Treating CPP like any another plan ‘misses the point of what it is'
There are issues around a recent report that supports Alberta’s initiative to break away from the Canada Pension Plan (CPP) and start its own provincial pension plan, according to Doug Chandler, a Calgary-based research actuary and an associate fellow of the National Institute on Ageing at Toronto Metropolitan University.
The report, created by the independent consultant LifeWorks, suggests an Alberta Pension Plan (APP) could save Albertans billions each year, with lower contribution rates, higher benefits, and stronger benefit security for families and retirees.
The report estimates that Alberta would be entitled to a $334 billion asset transfer from the CPP in 2027. This total reflects the amount Albertans have contributed to the plan, minus benefits paid to Albertans since the CPP’s creation in 1966, minus some administrative costs, plus investment returns on that amount. This total asset transfer would be the value of an APP if it had always existed from day one.
Chandler says there are three problems with that “big” number.
The legislation is a bit obtuse
Firstly, he says the legislation used for the report is a bit obtuse. It may have made sense in 1965, but probably should have been changed no later than 1995.
“It’s this whole idea of making a province whole as if they had never joined; a retrospective approach to allocating the assets. I'm not sure how that will eventually be resolved. There are a couple of ideas on the table in the context of the current legislation. A lot of the people who are commenting on it are saying they should do whatever everybody in the private sector does – give Alberta a pro rata share of the assets based on the obligations that they're assuming. It’s just that’s not what the legislation says. Treating the CPP like any other pension plan misses the point of what it is.
“CPP is a social contract. The best comparison in terms of where it started is US Social Security, which is also a social contract, but it did not make the funding changes that Canada made in the mid-90s. A social insurance program is a way that of transferring goods and services from people who are working to people who are no longer working. That’s the way CPP and US Social Security were set up.
“From a macroeconomic perspective, it would be completely impossible to fund US Social Security and when CPP was set up, it was considered undesirable to fund. It was intended to run with an operating balance and not much more. So, the question of assets was just the operating account.
“In large measure that is still what CPP is. Whenever people start talking about this, they begin by saying ‘It's an exemplary program,’ It's sustainable for the long term,’ or ‘It's very safe and secure.’ And that's all true, but not the way somebody who works in the private employment-based pension industry would think. If you look at the CPP annual reports and the actuarial report, they footnote where the plan would stand on a closed group basis – the basis that almost everybody in the private sector uses – and at last report, CPP was about 33 percent funded using a best estimate expected rate of return.
“If they used one of the metrics that we're familiar in the private sector, either using corporate bond yields, or in this case provincial bond yields, to calculate the liability as opposed to the funding target or if we were to calculate a solvency liability, it would be a lot less than 33 percent because it's such a long-term pension plan.
“So, if you look at it through that lens, this is not a well funded pension plan. This doesn't matter, however, because it fine, it's safe and it's secure.
“The problem is a lot of the discussion you're hearing right now is as if it were a privately funded pension plan, a funded pension plan. if Alberta gets all the money they say they're owed, it would be close to fully funded at least on a going concern basis.”
Primary risk on the investment side
“That means that whereas the CPP primary risk is demographic, it is dependent on whether population growth and productivity growth will be enough to continue to make it affordable. However, if Alberta goes ahead as they're proposing, their primary risk will be on the investment side, just like an employer-sponsored pension plan. They would be changing the kind of pension plan they have and changing the nature of the social contract.
“The older generation’s pensions in CPP will mostly be paid by their grandchildren just like they paid for their grandparents’ pensions. Our parents and grandparents got a really good deal out of CPP because that what was intended in 1965.
“We'll get an OK deal and future generations will get an OK deal as long as population and the GDP continues to grow.”
Accounting risk for APP
Chandler says the other issue with where Alberta is headed is an accounting risk. He admits he is not an accountant but, in general, the CPP has multiple sponsors and no sponsor acts alone, he says.
“The financial statements of Canada or of any province are not consolidated. Yes, we make contributions, but it doesn’t go into the public accounts. The APP would only have one sponsor, the government of Alberta, no matter how much they say they intend to take a hands off approach to it. They would probably be expected to consolidate it on accrued benefit type of valuation approach.
“Public sector accounting standards are in a state of flux right now so, if they end up requiring full funded status and the pension plans ends up on the corporate balance sheets, then Albertans could get a real shock in terms of what this does to the public accounts.
“If they get the money they're asking for, they would be looking at a plan that is more or less fully funded using the best estimate expected rate of return. That wouldn't be a shock. However, if they get less money, they’d be posting a deficit. Then they’ll be looking at a big shock for the public accounts.”
APP doesn’t have the data they need
The second issue is LifeWorks just didn't have the data it needed to deal with where people were employed as opposed to where they live, says Chandler.
“Part of the problem is we're talking about is this in an ‘us versus them’ discussion. They are saying ‘If you're an Albertan, you come out ahead. But not everyone comes out ahead. Pensions plans are not intended to be equal.”
People move around a lot in Canada. It has always been a place where people can move around for economic opportunities. Chandler says that is one reason why the CPP numbers have worked the way they have, because each generation pays for their grandparents despite which province they are living and working in.
But with the APP, if people move out to Alberta to work, they wouldn’t be paying for their grandparents. They may worry about whether they will have the same security if they work in Alberta for a period of time than if they don’t. Older Albertans retiring in British Columbia’s Okanagan wouldn’t be part of the numbers yet, but they would still get their pension.
“These are some of the numbers LifeWorks was not in a position to deal with, but the chief actuary will be in a position to deal with them.”
Retrospective calculation doesn’t make sense anymore
“The third issue is that a retrospective calculation doesn't make sense anymore. Every other time there is a divestiture, it is done on a prospective basis, not a retrospective basis. That's where the actuarial aspects of this aren't making a lot of sense.
“When people talk about a retrospective calculation, they're not thinking about who bore the risk.”
Chandler doesn’t see any design implications for private pension plans. He says there may be communication implications because members may worry about whether their pension is secure and whether the APP will have any impact on them.
“If nothing else, it's a communication opportunity for employers to get their message to their members.”
