Canada’s Chief Actuary reports on CPP withdrawal

On Friday 20 December, Canada’s Chief Actuary Assia Billig released a report on the withdrawal formula under section 113(2) the Canada Pension Plan Act. Billig emphasized that “throughout this process my office has acted with independence and impartiality. These two factors are foundational elements to my role as the Chief Actuary.”

Background

The report was requested by a committee of officials representing ministers of finance as a result of the 23 September announcement of the Smith government they would begin an engagement process based on the Lifeworks (consulting actuary)  report’s interpretation of section 113(2) (see below). As part of the $7-million pension roll-out, Premier Smith has claimed that Albertans won’t be asked to decide a referendum question without a number.

The Lifeworks’ report interpreted the formula in section 113(2) below in such a way as to grant Alberta $334 billion of the CPP’s assets or 53 per cent of the Canada Pension Plan’s (CPP) projected assets. This ludicrous conclusion was immediately challenged by provincial and territorial ministers of finance and its was decided to refer the question of interpretation to Canada’s chief actuary.  The Chief Actuary is the actuary for the CPP and reports through the Office of the Superintendent of Financial Institutions (OSFI).

The day before the report was available on the federal website, Premier Smith stated there was no number from the Chief Actuary and she would follow up to get clarity on next steps.

Full text of Section 113 which authorizes a participating province’s withdrawal from the CPP.  Section 113(2) highlighted Effect of regulation made under subsection 3(2) 113 (1) Where any regulation has been made under subsection 3(2) prescribing a province as a province described in paragraph (b) of the definition province providing a comprehensive pension plan in subsection 3(1), (a) all obligations and liabilities accrued or accruing as described in that paragraph, for the assumption of which under the provincial pension plan of that province provision has been made by any law of that province, shall, from and after the day on which the regulation became effective, cease to be obligations or liabilities accrued or accruing with respect to the payment of benefits under this Act attributable to contributions made under this Act in respect of employment in that province or in respect of self-employed earnings of persons resident in that province; and (b) the Minister of Finance shall pay an amount calculated as provided in subsection (2) to the government of that province, by the transfer to that government in the first instance and to the extent necessary for that purpose, of securities of that province that are designated securities as defined in section 2 of the Canada Pension Plan Investment Board Act, and in the second instance and to the extent necessary for that purpose, of securities of Canada that are designated securities as defined in section 2 of that Act, and by the payment to that government of any balance then remaining in any manner that may be prescribed. Transfer by Investment Board (1.1) The Minister of Finance may, by notice, and in accordance with any agreement entered into under section 111.1, require the Investment Board to pay to that Minister any amount, and to transfer to that Minister any securities of the province or of Canada referred to in paragraph (1)(b), that are necessary for the purposes of subsection (1). Amount to be paid to government of province     (2) For the purposes of subsection (1), the amount to be calculated as provided in this subsection in the case of any province shall be calculated by the Minister of Finance as the amount obtained by adding          (a) the total amount of all contributions credited to the Canada Pension Plan Account and the Additional Canada Pension Plan Account, to the day on which the regulation referred to in subsection (1) became effective, in respect of employment in that province or in respect of self-employed earnings of persons resident in that province, and          (b) the part of the net investment return of the Investment Board and all interest credited to or accrued to the credit of the Canada Pension Plan Account and the Additional Canada Pension Plan Account, to the day on which the regulation referred to in subsection (1) became effective, that is derived from the contributions referred to in paragraph (a),      and subtracting from the total so obtained          (c) such part of all amounts paid as or on account of benefits under this Act as would not have been payable under this Act if that province had been a province described in paragraph (a) of the definition province providing a comprehensive pension plan in subsection 3(1), and          (d) the part of the costs of administration of this Act, to the day on which the regulation referred to in subsection (1) became effective, that is equal to the proportion of those costs that the total amount of the contributions referred to in paragraph (a) is of the total amount of all contributions credited to the Canada Pension Plan Account and the Additional Canada Pension Plan Account to that day. Agreement respecting assumption of obligations and liabilities (3) Where notice in writing has been given to the Minister by the government of a province as described in the definition province providing a comprehensive pension plan in subsection 3(1), the Minister, with the approval of the Governor in Council, may on behalf of the Government of Canada enter into an agreement with the government of that province, (a) for the furnishing of that government under prescribed conditions with any information obtained under this Act, including records of any amounts that are shown in the Record of Earnings to the accounts of persons who have made contributions under this Act in respect of employment in that province or as persons resident in that province in respect of self-employed earnings; and (b) generally for the making of all such arrangements as may be necessary to permit provision to be made for the assumption, under the provincial pension plan referred to in the notice, of all obligations and liabilities accrued or accruing as described in paragraph (b) of the definition province providing a comprehensive pension plan in subsection 3(1).

