Hands off CPP, says C.D. Howe

Ottawa should protect the integrity of the Canada Pension Plan, ensuring that is used only to pay benefits to plan participants, the C.D. Howe institute says in a new study. The report comes on the heels of a suggestion that the federal government consider using some of its budgetary surplus to boost the CPP fund and at the same time, reduce CPP contributions from both employers and employees.

Though such a move would be politically popular, since a reduction in CPP contributions equates to a tax cut, it’s a slippery slope, C.D. Howe’s Bill Robson warns.

“That transaction would breach what has up to now been a solid wall between the CPP and the federal budget. Create a hole through which money repeatedly flows between the two, the odds are high that one day the flow will go the other way,” he says.

The CPP fund stands at a healthy $98 billion, according to the latest CPP Investment Board report, growing more than 15.5% in 2005.

“As the fund grows, governments under pressure to deliver on their promises to provide healthcare, education and infrastructure to a tax-weary population will inevitably look covetously to the fund,” says Robson.

“It is not too early for a re-assertion by the CPPIB, by governments, and by concerned Canadians that the CPP’s funds are for one purpose, and one purpose alone, to pay benefits to plan participants.”

Indeed, experience in other countries has shows that government interference in state pension plans can lead to disastrous consequences.

According to Robson, a survey in 2000 of 22 countries providing at least eight years of comparable data, found that only two — Malaysia and Korea — earned real returns of more than 3%. Zambia, Peru and Uganda lost 31%, 47% and 51% respectively. “Half lost money and some obliterated the savings of their participants.”

Robson argues that since the CPP was restructured in 1998, the model has worked well. “The CPP’s last actuarial evaluation at year-end 2003 showed that the current 9.9% contribution rate would be sustainable through the lifetimes of current plan participants.”

Still, the CPP faces other challenges. Many Canadians would likely favour steering CPPIB investments toward public infrastructure and social housing, Robson notes, and away from the companies that do things some people dislike, such as tobacco production or working in countries accused of human rights violations.

To address this, the CPPIB has produced a policy on responsible investing and signed off on the UN’s principles for responsible investing, maintaining the argument that it has a duty to investors to focus on financial performance.

“While the CPPIB has thus far invested largely in portfolios managed by third parties and in direct investments where it exercises no governance role, keeping itself ‘below the radar’ in this way will get harder as its holdings expand,” says Robson.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com