H.M. Wise Asset Management

The Proposed Alberta Pension Plan

excerpt from my September 2023 newsletter: The big news on the investment front for Albertans is the proposed Alberta Pension Plan. The Alberta government had commissioned a study by pension consultant Lifeworks (formerly Morneau Shepell – yes, father of the Morneau that was Liberal Finance Minister), concerning the viability of transferring assets from the Canada Pension Plan to a brand-new Alberta Pension Plan. Lifeworks delivered its report to the government about a week ago, and it has certainly generated lots of comment.

Whether that comment was informed is another question; when I downloaded the report, only 4,771 people had accessed it. Fewer than 1 in 1,000 Albertans have actually seen the document, let alone read it!

Here is the Lifeworks report in its entirety.

To start at the beginning, the Canada Pension Plan Act (1966) has a provision that a province may leave the Canada Pension Plan upon 3 years' notice. Lifeworks made the assumption in its analysis that notice would be given on 1 January 2024, with termination 1 January 2027. These dates are arbitrary and don't affect the analysis. Certain caveats apply:

  • An Alberta Pension Plan (APP) must provide comparable (or better) benefits as CPP;
  • The APP must assume all obligations and liabilities accrued to members up to the date of withdrawal from CPP.
As you likely know, Quebec has never partcipated in the Canada Pension Plan, but its benefits are essentially the same as CPP.

Furthermore, to quote from the LIfeworks report: "The other provinces are not legally entitled to a formal role in the withdrawal process or a veto over the withdrawal."

The Lifeworks report made the rather startling assessment that the new APP would be entitled to receive assets totalling $334B from the CPP as startup capital. This is, according to Lifeworks, the accrued net contributions from Albertans since 1966. This sum represents more than half of CPP assets, so the question naturally arises as to how a province with only 15% of the country's population could lay claim to 53% of the assets.

The answer, according to Lifeworks, is that through the history of CPP, Alberta has always had a younger population with higher labour participation and a higher income than the rest of the country. It has had fewer retired people making withdrawals than other provinces, and has been a net contributor almost every year*. Some other provinces - think the four Maritime provinces, Saskatchewan and Manitoba - are the exact opposite, and have had net withdrawals (negative equity, if you will) from CPP.

According to the Canada Pension Plan Act, the withdrawing province is entitled to the net contributions of the residents of the province (payment into the CPP, less retirement and death benefits), plus the accrued earnings from those net contributions. For example, if Alberta contributed $100,000,000 (net) to CPP in 1966, this sum would be compounded by the investment returns of CPP over 56 years. If CPP had achieved a compound 7% return over those 56 years, that would amount to $4.42B "owed" to the new Alberta Pension Plan. If you do this type of calculation each year for 56 years, it doesn't take long to come up with a number in the hundreds of billions.

Others have disputed this approach. Fair enough, but the formula is laid out in the Act and the discussion has to be based upon the law as it currently exists. Net contributions and the investment returns of the CPP from 1966 to 2023 are not easily disputed. Appendix B of the Lifeworks report shows net contributions and investment returns by year from 1966 to 2021.

And to repeat what I wrote earlier: "The other provinces are not legally entitled to a formal role in the withdrawal process or a veto over the withdrawal."

The amount to be transferred from CPP to APP is a key component to any discussion of future contribution rates and/or improved benefits to Albertans. Everything else deals with assumptions about the future, and as Yogi Berra once said, "it's tough to make predictions, especially about the future."

Lifework's base estimate is that the new APP could support a contribution rate of 5.91%, versus the current CPP contribution rate of 9.9%. This would save every Albertan (and every employer) who has earning at or above YMPE over $1425/yr, adding more than $5B annually into the Alberta economy.

In this regard, Lifeworks makes the assumption that Alberta's advantage of youth and high earnings will gradually disappear, such that the demographics and earnings potential of Albertans will be same as the rest of Canada by 2050.

Most other assumptions in the report are the same as made for the Canada Pension Plan: future returns will be 5.9% to 2030, then 6.0% thereafter, and participation rates will be the same as they are today. And so on, with assumptions that only an actuary could love (see Appendix C).

One key bone of contention has been who would manage the money in a future APP. The main contender is Alberta Investment Management Corporation (AIMCo), which already manages the pension funds of almost all Alberta public sector workers. However the Lifeworks report seems to lean towards making an agreement with CPPIB (the investment arm of CPP) to continue managing the assets. This is an interesting choice. A lot of CPPIB's investments are in "private equity", which by its very nature is illiquid and hard to divide between CPP and a new APP. Also, CPPIB has had better returns over the last 10 years than has AIMCo. On the negative side, CPPIB is fully committed to ESG (Environment, Social, Governance) and DIE (Diversity, Inclusion, Equity) so favoured by the current federal Liberal government. CPPIB does not like investment in Alberta's energy industry. An APP that had funds managed by CPPIB could not have an independent investment policy, unlike the Quebec Pension Plan that has the mandate of promoting Quebec's economic development.

Anyway, read the report for yourself so that you can form an informed opinion. Feel free to pass it on to others. The Executive Summary is short, and does a good job of summarizing the body of the report. As always with this type of study, the useful details are in the Appendices: Lifeworks report.

* Alberta had net outflows from 1992 to 1997, along with every other province. CPP changed from a "pay-as-you-go" funding system to a fully-funded model in 1997 with the establishment of the Canada Pension Plan Investment Board (CPPIB).

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