The Fraser Institute

The Fraser Institute

April 14, 2011 06:32 ET

The Fraser Institute: Expanding Canada Pension Plan Fraught With Risk; Government Should Instead Improve RRSPs and Tax Free Savings Accounts

TORONTO, ONTARIO--(Marketwire - April 14, 2011) - Due to its vast size, expanding the Canada Pension Plan is fraught with risks that could actually hinder the plan's performance, concludes a new study released today by the Fraser Institute, Canada's leading public policy think tank.

"The Canada Pension Plan is already so large that any expansion of the plan will increase the risk that the manager of the plan's assets, the Canada Pension Plan Investment Board, will become more inefficient and the ability to generate positive investment returns actually decreases," said Neil Mohindra, Fraser Institute director of financial policy studies and author of Should CPP Be Enhanced? An Examination from an Economies-of-Scale Perspective.

"This risk arises from diseconomies of scale. Numerous studies examining other large investment funds have found that as asset bases increase, fund managers generally experience additional challenges that adversely affect investment performance."

Rather than expanding CPP contributions and benefits, Mohindra recommends that governments should instead concentrate on improving other pillars of the Canadian retirement system, specifically individual and group RRSPs, Tax Free Savings Accounts, and registered pension plans.

Expanding the Canada Pension Plan has become an issue in the current federal election campaign, and is supported by both the Liberal Party and NDP, as well as several trade unions.

But Mohindra says little thought has been given to how the performance of the Canada Pension Plan Investment Board (CPPIB), the investment manager for the CPP, would be affected by the expansion.

"There's a considerable body of research that shows when investment funds reach a certain size, their ability to generate a return in a cost effective manner is compromised," Mohindra said.

The CPP's net assets at the end of its last reported year were $127.6 billion (Cdn.), ranking it as the fifth largest sovereign pension fund by assets in 2009, according to Towers Perrin. CPP assets are also expected to grow to $700 billion (Cdn.) by 2038.

In examining changes in costs and investment management practices within the CPPIB, Mohindra found the board was already taking actions similar to other large investment funds that attempt to ward off diseconomies of scale.

Those actions include shifting assets towards alternative asset classes, such as private equity. Alternative assets in the CPPIB portfolio grew from 2.7 percent of total assets in 2003 to 25.6 percent in 2010. Mohindra also found that changes in investment management practices likely contributed to a rapid escalation of costs for the CPPIB, noting that administrative expenses and advisory fees increased five-fold as a percentage of average assets between 2005 and 2010.

"The CPPIB's actions in expanding the number of managers, shifting towards internal management, and shifting to alternative assets are all consistent with the behaviour of a pension fund recognizing and addressing the risks of diseconomies of scale in investment returns," Mohindra said.

"But no matter how well-equipped it may be to handle it, the CPPIB faces a tough challenge in managing the growing size of its portfolio. And as the portfolio continues to grow, the board faces an increasing risk of diseconomies of scale."

Mohindra concludes that even a modest expansion of the CPP creates a significant risk of diseconomies of scale, and with it, the potential that the CPPIB will not be able to meet its objective in terms of providing retirement income for Canadians.

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The Fraser Institute is an independent research and educational organization with locations across North America and partnerships in more than 80 countries. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit

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