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Pension pools: The way to go?

Pooled Plans Are an At t ract ive Opt ion
A version of this commentary appeared in the Huffington Post and the Hill Times Canadians have had a number of suggestions f or pension ref orm placed bef ore them in recent months, including proposals to expand the Canada Pension Plan (CPP). But another possible model seems to be gaining traction with the f ederal government. T his proposal is ref erred to as Pooled Registered Pension Plans. T hese plans are a good idea f or a number of reasons. How would this work? In essence, the government would approve the creation of some very large asset pools or f unds. Anyone could join one of these asset pools: small to medium sized employers, individuals, the self -employed, creating what is called a co-mingled f und. T he assets would then be managed as a large pension plan would be. T hese asset pools would be very large, expected to exceed $10 billion. Many advantages come f rom having a large asset pool. Administration and management costs are lower, and there are investment opportunities outside the stock market that exist f or large f unds that smaller f unds cant 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 each participant. T his 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 f riction in the insurance mechanism (agents commissions, administration costs and investment management f ees) if they chose to buy an individual lif e annuity. Further, a large commingled f und has the advantage of pooling the mortality risk resulting in a more accurate estimation of the groups average lif e expectancy. Clearly, one can calculate the average lif e expectancy f or 10,000 individuals more accurately than that of any given individual in the group. Data tell us that large f unds (in excess of $10 billion) can be managed f or f ees as low as 0.28% while Individual RRSP Mutual Fund accounts of ten have f ees in excess of 3.00%. T his 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 it another way, in a world where interest rates are 5% and inf lation is 2%, paying 3% in investment f ees means that you have ef f ectively no real growth in your pension f und at all. You are just standing still. Pooled Retirement Pension Plan assets could be managed by the private sector or by an arms-length government-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 government controlled or even government inf luenced (again, like the CPPIB). Whether the management of the f unds is public or private is not as important as requiring (by legislation or regulation) very low total management expense f ees lower than 0.35%.

It would also be possible f or the government to transf er orphaned pension benef its to these pooled f unds (e.g., all the pensioners in Nortel af ter Nortels bankruptcy). As stated, anyone could join a Pooled Registered Pension Plan. In f act, an individual could place his/her RRSP and T FSA Accounts in one of these pooled f unds. T he essential element of Pooled Retirement Pension Plans is the commingling of individuals and pension plan assets into very large f unds, $10B or more, resulting in very low management f ees, plus the advantage of commingling of the lif e expectancy risk. If legislated and regulated prudently, these new Pooled Retirement Pension Plans could be a big step towards designing the retirement income security systems required f or Canadians f or the 21st century. And, this is very important given the continued decline of Def ined Benef it pension plan coverage in the workplace. Only about 38% of workers are covered by a Def ined Benef it pension plan and, in the private sector, coverage is below 25%. Pooled Retirement Pension Plans are a good idea; one clearly worthy of pursuing. It is now time f or the f ederal and provincial governments to pass legislation to allow f or their existence. Rob Brown was Professor of Actuarial Science at the University of Waterloo for 39 years and a past President of the Canadian Institute of Actuaries. He is currently an expert advisor with EvidenceNetwork.ca.