Another year has passed, and once again the Nova Scotia Health Employees’ Pension Plan won and my personal RRSP lost. I’m talking about the annual investment return contest between the two retirement funds that I manage.
There is, of course, a difference in size, with the NSHEPP fund more than $6 billion while my personal RRSP has less. Accordingly, there is a difference in fees, but the return difference over the years has averaged much more than can be explained by just fees.
Many others have written about the return advantage that defined benefit (DB) funds tend to have over defined contribution (DC) funds. Aside from fees, I had always assumed that the DB return advantage came from the superior decision making of institutional funds compared to DC members. But that doesn’t explain NSHEPP’s performance next to my RRSP since both have the same decision maker: Me!
My conclusion is that NSHEPP’s biggest advantage over my RRSP is the investment products and tools that are available to it. NSHEPP can invest directly in alternative investments, such as real estate and infrastructure, whereas the best that my RRSP can do is invest in publicly-traded versions that are simply not as effective. And NSHEPP can supplement its physical investments with unfunded exposures (like derivatives) that I can’t easily or cheaply mimic within my RRSP.
Institutional investing has changed enormously over the last decade, with this widening the gulf between the returns that can be expected from DB funds compared to DC member accounts. The debate between DB advocates and DC advocates has raged for so long that most of us have picked our sides and aren’t going to change our opinion.
But those in the DC camp should at least consider the shift that has occurred. Investment toolkits have evolved, with this being much more pronounced for DB funds than for DC member accounts. As a result, the potential return that is being sacrificed by DC plans has likely increased.
Calvin Jordan has been CEO of the NSHEPP since 2005, and was the pension plan’s external actuary for the decade before that. He is an actuary and a chartered financial analyst.
Benefits Canada‘s Sounding Board column is a new online feature that will explore the challenges and issues facing Canada’s biggest pension funds. If you have a point of view to share, please email managing editor Jennifer Paterson.