Pension expert concerned about CPP if Alberta creates its own pension plan

What impact will Alberta leaving have on Canada and the CPP?

Pension expert concerned about CPP if Alberta creates its own pension plan

There has been much discussion in the pension community about whether or not Alberta’s plan to create its own provincial pension scheme is a sound idea and how it might impact the rest of the country and the Canada Pension Plan (CPP).

The public survey held by the government of Alberta to get feedback from Alberta residents on the proposed Alberta Pension Plan is about to close on December 10. This public engagement was to get Albertans’ views on the report by LifeWorks, completed in September, that suggests an Alberta Pension Plan could secure Albertans’ pension benefits and achieve substantial savings with lower contribution rates and higher benefits for families and retirees.

However, since the LifeWorks report came out, there has been much discussion about some of the numbers behind the report.

“The proposal to separate from the Canada Pension Plan (CPP) and create the Alberta Pension Plan (APP) is based on the report by LifeWorks that argues that Albertans are entitled to 53 percent of the entire capital of the plan, which is a number right now being discussed at length because the assumptions underneath that calculation are questionable,” says Sebastien Betermier, associate professor of finance at McGill University and executive director of the International Centre for Pension Management.

Betermier says people in the pension community are discussing alternative assumptions and coming up with different calculations. “Alternatives are being put together because that number is absolutely key as it ultimately affects all of the calculations that are being proposed as part of the new plan. So, it is very much up in the air.”

Canadians have a plan that works really well

He adds that Canadians have a current national plan that “actually works really well and provides a defined benefit for every Canadian that they can access from wherever they live in Canada. It’s a plan that is well administered.

“It's a plan that has become increasingly funded over the years, especially with the CPP2 now, which is fully funded as opposed to the partly funded CPP. It's one of the largest pension funds in the world and is well managed by CPP investments. It has a great track record; why would you want to change all that?”

CPP has done well on both the investment and the liability front. It’s a plan that has the benefit of bringing all Canadians together, which means that all Canadians share the risks, he says.

Betermier says the move to a provincial pension plan is a bold move.

I'm not convinced it's worth all of the discussion and effort, given the fact that we are currently working with an overall national plan, that is and has been a success. In fact, when you look at Canada, it's one of only a few countries in the world that has gone in the direction of providing a nationally covered define benefits program. Most countries or most systems have gone away from them because they're too expensive to maintain.

“But the way the Canadian system works has made it possible, and the way the Canadian pension fund has been able to invest over the long term has made it possible to sustain this plan over the long term.

“It's a precious benefit for Canadian society.”

Maybe they can do a better job

When asked why he thinks Alberta wants to break away from the CPP and start its own plan, Betermier says they may believe they can do a better job on their own and be able to design a plan suited more appropriately to its population.

“If they disagree with the terms of the CPP and wish to provide a different type of plan that is better catered to the needs of their population, I could see a benefit there.

“I could also see a benefit if they believe the investments are being mismanaged and they can do a better job by having their own team on a smaller scale.”

The LifeWorks report suggests an Alberta Pension Plan could save Albertans billions each year, with lower contribution rates, higher benefits, and stronger benefit security for families and retirees.

It states that Alberta’s young population, high employment rates, and higher pensionable earnings means the province has contributed billions more into the Canada Pension Plan (CPP) than what was required to fund benefits paid to Alberta seniors.

However, could the APP really do as well as the CPP? Compared to a smaller provincial fund, the CPP benefits from its size with economies of scale.

Betermier says it’s a difficult to do a proper comparative analysis because there are not too many funds the size of CPP. However, “in general, there is consensus that larger funds do better. 

“They are able not only to generate economies of scale on the benefits administration, but also on the investments. You have more capabilities when you are larger, you can do more in-house investments, which is something the Canadian funds are fairly specialized in doing and do quite well. You also have greater leverage in speaking with third party providers and access to better external managers.”

However, Betermier points out that Alberta is one of the largest provinces in Canada, so it would automatically have scale. “So, in that sense, this is not necessarily the one point where I would be the most concerned.”

The greatest threat, says Betermier, “is if, ultimately, the provinces do not deem the capital allocation to be fair and then other provinces jump on the bandwagon and also potentially try to secede, then we lose agreement consensus among the provinces. This could lead to the demise of the CPP in its entirety.

“That would be, in my view, a very bad scenario because we have, through the coordination of the provinces, a great system and one that Canadian should be proud of.