What the Report said

While there was no “number” in the report, that wasn’t specifically what the Chief Actuary was directed to report.  In fact, the actuary labelled her report as a “position paper.” Indeed, any final “position” taken is left to the federal Minister of Finance under the Ac.

A specific number, which Smith is looking for, is less important than agreement on what the formula in section 113(2) means.  Once the assumptions and formula are settled, a number can be determined based on actuarial assumptions, projected investment returns, and what the projected time of withdrawal would be.

To sort the interpretation out Billig appointed an “independent advisory panel” of five actuaries to determine how to calculate the value of the assets which would be transferred to Alberta. The names of the panel members have not been released.

To simplify matters, the Committee examined the logic behind the Lifeworks’ report, the findings of the Independent Advisory Panel (IAP), and the academic study by Professor Trevor Tombe, a professor of economics at the University of Calgary.

The most problematic question is the meaning of 113(2)(b) net investment income.  The general formula starts with total contributions into the fund since the creation of the CPP to which is added the net investment income.  From that total are subtracted benefits paid from the CPP that would not have been paid had the provincial plan existed over the reference period and a pro rating of the administration costs.

According to the IAP and Chief Actuary, the amount of contributions- based on employment income in that province- is the critical determinant in deriving the final number.  Contributions are easily determinable and necessary to derive the net investment income number. This is different than total contribution cashflow which would benefit Alberta significantly.

Another determination of the actuary was that the formula must ensure that 100 per cent of the assets are divided as opposed to Alberta’s claim of 53 per cent which implied that more than 100 per cent of the assets could be divided.

Bittig’s position is also consistent with standards applied to defined benefit plans’ legislation in Canada, namely liabilities must also be divided according to contributions in respect of work in each province, and the assets must be apportioned so that the portions leave neither the main plan nor the split-off plan in worse or better condition immediately after versus before the transfer.

While Bittig doesn’t give a specific number, she refers favourably the study by Trevor Tombe which estimates Alberta’s portion of around 20% to 25%, not the 53 per cent touted by the Smith government.

By declining to undertake the detailed analysis that would be needed to determine both the asset and liability sides, the Chief Actuary has punted the ball back to Alberta to undertake further analysis at Alberta taxpayers’ expense, which Smith might be loathe to do.

What may happen

Although the position paper drives a dagger to the heart of the promises made by Smith, Horner, Dinning & company, this does not necessarily mean that the government will not proceed with an actuarial analysis and produce a number.  The fact of the matter is that not only Smith but those close to Smith including Stephen Harper the recently minted Chair of the Alberta Investment Management Corporation (AIMCo), co-author of the Firewall letter and Rob Anderson, her deputy and co-author of the Free Alberta Strategy, regard an Alberta Pension Plan as a critical piece in their sovereigntist agenda.

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In spite of survey data, that the government has not released presumably because it showed strong opposition to the plan, the APP’s political proponents may still believe that a referendum could be won with the right propaganda messages.

What the government should do

The Smith government should recognize that this issue is not a hill to die on.  They should forego wasting more taxpayers’ dollars on obtaining a specific, but lower number, and should finally admit that public opposition to the plan, especially from Alberta seniors, has caused the government to back away from the plan.  We may not find out what the government intends to do until the provincial budget is brought down at the end of February.

 

Ellen Nygaard assisted in this post.  All errors are the author’s alone.

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