DP Column 6.12.2013: Canadian Pension Plan Sustainability

Canadian Pension Plan Sustainability
Money well spent by Canadian tax dollars?

The Canadian Pension Plan Investment Board (“CPPIB”) invests assets belonging to the 18 million pensions, ensuring the Canadian Pension Plan meets the financial needs of Canadian retirees. While there exists growing concern over increasing disparity of remuneration in the private sector, little attention is paid to public sector employees who make up a nominal percentage of the national labour force. Unfortunately, a large disparity of remuneration exists in the public sector as CPPIB managers earn $500,000 a year or more.

Increments of remuneration are built into union laws and employment contracts, in turn building the expectation of the labour force to expect higher pay as their tenures increase. This expectation is not just exclusive to the private sector but public sector employees are encouraged to improve their productivity, efficiency and commitment in return for remuneration increases. According to Statistics Canada, the average civil servant earns an annual salary of $53,469, which is one- fifth to one-tenth of a CPPIB manager’s salary. Employment requiring high skill, education and experience tends to correlate with higher remuneration, no exception to CPPIBs case. CPPIB run $193 billion in assets across North America, Europe and Asia with salaries and bonuses their only large expense. With a relatively small management expense ratio, it would be unwise to risk the fund’s performance through cost cutting. Not only do CPPIB managers have extremely risky, volatile and high-pressured jobs, their jobs depend largely on the fund’s performance. A lost one tenth of a percentage point is worth $193 million in lost investments, a loss hardly worth paying for in remuneration cuts. With a workforce of 903 highly specialized employees, the cost to ensure the viability of the Canadian Pension Plan is hardly worth fretting about. From one point of view, a CPPIB manager raking in ten times the average civil servant will appear outrageous. However, when this disparity is put into context, it becomes a logical and calculated expense the Canadian Pension Plan can afford to incur.

As more countries with aging populations become more integrated into the market economy, the significance and risk of national pension funds increase. Income disparity in the private sector has seen widespread social and political ramifications. Arguments against wall street salaries and bonuses concern private funds, the well-being of which does not necessarily impact the sustainability of province or federal pension plans. In the case of CPPIB, as long as unnecessary expenses are minimized and the chosen workforce is justified, it’s a price worth paying for.

DP.

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