# Enhanced CPP best solution



## sags (May 15, 2010)

Here is a good example of why the proposed new pension scheme in Canada is a bad idea. It relies on insurance companies, and other financial institutions to honour committments made when times are good and profits are rolling in. CEOs award themselves with high salaries and bonuses, shareholders with dividends and increased market share values, and then is shocked when it comes time to honour their committments and pay the beneficiaries.

http://www.theglobeandmail.com/globe-investor/manulifes-long-term-us-headache/article2013496/page2/

The actuaries miscalculated they say. Premiums must increase by as much as 90%.

Great...........how about all that money that was paid into premiums for decades and split up as "fees and profit" for the company?

Examples like this have me convinced that an enhanced CPP is the best answer to future retirement needs.

The private sector just isn't up to the task.


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## andrewf (Mar 1, 2010)

I don't think the problem is that private provision can't work, but it needs to be pretty tightly regulated. And if there is an implied government guarantee backstopping these insurers, does it really make sense to let them profit if things go well and pick up the tab if their bets go sour? I'm not sure. 

I'm not sure that an increase in mandatory CPP contributions/benefits is the answer. Some have suggested raising the yearly maximum pensionable earnings (YMPE) to the $90k range. Others have suggested increasing the replacement rate to 50% or more from the current 25%. I think before we pick a solution, we need to ask what the purpose of a mandatory pension scheme is.

To me, a mandatory pension should be to ensure that those who had reasonable lifetime earnings fund their own retirement to sufficient extent to ensure they will not live in poverty or rely on our collective charity through welfare schemes like GIS/OAS. To that end, I think raising the replacement rate could be defensible, to perhaps 50% of YMPE--this would cost about 5.2% in incremental contributions in addition to the 9.9% that's paid now. I don't think that we need to increase the YMPE covered by our mandatory pension scheme above where it is now--it could probably even be lowered. An income of 50% of $48.3k (current YMPE) is above the poverty line for seniors. Enough to pay for a modest apartment, food and utilities without requiring much additional government assistance except in the case of illness or infirmity.

If people want to ensure a more comfortable lifestyle in retirement than what I described above, it is up to them to save on a voluntary basis. I'm okay with 'nudging' people with automatic enrollment in saving plans with the ability to opt out, and asking people whether they would like to dedicate half or a third of future salary raises to increased savings when they enroll. We can help people make the right decision and overcome our own self-defeating irrational behaviour without forcing a one-size-fits-all solution on everyone. 

The government has suggested creating legislation to support pooled defined contribution pension plans that can be ported across many employers. I think this is a pretty decent idea, and welcome. I liked the Liberal proposal to create a similar pension scheme (DC) offered and managed by the Canada Pension Plan Investment Board. It should be offered by every employer, to help keep the private pensions offered by the big banks and insurance companies honest in terms of cost. Leveraging the CPPIB makes sense to me. We already have an organization with top flight managers handling a huge pool of assets, and pension funds benefit greatly from economies of scale. Nonetheless, if people want to participate in private pooled pensions, or funds run by the provinces, etc. that should available. I'm not sure how much stock we should put into the argument that it's dangerous to put all your eggs into one basket. It seems to me that small funds are as likely or likelier to make mistakes like the Caise de depot made with ABCP.


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## sags (May 15, 2010)

I agree with your assessment, and there are various ideas that need further exploration. The CPPIB and other large DB pension providers could provide expertise in what would be the best solution. In fact, I think many of them have already put forth recommendations that some form of DB pension plan is workable in scale, and desirable because the future benefits will be known.

For private pooled capital schemes, the problem, as I see it, is the lack of information regarding the "collecting" end of these schemes.

Nobody is interested investing in a pension plan that has unknown costs, unknown benefits, for an unknown period of time. administered by an unknown company.

That isn't retirement security......it is rolling the dice.


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## andrewf (Mar 1, 2010)

I'm not convinced that there should be a voluntary DB option offered, since it would expose the rest of the fund to a lot of risk should investment returns underperform: who makes up the shortfall if benefits are guaranteed? Ottawa? 

