Fraser Institute calls for clarity on CPP investment costs

A new report from the Fraser Institute is questioning whether the group that manages the CPP is being fully transparent about the costs of investment.

The report, by former Statistics Canada chief economic analyst Philip Cross and Fraser Institute fellow Joel Emes, says the Canada Pension Plan Investment Board should more clearly explain the added costs of its new approach to investing.

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Beginning in 2006, the CPPIB broadened its holdings beyond traditional stocks and bonds to invest in areas such as international real estate and infrastructure projects.

That new approach resulted in an additional $782 million for external management fees and $177 million on transaction fees, the authors say, arguing costs are much higher for this form of "active investment."

The CPPIB, which manages the funds not needed in the near term to pay Canada Pension Plan benefits, has moved away from traditional holdings because of low interest rates that keep bond returns low, according to CEO Mark Wiseman. In the past year, it has also invested selectively in stocks because of their high valuations.

Long investment horizon

Wiseman says the active investment approach is needed to create value “over long investment horizon” and to diversify the CPPIB portfolio.

It points out some things that bear watching, like certain types of expenses have been ratcheting up quickly as the investment strategy changes- pension expert Malcolm Hamilton

The Fraser Institute argues the CPP has faced a big hike in the cost of its investments as a result of its new strategy — from $600 million or 0.54% of assets in 2006 to $2 billion or 1.15 per cent of its assets in 2013.

That figure includes the cost of collecting the CPP from Canadian paycheques and sending benefits to pensioners.

It is being less than transparent in failing to report its external management fees and transaction costs as part of CPPIB accounts, the report says. 

But the CPPIB said the Fraser Institute seems to have confused the annual report of CPP, which does not break down all the investment costs, with the report of the CPPIB, which includes itemizes all of that agency's costs and management fees.

“Our disclosure practices span all aspects of CPPIB, its business operations and our performance results," the CPPIB said in a statement released Monday.

"We seek to inform our stakeholders, for the sake of transparency itself, and to maintain public accountability. In fact, we provide a complete and detailed breakdown of costs each year in CPPIB’s annual report," it continued.

The returns on the investment portfolio handled by CPPIB are reported net of costs — that is, the return reported is after all costs are deducted.

It earned 16.5 per cent on its investments in the 2013-14 financial year, managing a fund of $219 billion.

The CPPIB has invested in infrastructure projects in countries such as Brazil and India and real estate portfolios in the U.S. and Australia as part of its investment strategy since 2006

• Accounting for the true cost of the CPP

External management fees might include investment banking fees, consulting fees, legal and tax advice and taxes on transfer of real estate, which would apply to the new style of investing. Bond and stock investments are simpler and the fees are lower.

Malcolm Hamilton,a senior fellow at the C.D. Howe institute and one of Canada's leading pension experts, says the Fraser Institute's report flags increased costs, but that's nothing to worry about.

“It points out that analyzing expenses of the CPPIB is a tricky thing because there are many different kinds of expenses, so you can’t just grab one number and go to town with it,” he said in an interview with CBC's The Exchange with Amanda Lang. 

Not doing a bad job

“And it points out some things that bear watching, like certain types of expenses have been ratcheting up quickly as the investment strategy changes,” he said.  “It doesn’t say they’re doing a bad job. It doesn’t say there’s anything for Canadians to be worried about.”

The Fraser Institute acknowledges that the CPPIB has “served Canadian workers well during the last seven years of financial market turmoil” but calls for a full accounting of all CPP costs, including those incurred by the government of Canada, saying every dollar spent is a dollar less for Canadians.

The institute, which is an advocate for smaller government, argues that Canadians have a right to know all the costs associated with their pension plan.

The report comes at a time when the federal government has resisted pressure from the provinces to expand the CPP, saying businesses cannot handle additional costs.

Ontario premier Kathleen Wynne has pledged to implement her own separate pension plan for workers without a company pension, saying she fears these Canadians otherwise will end up without an adequate pension.