In reading over the 2025 Canada Pension Plan Annual Report, this author realized that the rate of return on my RRSP, TFSA and other investments was considerably higher than that achieved by the very well-paid brain trust at the CPP! My investments returned about 15 per cent over the past year, whereas the CPP rate of return was 9.3 per cent. My education savings plans for my grandchildren did even better at 20 per cent as they’re young enough to take a bit more risk. How can it happen that the tall foreheads at the CPP can do so poorly in a year when market returns were very strong in Canada and the U.S., running 20 to 30 per cent?
To be fair, cherry-picking one year is not necessarily representative of longer-term performance. That being said, the Annual Report also noted that the 10-year net real return (accounting for inflation) was a mere 5.6 per cent. Around five per cent annually is usually viewed as the minimum return that should be achieved over the medium to long term. An average yearly return for the stock market is about 10 per cent over time. The CPP numbers are not impressive.
CPP management has changed significantly over the past couple of decades. Back before 2006, the fund was invested “passively,” meaning that the managers basically matched the broad market indices. In 2006, for some reason the CPP decided to change to an active management approach, with investment experts attempting to pick stocks, bonds and private investments that would outperform the market average. This naturally required much higher expenditures by the CPP Investment Board (CPPIB) and many very highly paid executives. In fact, overall annual spending went from about $120 million prior to 2006 to over $6 billion today.
Back in the pre-2006 days, CPP Annual Reports were pretty dry documents, reporting annual numbers, rates of return etc. Now they read like promotional documents intended to whip Canadians up into a frenzy over their wonderful pension plan, presumably to justify the enormous amount of our money they are spending just to manage the fund.
The CPP fund itself has only existed since 1997, when the Chrétien government made the correct move to create a separate fund into which CPP premiums would go. Prior to that, they were merely dumped into general revenues out of which CPP pensions were paid. The money was regularly abused by both federal and provincial governments and spent on anything but pensions. As the prospect of the aging population was about to impose a heavier burden on CPP outlays, the separate fund was created to enable CPP solvency in future. CPP premiums were also doubled at that time to account for all of the past abuse. Actuaries have estimated that if CPP premiums since the inception of the fund had been only used for CPP payouts, premiums today would be about six per cent instead of around 12 per cent.
The Trudeau government also increased CPP premiums on employers and employees, promoting it as a great boon to future retirees. However, many young workers today may find this added cost not a particularly good investment as it goes to pensioners retiring before they do. As well, government employees’ generous pensions are also integrated with the CPP. If CPP pays out more, as the Trudeau changes will lead to, less money has to come out of the underfunded government employee pension plans. Many suspect this was the real motivation for the Trudeau government’s CPP changes, not to benefit average Canadian workers.
There is no question that an investor with average skills could do much better investing their CPP premiums themselves than handing the money to the government to invest. As most CPP pension recipients are aware, even if the fund earns a certain return, pensions only increase by the rate of inflation. Also, people that die young do not have their cumulative premiums go to their estate, but back into the CPP pot. Survivor benefits are limited under CPP and often nothing if the spouse has paid the maximum into the fund. The real purpose of the CPP is not a true pension plan but a system of forced payments from all employees and employers so that those who do not save for themselves over their working life will have some income when they retire.
All Canadians should be concerned about the underperformance of the CPPIB. The fund itself is enormous at $714 billion, so even a mediocre rate of return can add what seems like an impressive amount. However, we could see tens of billions more in the fund if a superior return was being achieved, permitting pension enhancements or premium reductions. Clearly a serious independent review of the CPPIB is in order to determine whether Canadians are getting value for all the money spent on management. This bears watching in the years ahead as our population continues to age and young workers seek better financial security.
She has published numerous articles in journals, magazines & other media on issues such as free trade, finance, entrepreneurship & women business owners. Ms. Swift is a past President of the Empire Club of Canada, a former Director of the CD Howe Institute, the Canadian Youth Business Foundation, SOS Children’s Villages, past President of the International Small Business Congress and current Director of the Fraser Institute. She was cited in 2003 & 2012 as one of the most powerful women in Canada by the Women’s Executive Network & is a recipient of the Queen’s Silver & Gold Jubilee medals.
