Pension pools: The way to go?
Pooled Plans Are an Attractive Option
A version of this commentary appeared in the Huffington Post and the Hill Times
Canadians have had a number of suggestions for pensionreform placed before them in recent months, includingproposals to expand the Canada Pension Plan (CPP).But another possible model seems to be gaining tractionwith the federal government. This proposal is referred toas Pooled Registered Pension Plans. These plans are agood idea for a number of reasons.How would this work? In essence, the government wouldapprove the creation of some very large asset pools or funds. Anyone could join one of these asset pools: smallto medium sized employers, individuals, the self-employed,creating what is called a co-mingled fund. The assets would then be managed as a large pension plan wouldbe. These asset pools would be very large, expected to exceed $10 billion.Many advantages come from having a large asset pool. Administration and management costs are lower, andthere are investment opportunities outside the stock market that exist for large funds that smaller fundscan’t make. (For example, the Canadian Pension Plan Investment Board owns toll roads and water utilities).If these plans are designed optimally, they will also manage the payment of retirement income to eachparticipant. This means that individuals will not have to bear the risk of managing their own “draw down” of income (turning their retirement asset into monthly income), nor will they have to bear the high cost of friction in the insurance mechanism (agents’ commissions, administration costs and investment managementfees) if they chose to buy an individual life annuity.Further, a large commingled fund has the advantage of pooling the mortality risk resulting in a more accurateestimation of the group’s average life expectancy. Clearly, one can calculate the average life expectancy for 10,000 individuals more accurately than that of any given individual in the group.Data tell us that large funds (in excess of $10 billion) can be managed for fees as low as 0.28% whileIndividual RRSP Mutual Fund accounts often have fees in excess of 3.00%. This is important. Fees of 3.0%per annum will wipe out half of your retirement assets over a 35 year accumulation period. Or looking at itanother way, in a world where interest rates are 5% and inflation is 2%, paying 3% in investment fees meansthat you have effectively no real growth in your pension fund at all. You are just standing still.Pooled Retirement Pension Plan assets could be managed by the private sector or by an arms-lengthgovernment-sponsored investment board similar to the Canada Pension Plan Investment Board (CPPIB).Note that while the investment board might be government sponsored, it should not be governmentcontrolled or even government influenced (again, like the CPPIB). Whether the management of the funds ispublic or private is not as important as requiring (by legislation or regulation) very low total managementexpense fees — lower than 0.35%.