McCaughey proposes CPPIB as savings bank

News Report: Let Canadians pay into Canada Pension Plan faster, CIBC Boss urges

Just as Finance Minister Jim Flaherty has beaten back those Provincial Treasurers who want to increase the CPPIB payroll tax, he’s got a new demon to tackle. I’m all for big ideas, and CIBC chief executive officer Gerry McCaughey presented one yesterday in Fredericton. This from the Globe:

The head of one of Canada’s largest banks is proposing a dramatic overhaul of the country’s pension regime, arguing that average Canadians need more certainty and simplicity from their savings than existing investment tools provide.

Canadian Imperial Bank of Commerce chief executive officer Gerry McCaughey said Canada should reform the Canada Pension Plan to allow people to make voluntary contributions that are beyond what they already pay through their salaries.

The move could give many Canadians something they do not have with RRSPs and other investment vehicles tied to the markets: a predictable payout when they retire.

Much as Canadians understand exactly how long it will take to pay off their mortgage when they buy a house, average earners should have a pension system that helps them forecast how much money they will have at retirement, and allows them to accelerate their contributions, Mr. McCaughey said in a speech to the National Summit on Pension Reform in Fredericton on Tuesday night.

“It would give Canadians the choice to put aside more – a little at a time – with the confidence of clearly knowing what benefits it will bring,” he said. “It would improve the future of Canadians who choose to opt in – through forced savings and no withdrawals – over the arc of 40 years.”

Based upon the news report (the speech wasn’t yet available online at post time), Mr. McCaughey’s idea can’t work as outlined. Leaving aside the unlikely notion that 25 year-olds will irrevocably sign up to a “40 year arc” of a voluntary monthly savings deduction plan, the difference between the Canada Pension Plan and a CPP-managed Savings Plan is that one is guaranteed by bi-weekly deductions from active workers and employers, while the “CPP Savings Plan” would have to rely on the investment prowess of the CPPIB team.

If our CPP cash horde isn’t large enough to pay out the promised future benefits, the government will just increase payroll contributions to make up the difference. That’s what happened about a decade ago, when our CPP contributions were jacked up to ensure that the CPP would be able to meet the 1970s-era “promise” that soon-to-be retirees were expecting. What the late and beloved John MacNaughton, the first CEO at CPPIB, called “the fix”.

It’s not that the CPP Investment Board is guaranteed to earn enough of a return over the next 20 years to pay my defined benefit pension, any more than workers who were in their 30s circa 1972 put enough into the CPP to ensure that payroll taxes wouldn’t be increased last decade to make good on their retirement expectations.

How the CPP Investment Board would, as manager of your voluntary savings account, guarantee you a certain defined and predictable pension is unclear. Without the backstop of the taxpayer, it would be impossible, unless Mr. McCaughey’s speech lays out the details and they weren’t covered by the media. As CPPIB CEO Mark Wiseman told the Globe ROB Magazine not that long ago, if they don’t produce high enough returns, they’ll just increase payroll deductions on future workers to make good on today’s pension promise:

And what happens if the CPPIB team turn out to be the worst investors the world has ever seen, and lose most or all of the money? Notwithstanding all of the checks and balances in place, Wiseman cracks a smile and says, “If they raise the amount taken off your paycheque by 50%, in less than five years we’re right back where we are now.”

Over the past five years, the CPPIB investment team earned an annual return of 2.2% according to the 2012 annual report. So, that $1,000 you put into Mr. McCaughey’s voluntary CPPIB savings account back in 2007 was worth $1,114.95 as of last March. There are a few hundred CIBC Investment Advisors across the land who’d expect to do better than inflation for you. Even the CIBC stock dividend yield, at 4.5% today, is a more attractive bet even if you make nothing on the underlying bank stock — something that Mr. McCaughey is well-compensated to ensure doesn’t happen.

Over at the Globe Investor site, there are 1,086 “Five Star” rated funds for you to put your money into. In fact, 330 funds on the Globe site earned better than 9% over the past 10 years — well above the CPPIB’s 6.2% 10-year return figure.

I haven’t had the chance to speak to Mr. McCaughey’s team to understand the details of his proposal, but one thing is clear. The CPP is backstopped by the worker and his/her employer; and it’s the payroll taxes that ensure the CPP’s expected benefit will be there when you retire. Not money management wizardry. Any voluntary savings plan managed by the CPPIB that isn’t guaranteed by the taxpayer to produce a certain defined benefit is subject to the same market moves as any other retirement account (TFSA, RRSP, Universal Life…).

With 975 Canadian funds doing better over the past decade than CPPIB’s 6.2% 10-year return, I’m not sure I see the magic in handing more of our capital to CPPIB.

But, if the government is going to start guaranteeing the long term returns of voluntary retirement plans, sign me up. And give a kiss goodbye to dozens of money management firms, ’cause it’ll be lights out for many…no matter what their track record has been to date.

MRM