Pension funds and provincial dreams — or nightmares

Hey there, time traveller!
This article was published 17/01/2025 (324 days ago), so information in it may no longer be current.

It was Christmastime — Dec. 20, to be exact — so it might have passed under the public radar a little bit.

Not long after getting elected, Alberta Premier Danielle Smith started campaigning to have her province split off from the Canada Pension Plan and start an Alberta Pension Plan. In an effort to build public support for the plan, she depended on a study set up by the Alberta government to see how much that province should be allowed to withdraw from the CPP.

The number was astronomical: the claim was that Alberta could withdraw $334 billion from the CPP, more than half the CPP’s assets. It would be a huge windfall for Albertans, and Smith used that analysis to anchor her drive to set up the new pension fund, discussing things like lower pension contribution rates and even a one-time cash payout for Albertans from the funds.

But Canada’s chief actuary looked at the legislation and the math used in the Alberta study, and spotted a little flaw.

A multibillion-dollar flaw.

The formula for a province leaving the CPP looks like a simple one: the amount transferred out to a province leaving the fund is A + B – C – D.

A is the direct contributions to the plan from employers and individuals in the province since the CPP’s inception, B is the investment income derived from those contributions, C is the benefits paid out to recipients of the leaving province from the CPP, and D is share of overall administration costs attributable to the province leaving the CPP.

Simple, right?

The problem is with letter B.

Alberta’s consultants interpret B as meaning that Alberta has a right to the overall investment income on compounded returns on Albertans’ net contributions to the fund, less the amounts of benefits paid out to Albertans and Albertans’ share of administration costs.

The chief actuary, meanwhile, views the legislation as meaning that Albertans would be able to withdraw a share of the investment income and interest based on the aggregate total share of contributions of Albertans over time.

If the Alberta method was the right one, and if other provinces left the fund on the same terms, the fund would owe substantially more to the individual provinces than the CPP fund actually holds. (The Alberta calculation suggests that though Albertans contributed 16 per cent of the CPP’s contributions, Albertans deserve 53 per cent of the CPP’s total holdings. The math is fascinating.)

Clearly, that’s untenable.

The difference? Using the actuary’s method, instead of a potential Alberta fund getting $334 billion, University of Calgary economics professor Trevor Tombe estimates the number would be around $137 billion.

And that changes the water on the beans considerably — because Smith’s public relations push to set up a fund extols all of the things that could be done with a pension plan windfall that soaks up plenty of contributions and investment gains by Canadians outside her particular provincial purview.

But what seems to be forgotten, though, is that it isn’t Alberta’s money at all.

It’s the pension contributions of people who happen to live in Alberta, and it’s funds which will pay pensions to those same Albertans, based on the rate of their contributions.

Not only is it not Alberta’s money, it isn’t any province’s money, and it benefits all current and potential CPP recipients to keep that money in the hands of a fund that continually outperforms, rather than run the risk of having the money end up being dipped into by provincial politicians who want money to invest in their own pet ventures.