Canadian taxpayers are providing $22 billion each year to the country’s public sector pension plans by assuming undisclosed investment risks, according to a new report by public policy think-tank the Fraser Institute.

In the report, its author Malcolm Hamilton suggested public pension funds view the income they provide to plan members on retirement as 20 per cent from member contributions and 80 per cent from investment returns. The fundamental reality of investing, which rewards investors for taking on more risk, means the riskier portfolios that DB plans take on, the less members have to contribute, the report noted.

Read: Taxpayers on hook for liabilities in federal staff pension plans: report

“The reward for risk-taking is determined by the plan actuary and distributed to contributors as a reduction in their contribution rates,” it said. “The plan actuary anticipates the additional returns that the pension fund will earn over the remaining lifetime of plan members. The actuary estimates by how much contribution rates can be reduced as a consequence. Contributors pay this lower rate immediately. This means that the reward for risk-taking, as estimated by the actuary, is typically distributed about 20 to 25 years before the risks are actually taken.”

Rather than estimating the cost of the pension plan by assuming the rewards of taking on the investment risk, plans should be considering the cost of the pension as the amount members would have to pay to receive the same pension benefits without taking on the risk.

As an example, Hamilton laid out a pension investing solely in government bonds and achieving a rate of return of one per cent, an extremely low-risk portfolio. In that scenario, contribution rates would have to be 43 per cent as opposed to the 21 per cent contribution rate members would pay given a riskier stock and bond portfolio that achieves a consistent return of 3.5 per cent.

Read: Are public sector pensions really revenue generators for governments?

Copyright © 2019 Transcontinental Media G.P. Originally published on

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There’s flawed premise in this analysis. It fails to acknowledge that contributors, employer and employee alike, pay heavy fees to investment managers and actuaries to identify and manage risk such that long-run returns are maximized.

Re-run the simulation, this time re-setting plan cost burden for these services at rates that assume passive management/compliance on both counts, and you would likely be surprised at how little contribution rates actually increase. So…taxpayers are not assuming the risk of underperformance. IM and actuaries are. If they do not perform, the comp. should be adjusted accordingly, which will never happen of course.

Final comment: this is not the only shoddy Fraser Institute-branded report that has been issued as of late. If it doesn’t understand the subject matter at a sufficiently technical level, it should simply stray clear of it.

Monday, December 31 at 10:37 am | Reply

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