Background
On September 21st Premier Danielle Smith, Finance Minister Nate Horner and former provincial treasurer Jim Dinning gave a press conference about an Alberta Pension Plan. There were two features of the conference- first the public release of a long-anticipated report from actuarial and consulting firm Lifeworks. The second aspect of the release was the announcement of what is being called an engagement panel led by former Treasurer Jim Dinning. Dinning served under Ralph Klein and then contested unsuccessfully the PC leadership in 2006.
At the news conference Dinning said this about the idea of an Alberta Pension Plan (APP)- ”it could be a game changer for the financial sector in this province to have that kind of weight in the international community to serve markets locally, nationally and internationally… and to not bring this forward for discussion with Albertans would be a missed opportunity.”
Joining the panel are chartered accountant and corporate director Mary Ritchie and Dr. Moin Yahya a professor of law at the University of Alberta and a former member of the Fair Deal panel. The Government of Alberta is committing $7.5-million of Alberta taxpayers’ money to swaying Albertans that an Alberta Pension Plan is best for Albertans.
What was most obvious from the news conference is that the Government of Alberta is very keen to take Albertans’ pension moneys away from the CPP Investment Board which manages independent of political pressures.
In a wide-ranging conversation with Trevor Tombe, Virendra Gupta, and Ellen Nygaard several key issues were canvassed. These issues included: missing numbers in calculating asset transfer of Canada Pension Plan (CPP) assets assumption made in the Lifeworks report which the Government of Alberta is promotion in marketing an APP; demographic and investment risk factors; and governance issues.
Below are some of the key points made by the participants-
Missing numbers
But the reality is, it’s just not a numbers exercise. It is a much bigger political exercise in so many ways. Even in the numbers, they say that they cannot calculate what would be owed by Alberta in respect of people who worked here but are collecting pensions outside Alberta. That’s one of the key missing pieces as I could tell it at a glance and how large?
Virendra Gupta- former senior official on tax and pensions policy, Alberta Treasury and former Executive Director, Universities Academic Pension Plan
Now Virendra noted that there’s a lot of issues around the data. The publicly available data doesn’t tell us how many retired Albertans there are in Kelowna or Nova Scotian: that’s relevant for the calculation. And unfortunately, there’s just no way to quantify how big that might be. And so, I think, it might be closer to 20%, recognizing that much of what’s counted as CPP spending in other provinces, is actually CPP spending to people who had time working in Alberta. And so that gives you a sense of the one potential sense of the range of what the CPP Act language might provide. And that’s massively important for what the implied contribution rate would need to be in Alberta. So, Lifeworks is hanging their hat and the Government of Alberta hanging its hat on a 5.9% contribution, so a significant drop relative to the Canada Pension Plan. But if all you do is change the amount of assets provided to withdrawing province to be more historically reasonable and now,I estimate that contribution rate would need to be at minimum 8.2, but then you build in the same cushion that currently exists in the CPP because our contribution rates higher than the minimum, right? There’s a little bit a cushion which is prudent say we would need to 8.6% contribution rate.
Trevor Tombe, Professor of Economics, University of Calgary and co-director, Finances of the Nation
I wanted to reinforce something that Virendra said about the rates that arrived from that asset calculation being undoubtedly without any padding or provision for adverse deviation as they say in the pension business. And in fact, all defined benefit plans now are expected to take into account the variability they might have in their future results. And the more variable your situation is for economic or demographic reasons, the more of a provision for adverse deviation that you are going to need. And that means that the cushion of what is it about half a percentage point, I think that is now in the CPP contribution rates is based on a situation of a lot more stability and less risk than if you’re just talking about Alberta. So that prudence would suggest that you actually have to build in more of a cushion.
Ellen Nygaard- former Executive Director, Pension, Alberta Finance and Chair, Special Forces Pension Plan (SFPP) Sponsor Board
Some of the other stated intentions would probably magnify the risk. I get very concerned about the idea that somehow, the purpose of having all these assets is to enhance the investment industry in Alberta. Numerous players here have often stated that it is also to concentrate investment in Alberta projects to an extent. It’s not that CPPIB does not invest at all in Alberta. In fact, if you look at it, probably still on outside investment, relative to the size of the capital market here versus the whole capital markets that they could be operating which is unusual. But if that degree of home market concentration is magnified then we could get into governance. There are all sorts of reasons why there are incentives for exactly that kind of over concentration to happen. Then you’ve just magnified that volatility risk you’ve created a possibility of a perfect storm.
Ellen Nygaard
Critical Risk Factors
And I just explore many in the paper, but it’s just a small subset of potential futures that might in a lot of these scenarios are really highlights how sensitive things are like if Alberta’s net migration flows, which are favorable now, strongly positive- If that is no longer the case, then more than half of that mechanical Alberta pension advantage evaporates. Just from that change in migration flows alone – not even looking at a future or migration flows are negative. And just having them balanced inflows and outflows and then risks in terms of investment returns and it’s volatile. But a separate Alberta plan would not be as able to manage that volatility as the broader, more diversified Canada Pension Plan and so the exposure to that risk is quite large. I estimate about a one in three probability that a separate Alberta plans contribution rate couldn’t actually be able to be below. 9.5, which is the CPP minimum. There’s a great deal of risk, non-trivial probabilities, where the contribution rate can’t actually fall at all. And that’s how I think about this. Because we are a younger population, there’s this mechanical advantage but then there’s an amplification of the risk exposure and that’s where reasonable people will put different amounts of weights on risks versus rewards but the Lifeworks report because it starts with such a favorable amount of assets to begin with. So large that the return on assets are basically funding all plan spending. It’s just wild. Then they get the larger drop in the required contribution rates that really tilts the scales in terms of how the government wants to market this as something where the benefits are so large, no need to worry about the risks. But I think that the benefits from the mechanically younger population exist but they’re fairly modest. And then the risk increases and that may very well be, I think, a non-trivial eventually high probability swamp all of the benefits that the province faces.
Trevor Tombe
Governance
You see every Albertans is now protected in the sense that the provincial government cannot change their benefits at this point. Once you have an APP, the provincial politicians could change your benefits. They have the authority. They have you dependent on them, so you are losing some degree of control you have about your CPP benefits….I think we should talk a bit about the governance issue per se, not just a management. I think that’s a very fundamental issue. Whether you say it’s good, fortune or not, but CPP has been professionally managed. Politicians have stayed out of their way, completely except for when contribution rates need to be changed or some big public sector policy issue has to be resolved. And also, it has helped check the provinces tendency towards interfering or intervention and deciding …. So CPP is two thirds, you follow me. Here, if you bring the CPP into APP, into Alberta, our politicians have always interfered. How are we going to protect the average APP contributor against the politicians’ tendency to even pick the CEO or change the benefits or grant something special before the elections. Because they have the authority.
Virendra Gupta
Ellen Nygaard: or make regulations, that give them directives that they’re to invest in Alberta, which was something that was really unwisely put in there by the NDP. One of the things I have asked people who are inclined to believe that the UCP have a great idea here and are fully capable of governing this properly, is, if you put things in place so that you give the politicians a lot of power, how do you feel about how it would look to you if the other party were in power? Is it still a great idea or not?
The Youtube video can be watched here.
The entire edited transcript can be found below
TranscriptDiscussion on APP Oct 18 2023 abpolecon FINALThe letter to Premier Danielle Smith from Prime Minister Justin Trudeau can be found here.
The reply from Premier Danielle Smith can here found here.
The letter to Honourable Jim Dinning from Michel Leduc of the CPPIB may be found here
See also opinion piece by Keith Ambachtsheer and Ed Waitzer in The Globe and Mail.
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