Canada's Secret Pension Plan?

Mark Brown of MoneySense reports on Canada's Secret Pension Plan (h/t, Jonathan Chevreau):

If you’ve been waiting for Ottawa to create Pooled Retirement Pension Plans (PRPPs) you need not wait any longer—if you needed to wait at all.

PRPPs are meant to help Canadians save for retirement, filling in the growing gap left by the elimination of many employer pension plans. But unbeknownst to many Canadians the Saskatchewan Pension Plan (SPP) has been operating very much like a PRPP for the past 25 years.

Despite its name, the SPP is open to all Canadians. It’s a voluntary plan that allows members to contribute up to $2,500 annually, or transfer up to $10,000 a year from an existing RRSP. Regular contributions into the plan receive the same tax rebate as would for RSPs. Some see it as the template for the government’s planned rollout of PRPPs.

The plan caters to people who work for small or mid-sized businesses that don’t run their own pensions. According to Katherine Strutt, general manager of the SPP, Canadians are drawn to the plan because of its low fees, its competitive returns and its simple structure. Emphasis on simple. Plan members have only two investments to pick from, either a balanced fund (60% stocks, 40% bonds) or a money market fund.

“One of the secrets to our success is that we haven’t made it complex to be in the plan,” says Strutt. “A lack of choice isn’t a bad thing.”

Dave Makarchuk, a partner with Mercer, agrees that the SPP’s structure has a niche. “There’s no broker relationship that you have to deal with, there’s no bank relationship. You just put your money in, it’s pretty easy,” he says. It’s the sort of structure that caters to lower income Canadians that are having a hard time connecting to financial institutions or advisers.

Although the SPP isn’t marketed as a supplemental pension plan, that’s precisely what it is. And that’s where some of the criticisms of the SPP start to come in. “No Canadian could sustain a pension on the contribution limits that this plan allows,” says Makarchuk. “At best it’s a little extra something to supplement what you already have.”

The SPP’s small size is another issue. Currently the plan has about $300 million in assets under management, $200 million of which is in the plan’s balanced fund. As far as mutual funds go that’s tiny; as a pension it’s minuscule. Despite its size, the SPP’s done a good job containing its costs, operating with a management expense ratio of just 1.1%. The SPP, which is professionally managed, has produced an average return of 8%. Year to date the SPP’s balanced fund is up 1%, although the same fund shed 1% in 2011.

The fee is competitive when compared to financial advisors, says Makarchuk, but they’re nothing special when you compare the fee to other pension plans or Group RSPs. “It’s kind of an in-between option,” he says. Until it grows and can take advantage of economies of scale, the SPP likely won’t be able to lower its fees. But with its low contribution limits that’s still some time away.

Perhaps the biggest criticism of the SPP is over its limited flexibility. This is a key issue for Anthony Windeyer, a financial planner at Coast Capital Insurance Services in Vancouver. The SPP locks in your assets until you’re 55, he says. “Why would you take money from an RRSP, where you can take it out if you need to, and transfer it to a locked-in account that is highly restrictive?”

For this reason Windeyer suggests the SPP is best suited to someone who already has locked-in assets, like a pension from a former employer, and who is looking for a low-cost, turnkey solution. He adds this is a one-size-fits-all plan, which doesn’t offer any advice or accommodate its members should their investment goals or needs change.

Windeyer also isn’t overly impressed with the performance of the two investment options either. “From an investment perspective it’s what you’re going to get from everywhere else in the marketplace,” he says.

Still, the SPP’s structure is attracting interest. As of the end of 2011, 11% of the plan’s membership came from outside of Saskatchewan and membership continues to grow. “It speaks to people’s need for something that’s simple and easy to use and has a really good expense ratio so people aren’t losing so much of their assets to fees,” says Strutt. “I think that resonates to a lot of people.”

Makarchuk, however, sees it a different way. “For people who are scared of banks and scared of financial planners and don’t trust anyone and want to save that’s where things like the SPP and PRPPs maybe have a home.”

Canadians interested in learning more about the Saskatchewan Pension Plan (SPP) should visit their website here. It offers a wealth of information and clearly states the following:

With the recent increase in our contribution limit (up to $2500 per year), SPP offers you even more benefits, now and when you retire. SPP is a voluntary, money purchase plan for people who want an easy way to accumulate funds for retirement.

The Plan is available to people between 18 and 71 years of age. Eligibility is not dependent upon residency or membership in other plans. You must have available RRSP room to make contributions.

Since 1986, SPP has grown to the 27th largest defined contribution plan in Canada with $298 million in assets and 32,000 members. (View rate of return history.)

The Plan is designed for flexibility, so that members can make it fit their situation and budget. SPP is:

• Voluntary - no obligation to contribute;
• Flexible - payment at any time during the plan year;
• Portable - people can join and contribute to the Plan regardless of where they reside; and
• Professionally managed - The return has averaged 8% since it started in 1986.

