Pensions: some thoughts

Ted Hsu
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If you are worried about what Stephen Harper has been saying about changing Old Age Security (OAS) benefits to make OAS more “sustainable”, know that I and my Liberal Party colleagues will do our best to prevent Stephen Harper from balancing the budget on the backs of those who will be depending on OAS income.

That was our lead-off issue in question period yesterday and today.

We’re debating Bill C-25 in the House today, an act to create Pooled Registered Pension Plans (PRPP) in Canada, as a way for employers and the self-employed to have private pension plans. The way it works is that banks and insurance companies would offer what amounts to a locked-in RRSP which would then convert to a variable annuity after you reach a certain age, and give you regular payments as long as you live. You would, however, take any investment risk and, importantly, you have to pay annual management fees to the plan you invest in.

The alternative to this scheme is to expand the Canada Pension Plan (CPP) and open it to people who don’t have access to a pension plan.

The big problem, in my view, is the cost of management fees in these private plans as compared to the Canada Pension Plan. You are locked-in and cannot take your money out of a PRPP. This scheme depends on competition to keep fees low but, whereas people can switch in and out of mutual funds, they are locked into a PRPP. Even for mutual funds, management fees are relatively high in Canada. In exchange for gaining a captive customer, I believe it is not an un-reasonable intrusion on the private sector to insist on regulation of management fees.

In Australia, where PRPPs have been tried, a study showed that a very large chunk of investment returns (over one-third) was eaten up by fees to financial institutions.

I remember when I worked in Japan running a group that handled orders to buy and sell stocks for mutual funds, there was one fund that sent in rather careless orders and had an abysmal historical investment return. We scratched our heads for along time wondering how such a fund could survive and finally concluded that perhaps some investors just did not or could not take their money out of these underperforming funds.

I think the idea of expanding the CPP is a good one, but given the fact that this bill is going to pass second reading, and that we’d have to get the agreement of the provinces for that alternative, I think we should amend the bill in committee to address the regulation of management fees.

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