No, the CPP Didn’t Squander $46 Billion of Taxpayer Money

The Globe and Mail claimed that the CPP Board mismanaged Canadians’ money, but it beat the returns earned by the iShares S&P/TSX Composite Index Fund (TSX:XIC).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Last week, the Globe and Mail ran an article arguing that the Canada Pension Plan (CPP) wasted $46 billion worth of taxpayer money on underperforming investments. The author argued that, because the CPP board achieved a 7.7% compounded annual (CAGR) return, 0.1% below its benchmark, it underperformed.

To make matters worse, the board spent $3.5 billion on hedge fund fees and increased its staff from 160 to more than 2,000, paying them $500,000 on average. It would appear the author found proof that the CPP Board enriched itself at taxpayers’ expense! On close inspection, however, that turns out not to have been the case.

The CPP board’s benchmark

First of all, the CPP board’s benchmark portfolio — the portfolio it tried to beat — was not a ‘standard’ benchmark like the TSX Composite Index. It was a benchmark the CPP board came up with itself, which performed better than the TSX Composite Index.

When the CPP board shifted from passive management to active management in 2006, the iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) traded for about $18. It trades for $36 today. It paid $12 in dividends along the way. If we count those dividends as part of the ending amount, then we get a CAGR return of 5.5% annualized. The CPP Board’s 7.7% return beats that by 2.2% per year.

Created with Highcharts 11.4.3iShares Core S&p/tsx Capped Composite Index ETF PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

“But isn’t the CPP a global portfolio?”

An obvious counterpoint to my argument above is the fact that the CPP board isn’t limited to Canadian stocks. It can and does invest globally. When we look at the data for global stocks, however, we see that my argument is not much diminished by this fact. The service Curvo dot eu reports that the MSCI All-World Index achieved a 8.6% CAGR return over the last 20 years. That’s a bit ahead of the CPP board, but remember that foreign countries charge withholding taxes: the CPP board would not have actually earned that 8.6% in practice. A typical 15% withholding tax would have reduced the after-tax return to $8.5% by my estimates.

Now, pensions have to have a certain amount of their money in bonds. They have recurring payouts to policyholders, so they can’t have 100% of their money in stocks: a 1929-style scenario would wreck a pension fund’s solvency. Bonds paid next to nothing for most of the last 18 years. They started offering some yield in 2022, but for the most part they’ve paid less than 1%. The average has been around 2.5%.

That doesn’t mean that the CPP board was wrong to have held bonds: pensions need bonds and hedges to reduce volatility. If the CPP Board’s 15% bond weighting is about right, then a benchmark of 85% global stocks and 15% U.S. treasuries would have given about a 7.2% CAGR return. This puts the CPP Board ahead by a 0.5% CAGR, or 32% cumulatively!

Foolish takeaway

As I have shown, the CPP Board has performed pretty well. This isn’t to say that the $3.5 billion/year in hedge fund fees or $500,000 average salaries are justifiable, just that the CPP portfolio has performed well after you subtract all of the aforementioned.

I do not say this to disparage index funds. I own a TSX fund similar to XIC in my own portfolio, and I’m glad that I have it. XIC has a rock-bottom 0.06% management fee, an ultra-diversified 240 stock portfolio, a 2.8% dividend yield, and excellent liquidity. It owns some of the nation’s best companies and has achieved adequate returns with relatively little volatility. For most investors, it’s a great index fund to hold.

But that doesn’t mean that the CPP Board should run out and put all of its money in XIC or even the mighty MSCI All-World Index. It’s a pension fund with recurring expenses: it can’t afford to go 100% equities. The volatility in a worst-case scenario with such a strategy (e.g., 1929 or 2008) would wreck its ability to pay pensioners.

Should you invest $1,000 in Ishares Core S&p/tsx Capped Composite Index Etf right now?

Before you buy stock in Ishares Core S&p/tsx Capped Composite Index Etf, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Ishares Core S&p/tsx Capped Composite Index Etf wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

coins jump into piggy bank
Dividend Stocks

How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investing $5,000 in each of these high-yield dividend stocks can help you earn over $1,057 per year in tax-free income.

Read more »

Man in fedora smiles into camera
Dividend Stocks

How I’d Build a $20,000 Retirement Portfolio With These 3 TSX Dividend All-Stars

If you're worried about returns and want to focus on dividends, these dividend stocks are the first to consider.

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

If I Could Only Buy and Hold a Single Canadian Stock, This Would Be It

Here's why this high-quality defensive growth stock is one of the best Canadian companies to buy now and hold for…

Read more »

Concept of multiple streams of income
Dividend Stocks

3 Safe Dividend Stocks for Retirees

These three Canadian stocks are ideal for retirees due to their solid cash flows, consistent dividend growth, and healthy growth…

Read more »

dividends can compound over time
Dividend Stocks

3 Canadian Market Leaders Where I’d Invest $10,000 for Sustained Performance

Market leaders like Alimentation Couche-Tard Inc (TSX:ATD) are worth an investment.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

How I’d Allocate $12,000 Across Canadian Value Stocks for Retirement Planning

Suncor Energy Inc (TSX:SU) is a Canadian energy stock worth investigating.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Stocks You Can Buy Now and Get Monthly Payouts From for Decades

Are you looking for monthly payouts? There are more than a few great investments that can fuel a monthly income…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Where I’d Put $1,000 Right Away in 2 Top Canadian Stocks for Growth

These two Canadian stocks are strong options and have been for decades, and that's not going to change anytime soon.

Read more »