Danielle Smith's big-money sales pitch on Alberta pension plan hasn't worked yet
Premier Danielle Smith has told Albertans that starting a separate provincial pension plan would bring residents higher benefits for lower contributions. Now she has to convince people about this rosy future.© jeff McIntosh/The Canadian Press
Prime Minister Justin Trudeau can usually only count on polite applause when he's talking to an Alberta business crowd.
But when executives hosted him this week at an Ottawa reception, he found one line worked surprisingly well — praise for the national pension program that Premier Danielle Smith wishes to exit.
In a list of federal programs assisting Alberta (health care, transit, housing), Trudeau added:
"It's why we strengthened the Canada Pension Plan and why we need to make sure it continues to protect a stable and dignified retirement for all Canadians."
As the solid bout of clapping died down, the prime minister smirked, "Couldn't resist that one."
The assembled energy executives and business lobbyists have ample qualms with federal energy regulations and climate strategies, but they don't have a bone to pick with CPP.
And this is an area where corporate Alberta's attitudes are in sync with the broader public.
According to the first major poll conducted since Smith began her persuasion pitch to remove Alberta from CPP, the proposal remains about as widely opposed as it was before. Fifty-two per cent of Albertans think it's a bad or very bad idea, compared to 19 per cent who think it's a good or very good one, and 15 per cent who are in the middle, the Abacus Data survey shows.
Last month, Smith released a feasibility study that suggested Alberta would get to start its own pension plan with 53 per cent of the CPP's assets — one-third of a trillion dollars. With that much in its kitty, an Alberta Pension Plan could offer residents a rosy future of both lower contributions and higher benefits, arguments the government is presenting through one of its large new advertising campaigns. (No, not that one; the other one.)
Those boasts don't seem to have shifted public opinion much. The few who support it are overwhelmingly younger Albertans — those farthest away from receiving pensions, and are therefore less vulnerable to any gyrations or risks in the health of the retirement security program.
"The (people) most engaged, most likely to vote, probably the most important to the UCP base itself are the most likely to be resistant to this idea right now," pollster David Coletto said in an interview.
For the pullout to be approved in a 2025 referendum, Smith and other proponents would have to convince all those people who consider it an "OK idea" to support it, convert some opponents to supporters, and ensure those enthusiasts come out to vote in greater numbers than the APP skeptics.
Coletto notes that most referendums to directly change the status quo get rejected, a record that holds from Québec separatism to the Charlottetown Accord right up to Alberta's 2021 ballot question to ditch Daylight Saving Time. (The province's equalization referendum? It directly changed nothing.)
The UCP government is doing its best to accentuate all the idealized positives of a plan that would supposedly enrich everybody, including the pension's payers and payees, complete with an online survey that doesn't offer Albertans much chance to register displeasure — preferring, instead, to describe how much rosier they'd like their contributions and benefits to be.
It might help Smith's sales pitch if more groups or experts were coming out to bolster the case for the APP. They're getting the inverse.
The national small business lobby questions the true benefits for Albertans, and the impact on members in the rest of Canada. The Calgary Chamber of Commerce is putting up caution flags about the various uncertainties in abandoning the predictable old Canadian pension system.
"We've benefited from being part of a bigger pool. That means the expenses are shared, the risks are shared," chamber president Deborah Yedlin told CBC's West of Centre podcast. The province cannot rely on the strong investment performance that the national fund enjoys, she added.
"Your returns are going to be challenged because you can't invest in (relative) size," Yedlin said.
The Fraser Institute, a conservative think-tank, is optimistic about the idea and potential perks for Albertans. However, its thinkers have been making the same case about Albertans paying less into a theoretical pension plan of their own for years, before Alberta began studying the idea in earnest under former premier Jason Kenney's Fair Deal Panel.
There is one Alberta entity that used to be more cautious about the pension idea, but now sees far more upside. That would be the Alberta Finance Department itself.
In September 2019, officials drafted a briefing note to then-finance minister Travis Toews, who served in that role for both Kenney and Smith. It was made public under Freedom of Information law and previously reported on in 2020, but bears revisiting today.
Unlike the government's current promotions, the briefing note assesses pros and cons. Pro: a relatively young province could offer residents lower contributions.
Con: that future is more prone to bumps: "The diminished risk pool of an Alberta Pension Plan is more likely to create contribution volatility relative to the CPP," the note to Toews states.
It expresses several other risks, like high administration costs, and weaker returns.
The 2019 briefing note doesn't only consider the assets Alberta could withdraw from CPP, but it also notes the high liabilities. And its estimated slice of CPP assets is much smaller than the government's recent Lifeworks report — below 12 per cent, rather than 53 per cent.
