Alberta stands to lose much if it opts out of CPP

Risky proposal is fraught with unknowns, say Virendra Gupta and Ellen Nygaard.

Premier Jason Kenney recently created a “fair deal” panel that will consider whether Alberta should withdraw from the Canada Pension Plan and create its own plan.

Whether this is a serious proposal or a political gambit, Albertans need to think hard before abandoning a public pension plan that is a Canadian success story.

CPP was started in 1966. It is financed equally by employer and employee contributions. Contributions and pensions are paid at the same rate across the country. Maximum annual pension in 2020 at age 65 is $14,110. Reforms made in 2016 will gradually increase the maximum pension earned in future.

CPP is jointly governed by federal and provincial governments. Changes must be approved by two-thirds of the provinces representing two-thirds of the population. Over the last 50 years, governments have negotiated reforms that have put the plan on a sound investment and administrative track. CPP’S latest actuarial report shows that current contribution rates could be stable for 75 years.

CPP investments are overseen by an independent expert board. Its members are selected by a committee composed of nominees from several governments. The board’s mandate is to invest solely in the interests of plan beneficiaries. The CPP investment fund is over $400 billion. Its average rate of return has been over 10 per cent a year.

Canadians who move within the country can rely on CPP as a secure source of retirement income. It is universal, stable, portable, well managed, has inflation-protected benefits and is well regarded internationally. Why would Albertans pull out?

Some claim an Alberta plan could have lower contribution rates. A small reduction might be possible in the short term, but that would leave future Albertans facing higher unfunded liabilities. The long-term stability of CPP’S contribution rates depends on steadily growing employment earnings base. If the earnings base does not grow as expected, significant rate increases could be required. This is particularly relevant for Alberta given our heavy dependence on volatile commodity prices. We are better protected as part of a larger, diversified whole.

It’s been suggested that an Alberta plan’s assets could be managed by AIMCO, the Alberta government’s investment management corporation. CPP’S investment arm enjoys a wide reputation for its independence, focused mandate and performance. In contrast, AIMCO has multiple clients with multiple mandates, some of which are directed by the provincial government.

Some anticipate that an Alberta plan’s assets could be directed toward promoting the Alberta economy. This would be contrary to the fiduciary obligations of the plan’s trustees. A pension trustee’s job is to act in the interests of current and future beneficiaries by choosing the best possible investments and diversifying risk.

If a separate Alberta fund underperformed because of investment in a suffering Alberta industry, workers would face multiple blows: fewer jobs, lower wages and higher contribution rates.

No province has attempted to withdraw from CPP. Quebec set up its own plan from Day 1. How a withdrawal request would be treated by the federal and other provincial governments is hard to know.

An Alberta plan would inherit liabilities for all benefits people have earned while working in Alberta since 1966. Because so many Canadians have moved into and out of Alberta, determining Alberta’s liabilities would be complicated and would likely involve difficult negotiations.

Although CPP has over $400 billion in assets, its liabilities exceed a trillion dollars. An Alberta plan could inherit about $180 billion in liabilities. Some have said our share of assets would be $40 billion. Whatever our share, a large unfunded liability and a smaller population base with a volatile economy is a risky proposition.

There are other concerns. A costly duplicate administration would have to be created. Such complex transitions are lengthy and errorprone. The federal government would have to renegotiate at least 59 agreements with other countries to cover Albertans working abroad or foreigners working here.

There are many unknowns to such a monumental change. Once done, it cannot be undone. Albertans could lose a lot. It’s not clear what we would gain.