A study finds that the cost of running the Canada Pension Plan (CPP) has more than tripled due to increased external management fees.
The Fraser Institute study, Accounting for the True Cost of the Canada Pension Plan, says that between fiscal years 2006/07 and 2012/13, the total cost of running the CPP jumped to $2 billion from $600 million, despite an investment board report that claimed its operating expenses in 2012-13 were only $490 million.
“Contrary to claims of proponents of an expanded CPP, or a provincial pension plan in Ontario, many of the costs of large, government-managed pension plans like CPP are hidden,” says Philip Cross, study co-author and former chief economic analyst for Statistics Canada. “A full examination of all costs shows that CPP is not as low cost as they want you to believe.”
Why the discrepancy? The study claims the CPP Investment Board (CPPIB) excludes management fees it pays to external consultants, transaction fees associated with acquiring assets, and costs incurred by four federal government departments from its operating budget.
“Contracting out investment strategy consultation may be justifiable, but excluding those rising costs from reported expense ratios is not,” he explains.
In fiscal 2012/13, the report says the CPPIB spent $490 million on operations, $782 million on external management fees and $177 million on transaction fees for a total of $1.4 billion. Add in the federal government’s administrative costs of $586 million for collecting contributions and paying benefits, and the total comes to just more than $2 billion.
“The CPP Investment Board now spends almost twice as much on management fees and transaction costs as it does on actual operations,” Cross explains.
By excluding additional costs such as external management fees, transaction costs and the federal government’s share, the board can portray itself as low-cost and efficient. In reality, notes the study, when all costs are considered, the CPPIB costs four times more than its official operating budget.
“For the public to understand the true costs of the Canada Pension Plan,” he says, “there must be greater transparency and a full accounting of all costs.”
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