Alberta wants to withdraw from CPP and establish its own pension fund. So what would that look like?
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 percent of the CPP fund, and that seems too big when Alberta represents only 16 percent 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 minds. 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.
When individuals apply for a pension, either Service Canada or the QPP administrator (depending on the province in which 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 oil sands plants in the Fort McMurray, AB area. Correct and complete data could thus lead to an asset transfer even smaller than $262 billion.
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 standalone 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 Premier Smith of Alberta meant when she said that 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.
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.
About The National Institute on Ageing
The National Institute on Ageing (NIA), based at Toronto Metropolitan University (TMU, formerly Ryerson University), is Canada’s leading policy and research centre dedicated to enhancing successful and healthy ageing throughout people’s lives. Through its collaborative approach, expert-driven analysis, and public-facing reports and tools, the NIA provides meaningful research, analysis, advice, and advocacy on the most pressing issues that are affecting the health and well-being of older Canadians.