Canada Pension Plan overstaffed and inefficient

[Argus]

The Canada Pension plan used to win awards and be considered the most efficient, effective, and low cost way pension plan in the country, and on.e of the best in the world. It had just five employees in 2000, and engaged in passive investing. That is, it simply bought various kinds of bonds and blue chips and ignored them.

But in time the CPP was let off its leash, and since then has plunged into all sorts of esoteric investments, requiring all sorts of expensive advice and even more expensive managers to administer it. Returns, relative to the market, haven’t improved discernibly. But costs have soared. Where the CPP Investment Board had just five employees in 2000, it now has more than a thousand. Then, the fund’s chief executive earned $250,000 a year; now, the average compensation in the executive suite is more than $3 million.

The cost of running the CPP now is many times higher than it used to be. It is filled with very highly compensated people who, like mutual fund managers, engage in all kinds of speculative investments which, in the end, don't produce any more than a passive investment in an ETF would - but at a much higher cost. Its investments are also much riskier than they used to be, investing in everything from Chinese real estate to formula one racing.

Now the Fraser Institute has published a study by former chief economic analyst at Statistics Canada:

The study, to be released publicly on Tuesday, concludes that CPP, the largest plan scrutinized over the period from 2009 to 2014, was in fact the costliest as a percentage of assets.

http://news.nationalpost.com/full-comment/andrew-coyne-ontario-pension-plan-not-about-helping-retirees-but-financing-infrastructure

http://business.financialpost.com/personal-finance/retirement/canadian-pension-plan-has-no-cost-advantage-over-other-large-public-pensions-fraser-institute-study

http://www.theglobeandmail.com/report-on-business/risk-rising-the-cpp-investment-arms-big-bold-bets/article19167553/?page=all

Edited February 2, 2016 by Argus

[hitops]

I'm glad I don't pay into this.

Abolishing the CMHC would do more to help retirees than the CPP ever will.

Edited February 2, 2016 by hitops

[overthere]

I'm glad I don't pay into this.

Abolishing the CMHC would do more to help retirees than the CPP ever will.

How does the CMHC affect retirees in any way?

That is, it simply bought various kinds of bonds and blue chips and ignored them.

One of the problems is that corporate bonds and 'blue chips' used to be safe places to invest for safe and undramatic . They are not. The massive clusterf**k of the global 2008 meltdown was centered on trillions of of dollars worth of binds rated AAA. I have no faith that analysts have a clue about what is really happening on Wall or Bay Streets. I guess your link supports that.

[Argus]

One of the problems is that corporate bonds and 'blue chips' used to be safe places to invest for safe and undramatic . They are not. The massive clusterf**k of the global 2008 meltdown was centered on trillions of of dollars worth of binds rated AAA. I have no faith that analysts have a clue about what is really happening on Wall or Bay Streets. I guess your link supports that.

Every study of investment done over the last twenty years has shown that passive investment does as well as or better than active investment, with much less cost. I track various kinds of equity investments and buying and holding blue chips still wins out over everything else over the medium to long term.

[hitops]

How does the CMHC affect retirees in any way?

Housing costs are out of control which spill over and drive up rents, and this is one of the biggest costs for retirees. Something like 1/3 of people retiring today, still have a mortgage. The lower-income retirees are affected more by the effect on rents.

Every study of investment done over the last twenty years has shown that passive investment does as well as or better than active investment, with much less cost. I track various kinds of equity investments and buying and holding blue chips still wins out over everything else over the medium to long term.

Is there a cheaper way to passively and safely invest than just going through a typical bank-affiliated investment adviser?

Edited February 2, 2016 by hitops

[cybercoma]

Want to know a great way to deal with the costs of administering the pension plan (and EI while we're at it)? Minimum Income.

[Argus]

Is there a cheaper way to passively and safely invest than just going through a typical bank-affiliated investment adviser?

