Expanding the Canada Pension Plan (CPP) is a risky proposition that could actually hinder the plan’s performance, according to study released by the Fraser Institute.
“The Canada Pension Plan is already so large that any expansion of the plan will increase the risk that the manager of the plan’s assets, the Canada Pension Plan Investment Board, will become more inefficient and the ability to generate positive investment returns actually decreases,” said Neil Mohindra, director of financial policy studies at the Fraser Institute and author of Should CPP Be Enhanced? An Examination from an Economies-of-Scale Perspective.
Expanding the CPP has become an issue in the current federal election campaign, and is supported by both the Liberal Party and NDP, as well as several trade unions. But Mohindra says little thought has been given to how this expansion would adversely affect performance of the Canada Pension Plan Investment Board that manages the CPP.
“This risk arises from diseconomies of scale; numerous studies examining other large investment funds have found that as asset bases increase, fund managers generally experience additional challenges that adversely affect investment performance,” said Mohindra who recommends improving such pillars of the Canadian retirement system as individual and group RRSPs, tax-free savings accounts and registered pension plans.
“There’s a considerable body of research that shows when investment funds reach a certain size, their ability to generate a return in a cost effective manner is compromised,” he said.