That amount may be overly conservative compared to what economist Trevor Tombe has supposed Alberta could get, and compared to Alberta's share of population among nine CPP provinces.
But it does underline the point that if the argument for a much larger take was widely understood or shared before the Lifeworks report became the apple of Smith's eye this year, the more astronomical figure would have been more common in the discourse before now. (But it hasn't been; in 2020, the Fair Deal Panel itself predicted Alberta's asset grab would be a more modest $40 billion to $70 billion.)
The Smith government's new arguments don't seem to have worked yet, but they have two years to shift opinion before a possible referendum in 2025. That leaves much more time for detractors to tilt the debate in their favour, as well.
Other provinces may develop counter-arguments to ensure Alberta doesn't weaken their program — and Trudeau's remarks on this divisive issue may one day amount to more than smirking asides.
The devil in the actuarial details: The problems with a $334-billion transfer from CPP to Alberta
Special to Financial Post | Doug Chandler, Bonnie-Jeanne MacDonald
Tue, October 10, 2023
Canadian one hundred dollar banknotes
The Alberta government has released a consultant’s report that includes a $334-billion estimate of the asset transfer from the Canada Pension Plan (CPP) fund to a new fund to be established for a stand-alone Alberta pension plan.
There are three distinct issues with this number. First, the provisions in the CPP Act concerning the asset transfer are not particularly clear. Second, the number is calculated using data by province of residence, whereas CPP operates on the province of employment. Last but not least, the transfer represents 53 per cent of the CPP fund and that seems too big when Alberta represents only 16 per cent of CPP contributions.
The formula in the CPP Act
The withdrawal provisions in the CPP Act were introduced in 1965 when all of Canada’s provinces, except Quebec, first agreed to join the Canada Pension Plan. Ontario in particular wasn’t fully convinced of the merits of going into a national plan, so the 1965 CPP Act included a money-back guarantee, allowing provinces to change their mind. That’s what the Alberta government is proposing.
After 60 years of contributing the same rate and getting the same benefits as everyone else, the Alberta government is asking Albertans to renege on the decision to join in the first place. What was akin to a 60-day money-back guarantee is being used as a 60-year money-back guarantee.
The formula in the CPP Act provides for a refund of contributions with investment earnings attributed to those contributions, minus the related benefits and administration fees. What this formula fails to mention is critical. It fails to deduct investment earnings on benefits and fees. The consultant’s report notes that a literal interpretation of this formula would lead to an asset transfer of $747 billion — more than the total CPP fund.
The consultants chose to deduct benefits and fees before allocating hypothetical investment earnings at the actual rate earned by the fund. This liberty brings the estimate down to $334 billion, excluding a small additional transfer for the benefit improvements added to CPP in 2019. Even with this correction, the formula doesn’t add up. If all of the provinces with above-average growth in their working-age populations elected an asset transfer, the formula would produce a total asset transfer that would exceed the total assets of the CPP fund.
In his working paper on the Alberta Pension Plan, Trevor Tombe suggests that Alberta’s entitlement to investment earnings under the Act means attributing the total realized investment earnings in proportion to contributions. This interpretation of the Act has the desirable feature that the total of hypothetical asset transfers to all provinces would equal the total assets. Tombe concludes the asset transfer using this interpretation of the legislation (and some other smaller differences), would be $150 billion.
Data problems
When individuals apply for a pension, either Service Canada or the Quebec Pension Plan (QPP) administrator (depending on where they live at that time), will determine benefits from both plans based on the entire history of pensionable earnings by province of employment, as reported on T4 slips. The administrator will make combined payments for the total pension and then the CPP and QPP will settle up their share of the pensions year by year.
In their report, the consultants used publicly available data by province of residence to calculate the $334-billion asset transfer. In the formal actuarial opinion, they say “the data on which the calculations are based are sufficient and reliable based on the terms of the engagement for this report.” Reference to the terms of engagement is a polite way for an actuary to say that the data isn’t really sufficient but they did what they could with the data and the budget they had and their client told them not to waste any more time trying to make it better.
This is a situation in which an actuary is required by professional standards to report both the quantitative and qualitative aspects of the impediment to obtaining adequate data. The consultants analyzed interprovincial migration statistics to quantify the impact. They found the potential asset transfer could turn out to be as small as $262 billion or as large as $362 billion once the necessary data by province of employment becomes available. Using interprovincial migration data doesn’t address individuals who maintained a residence or family ties in their home province while working in Alberta — an example of this would be construction camps for oilsands plants in the Fort McMurray area. So correct and complete data could lead to an asset transfer even smaller than $262 billion.