You mean for an individual? Stay away from those clowns. They'll steer you towards high-fee mutual funds if they get half a chance. They're not working for you, they're working for the money they're given every time they put someone into one of those things. It might seem like 1.5% or 2% isn't a lot, but it sure adds up over the years. Get your own investment account and buy some ETFs. Or, if you have the time to do some research (most people don't or are too scared), and a larger amount to invest, buy boring, dividend paying blue chip stocks.

Edited February 2, 2016 by Argus

[The_Squid]

Why did the Harper gov't bloat this agency so much? Friends and cronies?

[Argus]

Why did the Harper gov't bloat this agency so much? Friends and cronies?

I don't know if it was Harper or Martin. I wasn't able to find out. Apparently the board had been lobbying to allow it more freedom to invest in higher profit instruments for some time, and claimed that would produce larger returns. The problem is that while it's hired an army of financial people to seek out and negotiate all kinds of investments, the returns haven't increased to justify the costs. In my opinion the board should be returned to its previous incarnation of passive investment. Let those thousand people find work elsewhere.

[overthere]

Every study of investment done over the last twenty years has shown that passive investment does as well as or better than active investment, with much less cost. I track various kinds of equity investments and buying and holding blue chips still wins out over everything else over the medium to long term.

Your confidence in the arcane dealing of Wall Street is touching. I realized a few years ago that I had no idea what any of it really meant, small investors may as well look as chicken entrails . It was much worse when I realized more recently that the people I trusted to understand the markets also had no actual idea either.

Recommended reading: Flash Boys and The Big Short, both by Michael Lewis.. Neither is intentionally a horror story, but both are terrifying reads.

Housing costs are out of control which spill over and drive up rents, and this is one of the biggest costs for retirees. Something like 1/3 of people retiring today, still have a mortgage. The lower-income retirees are affected more by the effect on rents.

Housing costs are not out of control in most markets in Canada. Like anything else. it should not be hard for a retiree to assess their monthly nut and decide if they can afford to live or retire anywhere.

Without CMHC far fewer people-including retirees- would be in their own homes now. That would mean more renters, more landlords- and more seniors at the mercy of those landlords...

Home ownership has increased from about 55% of Canadians to about 70% since CMHC was created.

[overthere]

I don't know if it was Harper or Martin. I wasn't able to find out. Apparently the board had been lobbying to allow it more freedom to invest in higher profit instruments for some time, and claimed that would produce larger returns. The problem is that while it's hired an army of financial people to seek out and negotiate all kinds of investments, the returns haven't increased to justify the costs. In my opinion the board should be returned to its previous incarnation of passive investment. Let those thousand people find work elsewhere.

Neither. It was Chretien. Another reason to loathe him.

From their site:

"The CPPIB dates back to 1997 when an Act of Parliament created the organization to manage and invest the CPP Fund to help ensure the long-term sustainability of the Canada Pension Plan."

[Bonam]

Is there a cheaper way to passively and safely invest than just going through a typical bank-affiliated investment adviser?

Yes. Open an account at a discount online brokerage, and purchase shares of low cost broad index tracking ETFs.

[The_Squid]

Why didn't the Harper gov't fix this problem in their 10 years in power?

[cybercoma]

Why didn't the Harper gov't fix this problem in their 10 years in power?

"They couldn't because the left wouldn't let them."

[Argus]

Your confidence in the arcane dealing of Wall Street is touching. I realized a few years ago that I had no idea what any of it really meant, small investors may as well look as chicken entrails . It was much worse when I realized more recently that the people I trusted to understand the markets also had no actual idea either.

Recommended reading: Flash Boys and The Big Short, both by Michael Lewis..

My point was the exact opposite of how you seem to have read it. All those expensive 'experts' in their multi-thousand dollar suits getting paid a million or two a year to manage mutual funds usually didn't even do as well as a passive, index ETF. So why pay them? Just by an ETF or some dividend paying blue chips and go with that.

[Argus]

Neither. It was Chretien. Another reason to loathe him.