I think it makes more sense for the voluntary component to be defined contribution. Guarantees either require a government backstop or overly conservative management (ie, using 30 year bond yields).


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## MoneyGal (Apr 24, 2009)

C.D. Howe Institute has released a new report on the proposed expansion of the CPP:

http://cdhowe.org/?p=13661

From the precis:

_Expanding the Canada Pension Plan (CPP) is a risky route to addressing Canadian concerns about low incomes in retirement, according to a report released today by the C.D. Howe Institute. In “Don’t Double Down on the CPP: Expansion Advocates Understate the Plan’s Risks,” author William B.P. Robson says advocates of an expanded CPP as a solution to retirement income worries too often promote it as a plan with guaranteed benefits that are fully funded. “The CPP is a gamble, not a guarantee: expanding the plan would raise the stakes on a bet most Canadians do not know they have made,” says Robson, who is President and CEO of the Institute._


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## steve41 (Apr 18, 2009)

What about following the lead of Australia and the UK? Remove MERs, trailer fees... etc from the equation. A financial planner/advisor in those countries must earn their living based strictly on fee for service. 

(I may have the details wrong, but I believe I have the gist of it.)

Remove sales commisions from the equation... make everything transparent.


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## sags (May 15, 2010)

This article is nonsense.

Here are the true facts on the CPP.

http://www.cppib.ca/News_Room/News_Releases/nr_05191101.html


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## MoneyGal (Apr 24, 2009)

There is no question that the CPPIB is in GREAT shape. Nonetheless, it is not funded on the same basis as a DB pension plan. CPP is funded on a steady-state basis, which differs significantly from the requirements for DB plans. That's part of what the article points out.


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## I'm Howard (Oct 13, 2010)

The future of CPP is a concern when too few are funding too many, an inverted pyramid.

Young people, and rightly so, are rebelling at paying for old people who should have saved for their future,they are getting tired of funding people with high R.E but low cash flow.


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## Four Pillars (Apr 5, 2009)

steve41 said:


> What about following the lead of Australia and the UK? Remove MERs, trailer fees... etc from the equation. A financial planner/advisor in those countries must earn their living based strictly on fee for service.
> 
> (I may have the details wrong, but I believe I have the gist of it.)
> 
> Remove sales commisions from the equation... make everything transparent.


One downside of that idea is that people with small portfolios will have to pay a much higher fee for advice compared to the current structure. And they might not get access to that advice.

Ie right now, someone with $10,000 might pay $250 per year in mutual fund commissions. If they hired a fee-only advisor, the charge would likely be higher than that.

On the other hand, if that rule were put in place - I would imagine that some advisors would put together smaller (and cheaper) packages for newer investors.


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## HaroldCrump (Jun 10, 2009)

I don't understand how removing mutual fund fees, MERs, etc. helps with the pension issue.
It will marginally improve mutual fund returns, but that's not a pension plan.
Unless a mutual fund portfolio can provide a pre-defined, guaranteed income stream, ideally with inflation protection, it aint a pension.
Mutual fund is exactly the opposite.


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## ghostryder (Apr 5, 2009)

andrewf said:


> Nonetheless, if people want to participate in private pooled pensions, or funds run by the provinces, etc. that should available.



"Pooled" pension already is available. The Saskatchewan Pension Plan.

DC, open to anyone, employers can match if they want, etc.


Might not have the economy of scale that the CPPIB has, but a pooled pension is hardly a new idea.


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## Four Pillars (Apr 5, 2009)

HaroldCrump said:


> I don't understand how removing mutual fund fees, MERs, etc. helps with the pension issue.
> It will marginally improve mutual fund returns, but that's not a pension plan.
> Unless a mutual fund portfolio can provide a pre-defined, guaranteed income stream, ideally with inflation protection, it aint a pension.
> Mutual fund is exactly the opposite.


Harold, you are correct. It is a separate issue.

However, it has been brought up repeatedly by politicians (before the election) as one of the reasons for expanding CPP. 

Ie The average investor can't save properly for their retirement because of high fees for financial fees. 

It's all rubbish of course - yes, the fees are too high but that's not why the average person doesn't prepare properly for retirement.


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