Bigger isn’t necessarily better

By Andrew Rickard | February 04 2016 11:37AM

A report published by The Fraser Institute argues that several public plans do a better job of keeping costs down than the larger Canada Pension Plan (CPP).

The Fraser Institute’s report is meant as a response to those who argue in favour of expanding the CPP and who claim it has lower costs and economies of scale. The report's authors, Philip Cross and Joel Emes, compared the federal government's plan with five other large public pension plans based in Ontario:  the Ontario Teachers’ Pension Plan (OTPP), the Ontario Municipal Employees Retirement System (OMERS), the Healthcare of Ontario Pension Plan (HOOPP), the Ontario Pension Board (OPB), and the OPTrust. The authors conclude that, measured as a percentage of assets, there is no systematic relationship between the size of pension plan assets and their cost.

The paper notes that the CPP, the largest plan with $269 billion of assets, had the highest average expense ratio for the period between 2009 and 2014 at 1.07% of its assets. The OTPP, the next largest plan at $154 billion of assets, had the fourth highest average expense ratio of 0.63%. HOOP, which manages pensions for 269,000 nurses, lab technicians, and other staff in Ontario hospitals, came in with the lowest ratio of just 0.34%.

"In fact, there may be diseconomies of scale for larger public pension plans because of the complexity of implementing their investment strategies, which include contracting out for external experts — a practice that has become increasingly popular, with plans investing more in non-traditional assets such as real estate, infrastructure, and private equity," says the Fraser Institute. "These more aggressive investment strategies raise costs. Whether they are justified by higher rates of return will not be known for decades, and depend on whether the assumption that markets have mispriced these assets is borne out."