By Moin A. Yahya
and Charles Lammam
The Fraser Institute
In 2016, in fulfillment of a campaign promise, the federal government reached an agreement with the provinces to expand the Canada Pension Plan. Consequently, mandatory CPP contributions from working Canadians will increase steadily between January 2019 and 2025.
Expansion proponents have used many faulty claims to justify the changes, including the claim that CPP is a lower cost pension due to its greater efficiency. They argue that CPP’s large assets allow plan administrators to keep costs of running the plan down, relative to other pensions.
But that argument ignores a key reason why CPP may be able to keep costs comparatively low. CPP is exempt from many of the regulations and rules governing private pension plans in Canada. These regulations can increase the transparency and accountability of private plans, but also inevitably increase costs for plan administrators. By avoiding the regulations, CPP avoids these additional costs. That’s not necessarily a good thing for Canadians because it means less transparency and accountability.
In addition, CPP’s makeup and offerings to beneficiaries are quite rigid compared to private plans, which tend to offer more options and flexibility. This flexibility comes at an additional cost. The lax regulatory burden and vanilla nature of CPP give it an artificial cost advantage over other pensions and individual registered accounts such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
Consider some examples of how the regulations governing CPP differ from other pensions.
Private plans are subject to more disclosure and customer-related regulations. For instance, they must provide regular financial statements to clients and comply with anti-money laundering laws – sometimes known as “know your customer” laws. CPP does not.
Because CPP is a federally-constituted entity, it’s not subject to any provincial regulations. Nor is it subject to the jurisdiction of any regulations by industry organizations. Private plans, depending on the province, incur filing and administrative fees from constantly filing reports with their provincial pension superintendent.
Further, there are almost no laws allowing for CPP to be sued for bad governance. So where CPP enjoys substantial cost savings from not having to anticipate or defend against any liabilities, private pension plans are under constant threat of litigation and must account for that.
On top of dealing with extra regulations, private plans have several characteristics and options CPP does not, which also affect costs. Private pensions must account for transferability from one plan to another whereas CPP contributions are not transferable. Moreover, for private plans there are different rules governing pension contribution rates, payouts and early withdrawal provisions. These options create more uncertainty for private plan administrators and require more planning and safeguards, and therefore costs.
And whereas RRSPs, TFSAs and some defined contribution pension plans allow contributors to choose where funds are invested, CPP offers no such choice. All invested contributions to CPP are managed by the CPP Investment Board, which decides where funds are invested. With more rigid options, CPP’s lack of offerings and flexibility simplifies the administrative costs of running the plan.
Finally, thanks to the vast number of CPP contributors, CPP has a diversified set of contributors and payees. A private pension plan may have a skewed demographic of employee age profiles, which can pose unique challenges CPP doesn’t face.
Understanding what drives the cost differences between CPP and private alternatives is critical. The higher cost of private pensions is often a direct result of government-imposed rules and regulations, from which CPP is exempt. That means cost comparisons between CPP and private plans are like apples to oranges.
Moin A. Yahya is a senior fellow with the Fraser Institute and co-author of the study Understanding the Regulatory Framework Governing Private and Public Pensions. Charles Lammam is director of fiscal studies at the Institute.
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