What to make of Alberta’s unrealistic CPP withdrawal demand of half the assets

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Keith Ambachtsheer is director emeritus of the International Centre for Pension Management, senior fellow of the National Institute on Ageing, executive-in-residence at the Rotman School of Management and co-founder of CEM Benchmarking and KPA Advisory Services. Ed Waitzer is a lawyer and former chair of the Ontario Securities Commission.

Alberta’s intention to withdraw from the Canada Pension Plan is back in the news, after Prime Minister Justin Trudeau and Premier Danielle Smith traded barbs over the matter. Central to the debate: A study by LifeWorks (the human resources consultancy that has since been acquired by Telus Health) that the province commissioned calculates that Alberta is entitled to 53 per cent of the CPP’s assets, which would amount to $334-billion.

What are we to make of this surprising calculation and how should we respond to it?

One question to ask is how LifeWorks concluded that Alberta is entitled to 53 per cent of accumulated CPP assets while only making up 15 per cent of the plan’s membership? By using an allocation formula established at the inception of the CPP in the 1960s, when it was an unfunded pay-as-you-go plan with a very small liquidity reserve of non-marketable provincial bonds.

In essence, the system at the time had no inherent fund of its own, and payouts came directly from current CPP contributions. There was also no CPP Investment Board to manage a fund and grow people’s contributions.

That system changed in the 1990s, when Ottawa and the provinces agreed to address the looming retirement of the outsized baby boomer generation.

At one end of the action spectrum, CPP benefits could have been reduced to make the 4.95-per-cent contribution rate sustainable. But rather than push retirees below the poverty line, governments agreed that it was fairer to take a bigger bite out of the salaries of current workers, and out of the bottom line of their employers.

The pension plan was also changed to a funded system, with the CPPIB created to manage and grow the coffers.

The LifeWorks calculation of how to allocate accumulated CPP assets today ignores these developments (and a range of related complexities, such as the interprovincial mobility of contributors in the intervening quarter century).

Instead, it effectively returns the now-higher CPP contributions, less benefit payments, compounded by the extraordinary investment return earned by the CPPIB over the past 25 years.

The CPP Act was never properly adjusted to reflect the sustainability agreement of the 1990s. That agreement can only be interpreted to mean that the basis of any asset withdrawal today should be treating all CPP members equally. Ideally, any new Alberta Pension Plan should be set up on a going-forward basis, without altering the rights of existing CPP members.

With Alberta having just 15 per cent of the CPP’s membership, it should only be entitled to claim 15 per cent of the CPP’s assets. If necessary, the CPP Act should be amended to incorporate the social contract that was implicit in the sustainability agreement. The act can only be changed if at least two-thirds of the provinces with at least two-thirds of the population agree. But this also means the act can be amended without Alberta’s agreement.

This is, of course, more than a pension matter. Critics have accused Ms. Smith of purposely making a request that she knew Mr. Trudeau would reject, so that she can fuel her narrative of grievance against Ottawa. But leaving aside the political red herring that the LifeWorks report created, the fact is that Albertans would be badly served if their government chose to withdraw from being a provincial sponsor of the globally-admired CPP.

For one, they would lose the value of pooling future economic, financial and mortality uncertainties with other Canadians. They could also lose the value of CPP portability – and hence job mobility – across Canada, and the value of CPP’s strong investment and administrative capabilities.

Finally, Albertans risk their own government using the assets of a separate APP for purposes unrelated to backing future pension obligations. There is the real possibility of that happening, as Ms. Smith has already weighed in on the investment decisions an APP should make.

In any event, Albertans would be saddled with the material expense and startup risks of creating a new pension plan that would be challenged to provide benefits equivalent to those of the CPP at a marginally lower cost.

A final question: Without the unrealistic money grab suggested by LifeWorks, why would Alberta want to abandon a program which is the envy of the global pensions world and replace it with an untested, smaller, more costly alternative that would take years to build and mature? That is a question for Albertans – and other Canadians – to ponder.