Fairness
This brings us to the last issue. The money-back guarantee approach to calculating the asset transfer looks backwards to contributions and benefits that have already been paid. It rests on the premise that contributions are used to pay current benefits and Alberta contributions should only be used to pay Alberta pensions. Albertans have been contributing more than would have been required in a stand-alone provincial pension plan because workers have been moving to Alberta. The asset transfer contemplated in the CPP Act retroactively eliminates the responsibility of Alberta contributors for current beneficiaries in other provinces — even the parents and grandparents of those new Alberta workers!
If the result is unreasonable and the formula was never intended to be applied in this way, the solution is to amend the CPP Act to substitute a more equitable formula. The principle that a formula must be changed when it produces an unreasonable result appears to be what Alberta Premier Danielle Smith meant when she said Alberta wants a “better constructive relationship with the rest of the country and this begins the conversation” about equalization payments and other national programs.
One obvious alternative to the formula in the CPP Act would be to allocate the assets in proportion to the benefit liabilities being transferred to Alberta — the approach widely used for divestitures in private sector pension plans. That is, an asset transfer would be calculated by looking forward at the pensions that will be paid based on the history of Alberta contributory earnings, rather than backward at the benefits and contributions that have already been paid. This approach would produce an asset transfer around $100 billion.
A second approach used in private sector pension plans, is to transfer assets equal to the accounting or solvency liability for the pensions being transferred. This approach would produce a much larger asset transfer.
A third approach would be to determine the asset transfer in a way that avoids disruption for either Alberta or the remaining provinces by keeping the steady-state contribution rate or the target ratio of assets to liabilities the same in the new plans as it is in the existing plan. This last approach could produce an even smaller asset transfer, especially if it is assumed that Alberta’s working age population will continue to grow at the current pace.
So, to sum up, the right value for the asset transfer from the CPP fund to an Alberta fund is somewhere in a range of $100 billion to $747 billion. There are many moving parts to this calculation, most of which have been ignored. Of course, there are other issues to consider aside from the size of the asset transfer but, until this one is addressed, it will be difficult to focus on them.
What the Canada Pension Plan might look like without Alberta
Alberta wants to leave the CPP: What it means for Canada
‘Impossible’ for Alberta to exit with half of CPP assets: official
While the stated purpose of the consultant’s report was to “help answer key questions that Albertans are asking about the costs and benefits of such a move,” more work is required before Albertans will be in a position to make an informed choice in a referendum.
Doug Chandler is a Calgary-based actuary and an associate fellow of the National Institute on Ageing, Toronto Metropolitan University.
Bonnie-Jeanne MacDonald is a Halifax-based actuary and the Director of Financial Security Research at the National Institute on Ageing, Toronto Metropolitan University.
Special to Financial Post | Doug Chandler, Bonnie-Jeanne MacDonald
Tue, October 10, 2023
Canadian one hundred dollar banknotes
The Alberta government has released a consultant’s report that includes a $334-billion estimate of the asset transfer from the Canada Pension Plan (CPP) fund to a new fund to be established for a stand-alone Alberta pension plan.
There are three distinct issues with this number. First, the provisions in the CPP Act concerning the asset transfer are not particularly clear. Second, the number is calculated using data by province of residence, whereas CPP operates on the province of employment. Last but not least, the transfer represents 53 per cent of the CPP fund and that seems too big when Alberta represents only 16 per cent of CPP contributions.
The formula in the CPP Act
The withdrawal provisions in the CPP Act were introduced in 1965 when all of Canada’s provinces, except Quebec, first agreed to join the Canada Pension Plan. Ontario in particular wasn’t fully convinced of the merits of going into a national plan, so the 1965 CPP Act included a money-back guarantee, allowing provinces to change their mind. That’s what the Alberta government is proposing.
After 60 years of contributing the same rate and getting the same benefits as everyone else, the Alberta government is asking Albertans to renege on the decision to join in the first place. What was akin to a 60-day money-back guarantee is being used as a 60-year money-back guarantee.
The formula in the CPP Act provides for a refund of contributions with investment earnings attributed to those contributions, minus the related benefits and administration fees. What this formula fails to mention is critical. It fails to deduct investment earnings on benefits and fees. The consultant’s report notes that a literal interpretation of this formula would lead to an asset transfer of $747 billion — more than the total CPP fund.
The consultants chose to deduct benefits and fees before allocating hypothetical investment earnings at the actual rate earned by the fund. This liberty brings the estimate down to $334 billion, excluding a small additional transfer for the benefit improvements added to CPP in 2019. Even with this correction, the formula doesn’t add up. If all of the provinces with above-average growth in their working-age populations elected an asset transfer, the formula would produce a total asset transfer that would exceed the total assets of the CPP fund.
