The Fraser Institute has released a new report purporting to show that the real cost of operating the Canada Pension Plan is $2 billion per year, or four times as much as shown in the financial statements of the CPP Investment Board.
The study confuses the cost of operating the Canada Pension Plan, and the operating expenses of the CPP Investment Fund. The latter are just $490 million or 0.28% of assets. These operating costs are much lower than those of most other large private pension plans, let alone the 2 to 3% management fees paid by most ordinary individual investors in mutual funds.
The Fraser Institute includes as operating costs the $600 million per year spent by the federal government in collecting CPP contributions and issuing CPP pension cheques. These costs have absolutely nothing to do with the operating costs of the CPP Investment Board. They existed before the Fund was created, and would continue even if the Fund were to be wound up.
The report also says that the Fund should include transaction fees and external management fees as operating costs. These costs are disclosed by the CPP Investment Fund and have not been suddenly discovered by the Fraser Institute. They have risen as the CPP Investment Fund has gradually shifted from being a largely passive investor in shares and bonds to a much more active investor in areas like real estate, private equity and infrastructure development. The latter are long-term investments, which often require high up-front costs.
The real question to be asked is whether the Fund is getting a good return for Canadians to support pensions down the road, and perhaps even to provide improved benefits or lower premiums if returns are high. Last year, the CPP investment Fund had a return of 16.5%. Over the past five years, the average annual rate of return has been 11.7%.
The Fraser Institute implies, without any real evidence, that CPP Investment Fund costs are a bad deal for Canadians. Yet returns are clearly much higher than the individual retirement savings vehicles that the Institute favours.
