Let’s start with a question: What do DB pension plans, the Canada Pension Plan Investment Board and high-net-worth individuals have in common?
In the simplest of terms, they all use discretionary investment managers to make financial decisions on their behalf. No one from the CPP has ever called you to find out how you’d like your contributions invested. Likewise for any DB plan member. Those retirement plans rely on portfolio managers to do that.
Which begs a second question: If discretionary asset management is right for these groups, why isn’t it right for all of us? The answer, of course, is that it is.
A breakthrough for the Canadian pension market
Discretionary management inherently understands that average people are ill-equipped to make investment decisions on their own. Yet many Canadians, either in a DC plan or group retirement savings plan, are forced to do just that—and they’re the lucky ones. Of the 17 million workers in this country, 11 million of them have no workplace pension whatsoever. If you discount that number by removing those workers who will be adequately cared for by the CPP/QPP, and those with RSP contributions, that number drops to roughly 5.5 million—still a startling figure.
On June 28, Bill C-25, The Pooled Registered Pension Plans Act, received royal assent. The objective of pooled registered pension plans (PRPPs) is both noble and simple; as Finance Minister Jim Flaherty stated back in February 2011, “[PRPPs] will be a major breakthrough for the Canadian pension market. They will make well-regulated, low-cost private sector plans accessible to millions of Canadians who have, until now, not had access to such plans.”
In theory, at least, those millions of Canadians without a pension now have a shot at a decent retirement. However, if PRPPs are truly to be the private sector solution that reconciles the retirement challenges of all working Canadians, shouldn’t the level of professional investment management mirror that of DB plans and the CPP?
“I want my doctor to know something about medicine, not which investments to make”
As Jack Mintz points out in his Financial Post commentary on Jan. 13, 2011, “Even with all the financial education in the world, literacy can only go so far. Even the best and brightest who are busy with their own professions will not have the time to become financial experts. I want my doctor to know something about medicine, not which investments to make.”
Mercer’s Malcolm Hamilton goes further in an article in the June issue of Benefits Canada, saying, “Financial illiteracy is a disease for which there is no known or probable cure. Retirement savings plans that rely on the astute decision-making of plan members are destined to disappoint.”
With this in mind, it is worth considering whether PRPPs or Quebec’s voluntary retirement savings plans (VRSPs) will live up to Flaherty’s vision in the absence of discretionary investment management.
Perhaps we can learn a few lessons about pension plans from David Blake, Andrew Cairns and Kevin Dowd in their 2009 paper, Designing a Defined-Contribution Plan: What to Learn from Aircraft Designers, where they observe, “We cannot treat the typical pension customer as a fully rational and adequately informed consumer. Consequently, a role might exist for a sort of surrogate ‘intelligent consumer’ to act on behalf of pension plan members as a guide or supervisor. This role might be filled by pension trustees, sponsoring employers or even regulators.”
The wealthy and those fortunate enough to have a DB plan have long practised this type of surrogate “intelligent consumerism.”
PRPPs are a telling moment. Not since the introduction of the CPP has there been an opportunity to provide for the retirement needs of an entire country. Discretionary investment management can be provided on a national scale, no different than what is available to the wealthy and DB plans.
However, if PRPPs are truly to be the private sector complement to the foundation provided by the CPP, they must clearly be enshrined in the same principles: discretionary investment management, low cost and a fiduciary standard of care. When PRPPs emerge in the marketplace, hopefully the question will no longer be why isn’t discretionary investment management right for all of us, but rather, what took so long?
Zev Frishman is senior vice-president and chief investment officer with Open Access Ltd.
For more on PRPPs and pension reform, visit benefitscanada.com/PRPP.