In his working paper on the Alberta Pension Plan, Trevor Tombe suggests that Alberta’s entitlement to investment earnings under the Act means attributing the total realized investment earnings in proportion to contributions. This interpretation of the Act has the desirable feature that the total of hypothetical asset transfers to all provinces would equal the total assets. Tombe concludes the asset transfer using this interpretation of the legislation (and some other smaller differences), would be $150 billion.
Data problems
When individuals apply for a pension, either Service Canada or the Quebec Pension Plan (QPP) administrator (depending on where they live at that time), will determine benefits from both plans based on the entire history of pensionable earnings by province of employment, as reported on T4 slips. The administrator will make combined payments for the total pension and then the CPP and QPP will settle up their share of the pensions year by year.
In their report, the consultants used publicly available data by province of residence to calculate the $334-billion asset transfer. In the formal actuarial opinion, they say “the data on which the calculations are based are sufficient and reliable based on the terms of the engagement for this report.” Reference to the terms of engagement is a polite way for an actuary to say that the data isn’t really sufficient but they did what they could with the data and the budget they had and their client told them not to waste any more time trying to make it better.
This is a situation in which an actuary is required by professional standards to report both the quantitative and qualitative aspects of the impediment to obtaining adequate data. The consultants analyzed interprovincial migration statistics to quantify the impact. They found the potential asset transfer could turn out to be as small as $262 billion or as large as $362 billion once the necessary data by province of employment becomes available. Using interprovincial migration data doesn’t address individuals who maintained a residence or family ties in their home province while working in Alberta — an example of this would be construction camps for oilsands plants in the Fort McMurray area. So correct and complete data could lead to an asset transfer even smaller than $262 billion.
Fairness
This brings us to the last issue. The money-back guarantee approach to calculating the asset transfer looks backwards to contributions and benefits that have already been paid. It rests on the premise that contributions are used to pay current benefits and Alberta contributions should only be used to pay Alberta pensions. Albertans have been contributing more than would have been required in a stand-alone provincial pension plan because workers have been moving to Alberta. The asset transfer contemplated in the CPP Act retroactively eliminates the responsibility of Alberta contributors for current beneficiaries in other provinces — even the parents and grandparents of those new Alberta workers!
If the result is unreasonable and the formula was never intended to be applied in this way, the solution is to amend the CPP Act to substitute a more equitable formula. The principle that a formula must be changed when it produces an unreasonable result appears to be what Alberta Premier Danielle Smith meant when she said Alberta wants a “better constructive relationship with the rest of the country and this begins the conversation” about equalization payments and other national programs.
One obvious alternative to the formula in the CPP Act would be to allocate the assets in proportion to the benefit liabilities being transferred to Alberta — the approach widely used for divestitures in private sector pension plans. That is, an asset transfer would be calculated by looking forward at the pensions that will be paid based on the history of Alberta contributory earnings, rather than backward at the benefits and contributions that have already been paid. This approach would produce an asset transfer around $100 billion.
A second approach used in private sector pension plans, is to transfer assets equal to the accounting or solvency liability for the pensions being transferred. This approach would produce a much larger asset transfer.
A third approach would be to determine the asset transfer in a way that avoids disruption for either Alberta or the remaining provinces by keeping the steady-state contribution rate or the target ratio of assets to liabilities the same in the new plans as it is in the existing plan. This last approach could produce an even smaller asset transfer, especially if it is assumed that Alberta’s working age population will continue to grow at the current pace.
So, to sum up, the right value for the asset transfer from the CPP fund to an Alberta fund is somewhere in a range of $100 billion to $747 billion. There are many moving parts to this calculation, most of which have been ignored. Of course, there are other issues to consider aside from the size of the asset transfer but, until this one is addressed, it will be difficult to focus on them.
What the Canada Pension Plan might look like without Alberta
Alberta wants to leave the CPP: What it means for Canada
‘Impossible’ for Alberta to exit with half of CPP assets: official
While the stated purpose of the consultant’s report was to “help answer key questions that Albertans are asking about the costs and benefits of such a move,” more work is required before Albertans will be in a position to make an informed choice in a referendum.
Doug Chandler is a Calgary-based actuary and an associate fellow of the National Institute on Ageing, Toronto Metropolitan University.
Bonnie-Jeanne MacDonald is a Halifax-based actuary and the Director of Financial Security Research at the National Institute on Ageing, Toronto Metropolitan University.
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