Well, this has certainly been an interesting week in good old Canada for what is supposed to be the “short blog”. I mean between the spectre of countries conducting extra-national assassinations in our own backyard, a continued shakedown of Ottawa by Alberta, ongoing Chinese election interference, the Ontario Greenbelt fiasco and the ongoing persistent cost of living crisis, it’s hard to know what to focus on.
I mean, I can’t do oil prices because I celebrated that short-lived $90 juggernaut last week. And I won’t do gas prices because… Well we all know why. So I’m going to take a deep breath and talk about something I didn’t think I would have to care about and stay close to home.
I’m talking about the Canada Pension Plan and the idea that won’t go away that somehow Alberta will be better served by an Alberta Pension Plan. This has been floating around for decades as part of the culture of grievance that permeates a large portion of the Alberta conservative movement. A belief that somehow Albertans are getting a horribly, terribly, unconscionably raw deal in Confederation and big, bad Ottawa and the Laurentian Elite are out to get them and steal Alberta and Albertan’s money.
Look, I’m not here to argue against that. There are always kernels of truth in these discussions and I would be naïve if I didn’t realize that the Rest of Canada is a major beneficiary of Alberta’s outsized economic position. I mean that’s the whole point of defending and wanting to expand the energy industry, right? To create more wealth all around?
No, I’m just wanting to talk about the proposal/study/marketing document released by the government yesterday purporting to show all the massive savings and shiny baubles that would accrue to Albertans if they were to go it alone on the pension plan.
First, some basic background. The CPP was created in the 1960’s to provide Canadians with a basic level of pension income when they retire. All provinces (except Quebec) signed on to the program.
Contributions to the plan were based on a % of wages and split between employee and employer and subject to an annual maximum. Depending on the level of contributions made over a working lifetime Canadians could max out their pension benefits upon retirement. The benefits paid were guaranteed by the government and everyone was happy’ish.
Some years ago, the CPP was modified to become a much more active manager, making direct investments across a variety of investment strategies to maximize risk-adjusted returns and more effectively act “like a pension plan”. The current incarnation is a half-trillion behemoth called the CPPIB that is widely recognized as one of the best run pension plans in the world and serves as a model for governance and process. Plus they have consistently delivered exceptional results.
If there is anything Canadians should feel proud of as a unifying program, it’s actually the Canada Pension Plan.
As a quick aside, the Caisse De Depot, which is the Quebec version that started concurrently when Quebec opted out of the CPP is no slouch itself when it comes to size, although it does have a political mandate as part of its investment policies to promote re-investment into the province and build the provincial economy. Direct political interference is a thing of the past but its mandate does occasionally get it into trouble – Bombardier and SNC Lavalin investments come to mind.
At any rate, back to the UCP and the desire to have an Alberta-only plan.
On the surface, it’s a worthy discussion. Why can’t we have our own plan? In a province with great wealth, surely some form of trust fund as a result of that wealth could be created, a sort of Heritage Trust Fund you might say. Surely the government could be trusted to get that right. But I digress.
- It’s worthy of discussion. And a province CAN opt out. So, a province COULD opt out. Doesn’t mean that a province SHOULD opt out. But if we’re going to do consider anything, let’s be honest about it.
Yesterday, the province released a report that had been commissioned in 2020 by the then Jason Kenney UCP that examined the viability of an APP and what benefits might accrue. The report was of course updated for more current data.
The report as released comes to the conclusion that an APP would deliver sunshine and rainbows for Alberta-based employees, employers and seniors through lowered premiums (billions of dollars in total! Thousands less in premiums!) and potentially higher, nay, much higher benefits. Windfalls! Economic prosperity! Inbound investment! Financial freedom!
Sounds too good to be true. Which of course means it must be.
There are many weaknesses and wobbles in this presentation and while UCP MLAs spread far and wide across the province touting the miracles of an APP, let’s take a look at just a few of the whoppers.
First and foremost, the ability to reduce premiums and increase benefits in any pension requires a fund to be in a surplus position. That is, the assets in the fund and the expected contributions have to exceed the projected payouts based on some actuarial calculations based on mortalities and rates of return.
And lo and behold, guess what. The report delves into the CPP documents and determines based on some formula (that they admit they made up) that Alberta would be entitled to some $330 billion in assets from the CPP which, as it turns out, would enable a 30% reduction in contribution rates and probably even increased benefits.
The only problem of course is that $330 billion represents some 53% of the total CPP assets. A transfer of some $60,000 per Alberta, leaving a meagre $8,500 for all the poor saps left behind in such sad-sack provinces as Ontario and BC who I am sure would be sad to see us go but would recognize the inevitability of it all.
NOT!
Look. That asset number is preposterous. It. Will. Never. Happen. You would have better luck getting 53% of Justion Trudeau’s sock collection handed over.
Credible estimates put the real number at less than half that. Which takes all the purported benefits and chucks them in the trash.
Instead, we are presented with a situation where if the UCP successfully moved the fund over they would have less assets so they wouldn’t be able to reduce premiums or raise benefits. Or if they insisted on doing so, they would have to make higher risk investments to achieve higher return to keep the fund in surplus, backstopped or course by the provincial government.
It’s not the retirees of today who should be worried. It’s the retirees of 20, 30 years from now who should be worried about an under-funded plan and the working stiffs who are going to have to pay the ever-increasing contribution rates to keep the wheels on.
It’s a bad idea.
Never mind the costs involved which are estimated to be in the billions. Or the disruption.
Or even the central premise that somehow Alberta workers are being “ripped off” because they are younger and earn more so they contribute more for longer. Who cares? You’re younger. You EARN MORE. Sheesh. Last time I checked, that is a good thing. Contribute the max, collect the max benefit. Isn’t that how it works?
A final point on governance then I will move on.
This province does not have a great track record when it comes to interfering in the investment world. Whether it’s directing dollars to specific industries, poorly thought out investments in pipelines, propping up companies that should be let go, randomly moving pensions from one manager to another or raiding the rainy day fund for politically driven investments – the governance of any APP should it happen would need to be rock-solid and free of political influence.
Much like the CPP. And it should probably be invested and managed like the CPP.
So it should probably stay as the CPP.
This to me is nothing but a political stunt designed to poke Ottawa in the eye, simply because it is so preposterous.
That said, I have a recommendation that the UCP should consider. And this is free advice. No report needed.
If you actually want to help Albertans save then create an Alberta Savings Plan as a complement to the CPP. We have windfall money coming it right now from shy high energy royalties. Use it.
Model it after Tax Free Savings accounts and do a one-time contribution to a fund for each and every Albertan of $500 into a registered account that has a 5-year vesting period. And then do some form of matching contribution for future years. Say 100% matching up to $100 with no limit to what a registered owner could do.
Your initial outlay is $2 billion. You move to Alberta, you get $500. The fund is managed by AIMCO and can be focused on domestic investments, like the Caisse does. But you have to stay here for five years to vest into the government contributions.
A savings plan on top of what the CPP so capably does, tax free accumulation. Managed in Alberta by Albertans, investing in Alberta.
I think I might even call it the Alberta Advantage Fund.
Let’s drop the other nonsense and get on with it.
