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I got a call on Thursday asking me what I thought of the report out of Alberta examining the idea of that province bailing out on the Canada Pension Plan and starting its own Alberta Pension Plan.

At that time, I was packing for a long weekend celebrating my thirtieth wedding anniversary – hard to believe she has kept me around this long.   Of course, I dropped everything to read the report and I had an interview while we were in-transit to the airport – like I said, hard to believe she has kept me around this long.

I told the interviewer that the report was an actuarial gold mine and rambled out at least a half dozen immediate thoughts.  Lucky for me, Rudy was a skilled interviewer and kept the discussion mostly on track.  After 17 years working together, Jason wonders if anyone can keep me completely on track.

By now readers of this commentary have probably read at least a few articles on the proposed Alberta Pension Plan.   Much of the commentary I have seen laughs at the idea that a province that represents 15% of contributors to the CPP could possibly think that they could be entitled to more than 50% of the accumulated assets managed by the CPP Investment Board.

Consulting 101

When clients want to look at changes to the design of their retirement plans, my first question is always what does the plan say about making changes?  In this case I spent some time tracking down the relevant sections of the CPP Act and let me tell you that before you make fun of actuaries for writing incomprehensible reports, wait until you take a look at what the lawyers have come up with for our national retirement income program.

In a nutshell, as I understand it, Alberta can leave the CPP without the permission of the other provinces or the Federal Government.  The rub is that it has to setup something similar and once it receives a transfer of assets for its share of the funds at CPPIB it’s on its own to pay all future benefits and manage necessary future contributions.  Clearly taking this step would not be for the faint of heart.

Where the rubber hits the road is on the ‘how much money do we get?’ question.  The answer is written in a complicated manner.  I have tried to write it out simply, but I will be honest I am not sure if I have it right.  The amount to be transferred as I understand it is the sum or (a) and (b) less the sum of (c) and (d) as follows:

(a) the total amount of all contributions credited to the Canada Pension Plan Account in respect of employment in that province, plus

(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, that is derived from the contributions referred to in paragraph (a)

less

(c) 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 setup their own plan at the outset (like Quebec); plus

(d) the costs of administration of the CPP proportional to the contributions made by the province to the total contributions

Yep, that is the simplified wording.

I think I know how to calculate these amounts.  Of course, with something this complex and with so much money at stake I would be calling in a pension lawyer to validate my interpretation.  For some reason, Alberta’s consultants don’t read the provision the way I do and come up with the idea that if they followed the statute then Alberta would be entitled to 117% of the CPP assets.  The consultants then make up a method they think makes ‘more sense’ and come to 53%. 

I don’t know much about law but either the language is clear or if it isn’t then it won’t be the actuaries that decide what the language means, it will be the lawyers.  In addition, I have only testified before a judge a few times in my career but me thinks it will be hard to find a judge that thinks 117% makes sense which will destroy the credibility of Alberta’s advocates and likely see the equally unexpected result of 53% thrown out at the same time even if it is actually ‘fair’.

I once worked on a project to untangle about $20 million from two pension plans that were merged incorrectly.  I can tell you that the work to actually figure out how to determine Alberta’s fair share is a monumental task and I am skeptical that the data needed going all the way back to 1966 exists and if it does, surely it isn’t in a neat database which would ultimately need to be built first.

Actuarial Science 101

I have no disagreement that the formula provided under the CPP Act would be expected to provide a different ratio of assets among provinces and territories compared to the current number of contributors.  As correctly asserted by Alberta, a historically younger province will have spent proportionately less on benefits than ‘older’ provinces.

At the same time however, yesterday’s younger province is tomorrow’s older province unless fertility or immigration is high enough to keep it young forever which demographers will tell you is impossible.  If Alberta deserves a larger share of the accumulated CPP fund, it likely means they have greater liabilities on the horizon.  Everyone goes through the birth, work, retire cycle – at least everyone hopes they do.

Complicating the entire story is the fact that when the CPP was established, it only took 10 years of contributions to reach the level of full benefits.  Thus, all future generations in all provinces will have to pay for the benefits paid at the outset of the program.  This is a place where I have some sympathy for Alberta as my homework suggests that back in 1966, Alberta would have only been 7% of the contributors to the CPP – so proportionately fewer ‘early entrants’ to be paid for by today’s 15% of contributors.

Pension Administration 101

Where things get fun (or silly depending on your perspective) is when the discussion starts on how Alberta could execute a withdrawal from the CPP and setup their very own mini-CPP.

Did anyone besides me laugh out loud when you saw the spectacularly imprecise setup costs of $100 million to $1 billion?   This sounds like a gun registry debacle in the making.  Add in $100 million to $150 million a year for operational costs which may not result in an equal reduction in the costs of managing the ex-Alberta/Quebec CPP.  Maybe that is a problem for the other provinces and territories but regardless it is an anti-economy of scale move by all of us collectively.

To me, on administration, this project is a loser for all except the suppliers.  Maybe Alberta’s consultants hope that they will be chosen to take on a piece of that billion dollars mentioned above. Maybe I should shut up and hope to get a piece too, but long-time readers and people who know me well, know that I have trouble shutting up even when it’s for my own good.

Finally, the report also suggests that in setting up its own plan Alberta might create a new 1,500 to 2,000 jobs.  It is implied that this is ‘job creation’ and is a positive outcome of the effort.  Readers should be reminded that when a government creates jobs in the private sector, they help create new taxable incomes and, in many cases, new taxes on corporate profits.  Unfortunately, new government jobs are a net negative to an economy because the income taxes received are only a fraction of the tax dollars spent on those incomes in the first place and, of course, governments do not create taxable profits.

Professional Practice 101

Readers hoping that I would trash the conclusions of the folks at LifeWorks might be disappointed at this stage.  I really haven’t said they are wrong and all I can really say is that we don’t know what the answer is here.  The rules of the actuarial profession are that you don’t unduly criticize the work of another member.  This is a good rule because you don’t want members tearing down the profession publicly over a difference of opinion where both views could be valid.

What really bothers me here is LifeWorks approach to professional practice.  We are told that the work is in accordance with ‘accepted actuarial practice’ but we aren’t told that the work has been prepared by a Fellow of the Canadian Institute of Actuaries.  To me, hiding the identity of the report’s author substantially reduces the credibility of the work and simply has me wondering why the author is hiding.

We are told that the purpose of the work is to:

“give ATBF a clearer picture on what a future provincial pension plan may look like and help answer key questions that Albertans are asking about the costs and benefits of such a move.”

I don’t think the report achieves that purpose.  Almost every Canadian is left with more questions than answers on how an Alberta Pension Plan would come to life and what it means for future contributors inside and outside of Alberta.  The two reasons for this lack of clarity stem from unclear rules on how assets are divided and insufficient data available publicly to do this work properly.

In certifying that the work is in accordance with accepted actuarial practice, the alleged actuary is also certifying that the data provided was ‘sufficient and reliable’ for the purposes of the work.  I am just unconvinced that is the case here.

To me this is a big nothing at this stage other than political theatre allowing Alberta to try to motivate Ottawa to take their concerns on climate and carbon seriously.  In my view these are legitimate concerns but like the Ontario Retirement Pension Plan, I think a lot of time and money can be wasted here playing chess and sacrificing pieces that in the future might cause regret.

Politicians can run with this report and try to get Albertans worked up that they are being screwed being part of the CPP.  But I think when the dust settles, the best we will learn is that all Canadians are paying the start-up costs and initial benefits of CPP and Alberta cannot get out from under the cost of the decisions that all the provinces and territories made in the 1960s.