From their site:

"The CPPIB dates back to 1997 when an Act of Parliament created the organization to manage and invest the CPP Fund to help ensure the long-term sustainability of the Canada Pension Plan."

Far be it for me to defend Chretien, but the original CPP investment board was one which only had 5 employees and invested in a broad range of bonds and some blue chips. It was changed at some point, or at least, their investment process and policies were changed, sometime after 2000. Now there are way more employees and they make a lot more money, but the fund doesn't.

[poochy]

Why didn't the Harper gov't fix this problem in their 10 years in power?

Why haven't the new liberals already fixed the problem created by the old liberals? Better yet, why can't you find something better to do with your time than trolling and as you almost invariably do, adding nothing to the discussion.

[overthere]

My point was the exact opposite of how you seem to have read it. All those expensive 'experts' in their multi-thousand dollar suits getting paid a million or two a year to manage mutual funds usually didn't even do as well as a passive, index ETF. So why pay them? Just by an ETF or some dividend paying blue chips and go with that.

You misunderstood.

IMO the entire game is rigged. The giant merchant banks, the rating agencies and the stock exchanges are all witting participants in fleecing us. All are suspect. Investing in 'blue chips'(like there are any) and any fund including ETFs is high risk. The bond market, formerly a refuge for dull money, is even worse.

[msj]

Oh no, life has risk in it! Wadda I do wadda I do!

Simple, asset allocation.

Buy Vanguard ETF's: emerging markets when they are cheap, NA when it is cheap (not now), Asia when it is cheap, Europe when it is cheap.

Buy a bond fund or two, too.

Hold on for the ups and downs but always rotate your monthly purchases into what is cheap at that moment in time.

Wait 30+ years.

See what happens.

It's not rocket science.

Oh, and pay into CPP as this is another form of diversification.

Edited February 3, 2016 by msj

[cybercoma]

The average personal income in Canada is about $32,000. These people don't have he extra money to buy into these things, which means that the average person is relying on CPP alone.

[msj]

The average personal income in Canada is about $32,000. These people don't have he extra money to buy into these things, which means that the average person is relying on CPP alone.

Yeah, I feel sorry for these people.

But maybe home prices will always go up and hopefully they got in early and will get out at the right time .

[eyeball]

Yeah, I feel sorry for these people.

Why? If they're also the majority they'll just tax the wealthy minority to support themselves. What possible choice will anyone have?

[Argus]

You misunderstood.

IMO the entire game is rigged. The giant merchant banks, the rating agencies and the stock exchanges are all witting participants in fleecing us. All are suspect. Investing in 'blue chips'(like there are any) and any fund including ETFs is high risk. The bond market, formerly a refuge for dull money, is even worse.

Oh, I see. So it's mattress time, right?

[PIK]

I had read the lady put in charge of the new ONT plan is being paid 525Gs. That is more then the premier and PM make.

[overthere]

Oh, I see. So it's mattress time, right?

A bit in the mattress, a bit in actual gold, and the rest invested in things I can actually see and touch that are not managed by people named Goldman or Sachs- managed by me. I am done with the market. The ratings agencies are corrupt, the investment banks are criminal enterprises, the SEC is lost and the fund managers are lined up to screw anybody who foolishly drops a dime in their laps. And equities? So many companies fund themselves with bonds rated by the same agencies that brought us a a global financial crash, in cahoots with the same banks that made hundreds of billions off guppies like me. No thanks..

The best investment is an indexed public service pension, which is entirely disconnected from any form of market reality.

Far be it for me to defend Chretien, but the original CPP investment board was one which only had 5 employees and invested in a broad range of bonds and some blue chips. It was changed at some point, or at least, their investment process and policies were changed, sometime after 2000. Now there are way more employees and they make a lot more money, but the fund doesn't.

You dont understand the biology of Bureaucrats. They replicate exponentially like bacteria or cockroaches, and once in place it is impossible to reduce their numbers or get them to justify their ongoing employment.

.