIB says its disclosure practices include all business operations and performance results, including a complete and detailed breakdown in its annual report.

“We seek to inform our stakeholders, for the sake of transparency itself, and to maintain public accountability,” the CPPIB statement says. “In carrying out our investment strategy we are building a resilient, enduring portfolio that has contributed more than $110 billion in net investment income and added value to the CPP Fund since inception. We have conviction that our strategy will enable CPPIB to continue to add value over the long term.”

CPP expansion

The Fraser Institute report targeting the CPPIB comes amid calls for an expanded CPP and as Ontario considers its own provincial pension system. The federal government is also floating a new Target Pension Plan, where the employer and employee would share the investment risk.

Proponents of these proactive measures say they are necessary to help cover the soaring costs of funding the CPP, especially as the aging Baby Boomer generation continues to draw from it.

Others, including the Fraser Institute, argue there is too much emphasis being put on the CPP and other programs because Canadians have other savings vehicles such as the Registered Retirement Savings Plan (RRSP) and the equity built up in their homes.

“There is no retirement income crisis in Canada,” the Fraser Institute argued in a report released this spring called, The Reality of Retirement Income in Canada.

It argued back then that forcing Canadians to put more into government pension programs, such as the CPP, would likely mean they’d do less voluntary savings.

The Montreal Economic Institute also argued in its own report back in February that Canadians are saving enough privately, in their homes, and with the help of tax-sheltered vehicles such RRSPs and the Tax-Free Savings Account (TFSA).

“Canadians are better prepared for retirement than it may appear,” said economist Youri Chassin, adding that Canada’s poverty rate among seniors is lower than most industrialized countries.

"These reform proposals overvalue the advantages of the public plans and undervalue the advantages of private savings.”