Mark Wiseman, CEO of CPPIB (Art by Chris Buzelli)“Canada
Pension Plan’s Active Management Strategy Is a Crock,” according to a prominent
columnist for the National Post, a major Canadian newspaper.
Why? Not performance, primarily, nor asset allocation. The column, by writer Andrew Coyne, centered on the Canada Pension Plan Investment Board’s rising expenses and technique for reporting them. During the last week, nearly every major media outlet in the country has published about the same thing.
This flurry of coverage began with a September 3 report—“Accounting for the True Cost of the Canada Pension Plan”—released by right-leaning think tank the Fraser Institute. It accused the pension fund’s administrative body (CPP) and independent investment group (CPPIB) of twisting cost disclosures and thus understating expenses by as much as two-thirds. External active managers account for most of the difference, according to authors Joel Emes, formerly a senior government advisor and Fraser Institute economist, and Philip Cross, the ex-chief economic analyst for Statistics Canada. “Canadians should be informed of the total costs of the CPP’s operations and the total costs involved in its increasingly complex investment strategy,” Cross and Emes wrote.
The report failed to mention that both of those figures already are available to anyone with an interest and an internet connection. They have been for years.
CPPIB discloses all of its costs in its annual reports. The publication breaks out spending by external management fees ($947 million in FY2014), transaction costs ($216 million), operating expenses ($576 million), and compensation for seven executives (CEO Mark Wiseman earned $3.6 million), among other spending categories. Likewise, CPP’s annual reports give a full accounting of the cost of administrating Canada’s $288 billion pension system ($490 million).
“Canada Pension Plan Costs $2 Billion a Year, Not $490 Million,” a CTV headline announced, echoing many others, on the day of the report’s release. “The CPP is hiding the fact that its administrative costs have more than tripled since 2006 because of transaction and external management fees, according to a new report from a conservative think tank.”
“I never used the word ‘hiding,’” Cross clarified in an interview with CIO. “Other publications may have, but it didn’t come from the report.” He freely acknowledged that CPP and CPPIB fully disclose their own expenses: Arriving at the $2 billion aggregate figure involved no more investigative effort than Googling both annual reports, and adding CPPIB’s $1.5 billion to CPP’s $490 million.
Still, Cross maintained that the comprehensive annual price tag of operating the pension system ought to be disclosed in a single location. “This is public money,” he said. “You shouldn’t have to go search for the number.” As the parent organization, CPP would be the obvious party to include it. Indeed, its reports fail to note that “operating cost” refers only to administrative activities, not asset management. A mere footnote would have prevented the dozens of headlines like CTV’s, proclaiming CPP spent $1.5 billion in taxpayer money and then attempted to cover it up.
Whether greater transparency (or simply bureaucratic coordination) could have stemmed the public mistrust and partisan vitriol that followed remains an open question.
The Fraser Institute’s report arrived with exquisite timing. Even Cross admitted he was shocked at the volume of media attention and public dialogue it ignited. “I wasn’t expecting anything like this,” he said, “I mean, it had the word ‘accounting’ in the title.”
Starting in early 2013, provincial lawmakers launched public campaigns for an expansion of CPP benefits. When the federal finance minister nixed the idea last December, in came the prospect of an extraordinarily rare entrant to the institutional investing world: a brand new, very large, public retirement plan promising a lifetime income stream. The Ontario Retirement Pension Plan is set to launch January 1, 2017, with $3.5 billion in annual inflows. That is, provided voters continue to back the idea.
“One of the justifications for the Ontario plan was that big pension systems are much less costly than small ones,” Cross said. A function of the report was to challenge that notion. Although he and Emes noted that the paper only evaluated CPP’s cost, not its investment strategy, it nevertheless sparked doubt about the worth of the Canadian model.
“I guess if I take my pension savings and play the stock market that would be gambling,” remarked one of Coyne’s readers in the website's comment section. “However, if the government does it for me… well that’s investing.”
Still, the highest-rated feedback—by far—asked, “In all that talk, I didn’t see the most pertinent question answered: Relative to the performance of a passive system, adjusting for all costs and fees, does the current system beat (or not beat) the return?”
Once again, CPPIB has the disclosed the figures and Cross has done the arithmetic. Since the reference portfolio’s 2006 inception, active strategies have generated an excess $5 billion. Subtract all the fees—administrative plus investment—and Canada’s pensioners finish $3 billion richer.
In other words, CPPIB's crock of an investment strategy could buy every Canadian of reading age a year's subscription to the National Post (net of costs).