July 6, 2020

Defending The Canadian Pension Model

In a June 27 article about Alberta nationalism in Canada’s national newspaper the Globe&Mail, columnist Andrew Coyne trashed the manager of the $400 billion asset pool backing the Canada Pension Plan, calling the CPP Investment Board an “out-of-control monstrosity". In a Letter to the Editor published on July 1, Keith took Mr. Coyne to task, showing him to be misinformed about both the design of pension plans in general, and the design of the CPP Investment Board in particular. 

Alberta, Quebec and CPPIB - Letter to the Editor, Globe&Mail July 1, 2020

Andrew Coyne needs to get his facts straight on the Canada Pension Plan Investment Board. He wrote: “The CPP investment fund is an out-of-control monstrosity, its costs now exceeding $3.4-billion … its payroll swollen to more than 1,800 full-time employees … all in pursuit of the same fools’ gold: consistent above-market returns, with which promoters of such ‘active management’ strategies bilk the gullible.” As possible alternatives, he praised the Australia and Singapore systems of “mandatory individual savings plans”.

He confuses pension design and delivery mechanisms. Australia’s design is indeed based on mandatory saving through individual pension pots, but these pots are managed by a small number of “super funds” that aspire to be as good as the CPPIB. Singapore’s collective pension pot is managed by the Government Investment Corp., which operates very much like CPPIB. Singapore experimented with individually managed investment accounts for a while, but found (predictably) that they performed poorly relative to the collective pool expertly managed by GIC, and wisely chose to eliminate the option.

Management philosopher Peter Drucker argued for the expert collective option 40 years ago. Thirty years ago, the Ontario Teachers’ Pension Plan became the globe’s first special purpose, expert pension organization based on the Drucker principles. Today, it has one of the best performance records in the world. As its superior model came to be recognized, other Canadian pension organizations (including CPPIB) began to adopt it. Now, globally, the “Canada Pension Model” is what pension organizations around the world aspire to become.

Where does the model’s superior investment performance come from? A key factor is the insourcing of private-markets investing, which was historically outsourced to very high-cost (5 per cent of assets) commercial managers. This generally led to attractive gross returns, but disappointing net returns owing to the high expenses. By insourcing, the model cuts those expenses by as much as 90 per cent while maintaining the attractive private-markets gross returns.

So the CPPIB is not Mr. Coyne’s out-of-control monstrosity in pursuit of fools’ gold. Instead, it generates wealth to pay future pensions at a higher rate than the alternatives of outsourcing private-markets investing at very high cost, or simply investing CPP contributions in low-cost index funds. CPPIB’s most important success driver has been to hire all those people Mr. Coyne complained about in his column. Yes, they increase visible investment expenses, but those expenses are far lower than the high invisible fees that used to go to external investment/merchant bankers and fund managers. All those CPPIB investment professionals are making CPP members wealthier, not poorer.

Keith Ambachtsheer Director Emeritus, International Centre for Management, Rotman School of Management, University of Toronto; Senior Fellow, National Institute on Aging, Ryerson University; Cofounder, CEM Benchmarking Inc., and KPA Advisory Services.

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