From time to time, CSS receives inquiries from our members about various facets of their CSS Pension Plan investment funds such as the management expense ratio (MER¹), investment returns and the like. 

While we regularly report on performance through e-blasts, TimeWise, our annual report and members’ individual annual statements, and various webinars and other presentations, these communication methods are not necessarily well-suited to understanding how, say, our CSS Balanced Fund stacks up against investment choices our members see advertised in the retail marketplace.

Some history

There was a time when CSS focused on being the absolute lowest cost supplier in the marketplace. To this day, our members and others in the marketplace who know CSS, still refer to our low MER as a key characteristic of the CSS Pension Plan. It is still very true that our MER is very competitive (low) when compared to similar options in the marketplace.

While that focus on low cost led to MERs that were some of the lowest in the marketplace, it meant that CSS would not take advantage of investing in certain asset classes that might cost more but would be expected to provide beneficial investment returns to members, investment risk management benefits to members through diversification of the portfolio, or both. It also meant that CSS sometimes deferred investing in its in-house pension administration system, digital service delivery for members, online tools, information, and education services for members, and limited the number of people, like retirement and pension advisors, CSS has on staff who are available to assist members with their investment and retirement decision making. These deferrals were made to ensure our MER remained low but also meant that CSS wasn’t always able to provide the education, information, tools and services that members wanted.  

Today, consistent with our historic practices, CSS considers low fees to be one of the most important elements of our overall value proposition. Low cost has been a hallmark of CSS, and continues to be, over our 80+ years in operation. The overall value CSS generates for our members, however, goes beyond just competitive cost.

Purpose

CSS’ overall purpose is to empower our members to achieve financial security in retirement. Key inputs to creating and providing that empowerment include, amongst other things:

• Providing competitive, custom-designed, value-added investment and retirement products and services exclusively to co-operative and credit union employees and their employers
• Using our “strength in numbers” to achieve economies of scale in our operations, as well as access to and preferred pricing from global investment professionals and service partners
• Providing objective, transparent and non-conflicted advice to members in a commission-free environment
• CSS is a non-profit co-operative that is democratically owned and operated by and for our members

Not a product

CSS is not a product. It is really a platform that has been built over 80+ years with the relentless and steadfast aim to help our members achieve financial security in their retirement. That is why, for example, CSS has offered retirement income products like our fixed monthly pension and our Variable Benefit products for retirees, in addition to the four investment funds available to members to accumulate their pension holdings in their working years. This is not a common feature in many defined contribution pension plans across Canada.

The CSS platform is pictured below:

How do we compare?

It is that time of year when CSS provides annual statements to its members. This typically generates a number of inquiries from members about CSS’ investment performance, the MER on our funds and other related questions. Many of these inquiries include the member comparing CSS’ MER to a product in the marketplace. For example, “Why is CSS’ MER X basis points when I can get an S&P 500 ETF² for Y basis points (much less than the CSS MER) in the marketplace?”

The question is valid, and one that we are happy to discuss with members, because it provides an opportunity to better explain the value CSS generates for our members. The following are some considerations when exploring this type of question.

Care must be taken to compare like investment choices. In the above example, the S&P 500 is a collection of U.S.-based stocks only. While it can be considered diversified across the US equities market, it does not include other asset classes that could bring further diversification benefits and potential enhanced investment returns like global equities, fixed-income assets, private real estate, private commercial mortgages and private infrastructure holdings. The CSS Balanced Fund holds these other asset types so the comparison above is an apples-to-oranges type of comparison. 

Fair enough, but there are Balanced ETF Portfolios available in the marketplace. For example, Vanguard’s Balanced ETF Portfolio (VBAL). Its MER was recently³ reported as 24 basis points, which is less than the MER on CSS’ Balanced Fund. This is a better comparison than we described in the paragraph above as the VBAL ETF holds a more diversified portfolio of equity and fixed-income assets than just U.S. stocks, but it is still apples-to-oranges. Generally speaking, the VBAL ETF holds some similar asset classes to our Balanced Fund (but at different weights); however, it does not hold emerging market debt, private global real estate, private commercial mortgages or private global infrastructure investments like the CSS Balanced Fund does. 

These other asset classes are more costly to invest in but are expected to generate significant long-term benefits (enhanced risk-adjusted returns) for our members. It is CSS’ view that the Balanced Fund is a superior investment choice for the long-term accumulation of defined contribution pension assets. It is also suitable as a key component of the “decumulation” portfolio for members drawing a retirement income and wishing to manage their investments in retirement.

One last difference to keep in mind is the style of investing being utilized when making comparisons. For the sake of comparison, we’ll continue to look at VBAL and our CSS Balanced Fund. The VBAL product is made up of a collection of other Vanguard ETFs. Generally speaking, ETFs are passive investments. CSS, for a large part of its portfolio, uses actively managed investments where we think there is reasonable expectation that the asset manager will outperform the market on a risk-return basis, over the long-term. The costs associated with active investing are higher than passive market indexes. This also helps explain why products like VBAL do not hold private assets – there is no passive investment option available for these.

So, a key takeaway from the above is to recognize that not all “Balanced Fund” investments are the same. CSS purposefully invests differently than simply choosing index-based options or the lowest cost options available in the marketplace. Why do we do that? 

CSS understands that our members are looking for financial security now and well into retirement. CSS is built to help our members invest, and enjoy the fruits of those investments, for a very long time. This might include 30, 40 or even close to 50 years of working and accumulating retirement funds and then another 10, 20, 30 or more years in retirement, depending on individual member circumstances. It is not uncommon for our members to have their funds invested in our investment funds for 50, 60, or more years. Throughout that investment journey, CSS supports our membership through professional pension fund management, relevant and timely pension and retirement tools and service, and personalized support.

More on MER

The MER on CSS’ Balanced Fund is an “all in” measure. It includes all costs associated with our external asset managers investing and managing our members’ assets, all costs to provide the tools, education, information, access to retirement planners, and all administration and governance costs to run the pension plan, and all regulatory and compliance costs to run the pension plan. Approximately 75%-80% of the MER goes to paying for the external asset management services that CSS administers on behalf of our members. The remainder covers all other costs associated with running the pension plan – this level of non-asset management cost is extremely competitive (as it always has been for CSS) when compared to alternatives in the marketplace.

Conclusion

Our MER is where it should be. The fact that it is higher today than it has been in the past is not a sign that CSS has lost its focus on the importance of fees to our members’ financial security in retirement; quite the contrary. While CSS has incurred a small uptick in expenses related to digital transformation activities to modernize our systems, processes, and workflows to future-proof our pension plan, the increase in MER we’ve seen in recent years reflects CSS taking advantage of investment opportunities in the marketplace that are expected to improve the risk-return profile of our investments for all members for the very long-term. 

¹A management expense ratio (MER) measures the total cost (operating expenses and investment management expenses) to manage an investment fund. The MER is expressed as a percentage of total annual expenses over the value of the investment fund. 

²ETF stands for Exchange-Traded Fund. S&P 500 ETF refers to an Exchange-Traded Fund that is based on the Standard and Poor’s 500.

³January, 2023.