Une version française du guide à l'usage des cotisants de Régime de pension de la Saskatchewan est disponible sur notre site Internet sous les guides d'information dans la section des instruments et les ressources.

As far as fund management, the website states:

The Board has delegated day-to-day responsibility for investment management to Greystone Managed Investments Inc. and Leith Wheeler Investment Counsel Ltd. A quarterly report on compliance with the investment policy must be completed by the investment managers.

Greystone Managed Investments Inc. of Regina manages the Annuity Fund and part of the Contribution Fund. This Saskatchewan-based firm has been managing money for the Plan since 1989.

Leith Wheeler Investment Counsel Ltd. is based in Vancouver. This firm was hired by the Plan in 1995 to manage part of the Contribution Fund.

I know Greystone is an excellent shop and heard good things about Leith Wheeler as well. Most of the assets are in the balanced fund. The return history for the last 10 years of the balanced fund and short-term fund is shown below and you can click here to see full return history:

The advantage of the SPP is that it's flexible, portable, well managed and expenses are kept low. This plan is ideally suited for self-employed workers who are finding it hard to save for their retirement and need access to a well managed defined-contribution pension plan which keeps fees low.

The SPP should contact organizations like the Business Development Bank of Canada (BDC) to get the word out on the services they provide. I worked at the BDC and saw first-hand the unmet needs of small and medium sized enterprises when it comes to providing their employees with low cost retirement solutions. The SPP can help bridge that gap. It is far better than the PRPPs the federal government is banking on.

Having said this, the SPP is far from perfect. The lock-up of assets doesn't concern me as I actually think taking money out of your RRSPs is a dumb move, even when you're desperate for cash. The performance is quite decent for a defined-contribution plan because the assets are well managed and by pooling the assets, they keep the fees low. That is the key advantage of the SPP over other DC plans.

But the SPP suffers the same fundamental flaw as other defined-contribution plans, namely, it's not a defined-benefit plan. Importantly, there is no pension promise at the heart of the SPP. Its performance is inextricably tied to the whims and vagaries of public markets.

Those of you who have been reading my blog know very well that I'm a huge proponent of well governed defined-benefit (DB) pension plans for all Canadians across the public and private sector. As much as I like the SPP, it's no substitute for Canada's large DB plans like Ontario Teachers' Pension Plan (OTPP) or Healthcare of Ontario Pension Plan (HOOPP), both of which outperformed their peers in 2011 and trounced the balanced fund returns of the SPP.

In fact, all of Canada's large DB plans trounced the balanced fund returns of the SPP for the simple reason that they are able to invest across public and private assets, allowing them to mitigate the effects of extreme volatility in public markets. They do this by internalizing asset management (lowering fees) and by investing in the best public and private managers across the world.

Finally, Bill Tufts, founder and executive director of Fair Pensions For All, wrote an article for the National Post, Teachers’ Pension Plan CEO offers ‘dose of reality’. I've already covered this subject in an earlier post (click here), but Deborah Allen, Director, Communications and Media Relations at Ontario Teachers' shared these thoughts with me:

We are not going to respond to this, although we might offer a link to Jim's speech. Bill continues to confuse a pre-speech interview in the Spectator with the speech itself. There's one interesting comment now posted, though. Don't know if you've had a chance to see it yet:

Mr Tufts neglects to mention that he attempts to make a living through denigrating public pensions while promoting his own company WB Benefit Solutions. His business is to kill off defined benefits pensions. His distortions of what was said by Jim Leech, head of the Teachers' Pension Plan are laughable. Here is a direct quote by Mr Leech from that same meeting: "Let me stress that Teachers’ is not in any short term financial crisis. We have over $117 billion in assets and can pay pensions for decades without any changes."

He also said something that Mr Tufts failed to report, "The truth is that DB Plans are far better vehicles for pension saving. I know that this flies in the face of conventional wisdom, but it is true."

Instead of pulling everyone down to poverty, wouldn't it be nice if everyone could retire in dignity? The Ontario Teacher's Pension Plan pays out $4.7 Billion annually - this money is largely spent in Canada on goods, services and yes, taxes.

How about declaring your interest Mr Tufts?

I agree with this comment, Bill Tufts' agenda has been exposed. He only cites my blog comments when it suits his agenda, but rarely discusses them when I make a forceful case for defined-benefit plans for all Canadians, US, and world citizens.

Now more than ever, following the Great Pension Slaughter, Canadian and global retirement systems need reforms to boost defined-benefit pensions. My recommendation is simple: consolidate all private and public pensions into large well governed public defined-benefit pension plans. I keep emphasizing "well governed" because I see too many of them in the US falling by the wayside precisely because they're poorly governed.

Below, a tribute to Joint Task Force 2, Canada's super-secret commandos. I'm actually ashamed of how we're treating our military personnel. While they have well governed defined-benefit pension plans managed by the Public Sector Pension Plan Investment Board, soldier suicides are on the rise and our National Defence is slashing suicide prevention staff. The situation in the US isn't better (watch below).