Written by Geoff Norquay and John Whitehead. Originally published in Policy Options.
For many, the Alberta government’s proposal to withdraw from the Canada Pension Plan (CPP) and create its own Alberta Pension Plan (APP) may seem like a solution to a non-existent problem.
In fact, the idea stems from a narrative shared by many Albertans that Alberta contributes a lot more money to the Canadian federation than it gets back. In the words of the 2020 Buffalo Declaration, “Between 1981 and 2018, Albertans have sent more than $1 trillion to Ottawa in revenue and received only $650 billion in return. That is a transfer deficit of more than $400 billion.”
There’s a lot of history behind the Canada Pension Plan. The program predates Alberta’s protests about its financial contribution to the federation.
In 1996, the federal and provincial governments changed the CPP from a “pay as you go” basis to a hybrid structure in which its assets would be invested. Travis Toews, Alberta’s former minister of finance recently argued that since that change, “Alberta’s net contributions have exceeded all of the other participating provinces combined, including Ontario’s.”
Critics respond that this is because Alberta’s population is younger, more likely to be working, better paid on average than other Canadians, and has fewer retirees.
The $234-billion question
One highly controversial aspect of Alberta’s pension initiative is that on leaving the national pension plan, the province claims it will be owed 53 per cent (or $334 billion) of the estimated total assets of $575 billion held by the Canada Pension Plan Investment Board (CPPIB). Alberta represents about 15 per cent of the people who contribute to CPP. The CPPIB calculates that Alberta’s total contribution since the plan’s inception is around 16 per cent of the CPP’s assets, or about $100 billion, leaving a wide gulf with Alberta’s claim.
Why is there no clarity on what happens if one province wishes to leave CPP? When Ottawa and the provinces made the 1996 changes, the original rules for leaving the plan from three decades earlier were not updated.
David Dodge, Finance Canada’s deputy finance minister in 1996, said recently, “We wrote rules in the permissive sense in that the provinces were not denied the right to pull out, but we did not write rules around what happened should a province make that decision.”
The asset amount that Alberta is due if it leaves CPP will be sorted out either through negotiations between all provinces and Ottawa – and, failing that, by the Supreme Court. Whatever conclusion is drawn will be critical in defining the levels of the future contributions and benefits that would form the basis of a separate plan in Alberta.
When that matter is settled, the door will open to consider a host of issues as to whether an APP would be as good or better than the CPP.
The Quebec example only goes so far
When the CPP was established in 1966, Quebec opted to go it alone, creating the Quebec Pension Plan (QPP). Both CPP and QPP were starting from scratch. From this equal starting point, we now have the benefit of almost 60 years of experience and data to provide lessons we can learn about the coexistence of separate provincial and federal pension plans.
The first lesson is that a provincial plan really cannot diverge significantly from the national plan.
Notwithstanding Quebec’s economic and demographic differences from Canadian averages, the QPP has remained virtually in lock step with the CPP over the years. This is critical in a highly skilled country like Canada where significant labour mobility is a fact of life.
Alberta attracts many workers from elsewhere in the country, at least for portions of their working lives. That means that the equivalency of the prospective Alberta Pension Plan with CPP as well as its portability with the national plan will remain important factors for those Canadians deciding to work there as well as their employers.
As Deputy Prime Minister and Finance Minister Chrystia Freeland told the provincial finance ministers in their meeting on November 3, withdrawing from the CPP would require Alberta to negotiate reciprocal agreements with different provinces and other countries to ensure that Canadians who work outside Alberta would be assured stability regardless of where else they may work or retire.
The second lesson is when it comes to the economy and demographics, things can change over time.
Big things.
Pension policy is particularly challenging because it is, by definition, a long-term planning exercise. The rules setting contribution rates and establishing payouts cannot be changed in a major way or over very short periods without causing significant disruption for both workers and retirees.
Alberta’s economy is just fine right now. But its dependence on oil and gas revenues makes it particularly vulnerable to world energy prices. Over the past three years, the price of oil has briefly dropped to negative territory, ballooned to $122 per barrel, and is now in the $80+ per barrel range. To illustrate how dramatic change can be, consider that in the 1960s, when the QPP was starting out, asbestos production was a mainstay of Quebec’s economy.
Youth is not eternal
Demographics too, can change over time, and aging populations bring sustainability challenges to public pension plans. Currently, Alberta’s ratio of contributors to beneficiaries is positive, due to the province’s younger age profile. As time passes, a higher age profile for Alberta’s population is inevitable.
This is what happened in Quebec: in 2011, it was forced to raise its contribution rates for the QPP by 0.9 per cent above that of the CPP. As R. Kent Weaver and Daniel Beland wrote in 2017, “In effect, Quebec workers and employers have to pay higher contributions than their counterparts in the nine other provinces because of a decision made in the mid-1960s to create QPP in the name of provincial economic development.”
The third lesson from the past 60 years is that when it comes to investing pension funds, size matters.
And bigger is better.
A 2016 paper from the Bank of Canada notes that the largest and most successful public pension plan investments benefit from “economies of scale, diversification across a broader set of asset classes, investment styles and geography and the use of leverage and derivatives designed to improve returns and mitigate risks.”
The CPPIB’s investment arm, CPP Investments, had a 10 per cent annualized net return on investments of $570 billion over the 10 years up to March 31, 2023. For the QPP, returns via Quebec’s Caisse de dépôt et placement (CDPQ) was eight per cent on $402 billion over 10 years up to December 31, 2022. That’s 20 per cent less.
If Alberta proceeds with its withdrawal proposal, the investment base of the APP will be much smaller than at the CPP or QPP. If its asset management lags behind CPP Investment’s, as does CDPQ’s, this will create competitiveness challenges forcing either premiums to go up or for the province to backstop deficiencies.
So far, Albertans are wary of Premier Danielle Smith’s pension gambit. According to a recent Abacus Data poll, 52 per cent of Albertans view the prospect of withdrawing from CPP as a “bad or very bad idea.” That number rises to 72 per cent among Albertans who are aged 60 and over.
One of the reasons for this reticence is likely the recent performance of AIMCo, the Alberta agency that manages public sector investment in Alberta. According to Alberta Treasury Board and Finance, over a recent five-year period, AIMCo generated an annualized net nominal rate of return of 7.2 per cent. In 2020, it lost around $4 billion of the roughly $110 billion it manages by using a strategy that relied on low volatility in global markets.
Many of the choices made by governments can be quickly reversed or modified when circumstances or political exigencies demand. Whether to create a separate Alberta pension scheme is, inherently, a discussion about the long term.
Currently, Alberta has the benefit of a relatively young population and a buoyant economy. The real question for Albertans is whether those conditions, and the long-term investment success of the potential new Alberta new plan, can be presumed across the span of contributors’ working lives and retirement years.
If not, the prospects of an APP providing a better and cheaper alternative to the CPP for Albertans remain highly questionable.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
