Active/Passive Management of Canadian Public Pension Plans: Parliamentary Budget Officer

July 11, 2019
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For over a decade, the Canada Pension Plan Investment Board (CPPIB) and the Public Service Pension Investment Board (PSPIB) have adopted an active management strategy, but was this the best course of action?

An active management strategy aims to outperform the market – achieving higher returns – by picking investments that will outperform a chosen benchmark (or index). Passive management, on the other hand, tries to replicate a benchmark to achieve the same or similar returns. Active management costs more as there is higher complexity and personnel costs involved in doing it well.

Some have argued that these plans have taken on personnel bloat – and significantly higher costs. Andrew Coyne pointed out earlier this year that in 2006, the CPPIB had 150 employees and costs of $118-million, which increased to 1,500 employees and costs up to $3.2billion by 2018. Proponents of active management, like Mark Machin, the CEO of the CPPIB, believe the benefits outweigh the cost, saying in an interview earlier this year, “the net income last year was $32-billion and the return is 8.9 per cent, after all expenses — internal, external, everything. And that’s the important thing.”

It was with this argument in mind that the Parliamentary Budget Officer (PBO) released their report titled: “Analysis of Active versus Passive Management of Canadian Public Pension Plans”. The analysis, in response to parliamentary interest, was conducted to compare the actual returns of the CPPIB and PSPIB versus a customized passive portfolio.

Using a passive portfolio scenario that included two large public equity and fixed income indices, the PBO found the CPPIB’s actual net returns, after costs were accounted, outperformed the returns in each scenario significantly ($48.4-billion higher or 1.2% annually) while the PSPIB was less successful than the CPPIB, performing slightly better than a passive strategy ($1.7-billion higher or an additional 0.3% annually).  

To some – these small percentages may not seem like substantial improvements – but when we are dealing with pension funds that invest billions of dollars, small percentages can mean billions of dollars for the retirement security of millions of Canadians.