Alberta’s CPP exit involves more than just an asset transfer number — it brings a matrix of risks, too

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By Doug Chandler and Bonnie-Jeanne MacDonald 

At a meeting of federal and provincial finance ministers this month, Chrystia Freeland, Canada’s minister of finance, wisely agreed to refer the Alberta proposal to withdraw from the Canada Pension Plan (CPP) to Canada’s chief actuary. She said she will ask the chief actuary to determine the asset transfer from the CPP to a new Alberta pension plan based on a reasonable interpretation of the legislation. Federal and provincial officials will work together to determine the precise scope of the work.

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Engaging the chief actuary is the best path forward — but asking the right questions is critical.

The problems with the 53 per cent asset transfer estimate 

Until now, as discussed in our earlier article, the obstacle to informed debate has been uncertainty around the size of the asset transfer. In addition to the challenge of interpreting the legislation, there are significant problems with the data that Alberta’s consultants used to determine that Alberta would be entitled to 53 per cent of the entire CPP fund. The allocation of CPP benefits and contributions depends on the province of employment, but the only readily available data were by province of residence, leading to data errors whenever Canadians move from province to province or commute across provincial boundaries for work.

Many Canadians have said Alberta’s number doesn’t make sense, given that the province accounts for only about 17 per cent of CPP contributions. They question the appropriateness of applying an antiquated formula conceived for a different set of circumstances half a century ago. But to arrive at an asset transfer number as low as 17 per cent of the CPP assets would require more than a reinterpretation of the existing legislation: It would require disregarding the legislation.  

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Asking the right questions 

With its access to federal government administration data, the Office of the Chief Actuary is in the best position to overcome the data problems faced by Alberta’s consultants and provide insight into the consequences of alternative interpretations of the Canada Pension Plan Act. As Canada’s chief actuary, Assia Billig is responsible for advising the government on the financial sustainability of the CPP and Canada’s other social programs.

But simply asking her to estimate the asset transfer based on a single interpretation of the provisions in the Act is insufficient. The chief actuary should be asked to provide insight into the risks of a standalone Alberta pension plan and a residual CPP. How much riskier will this proposed arrangement be?

Understanding the risks 

The quantification of financial risks is exactly what actuaries are trained for, and it’s central to understanding the obligations and risks accompanying different interpretations of the Act.

For example, Alberta’s consultants reported that the withdrawal and accompanying 53 per cent asset transfer would increase the minimum required contribution in the CPP for base benefits from 9.54 per cent to 10.36 per cent. Alberta Premier Danielle Smith said this would translate into an increase in contributions of $175 a year for both employers and workers in the remaining provinces.

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But this is only true if the actuarial assumptions are precisely fulfilled. Smith posits using up the entire protective buffer built into CPP’s funding to arrive at her estimate. If things turn out worse than expected, the effect of Alberta’s withdrawal will be greater, given that there is no buffer left. If things work out better than expected, CPP’s current 9.9 per cent contribution rate will continue to be bigger than the minimum required, but Alberta’s withdrawal will continue to cut into the margin. Either way, the impact of Alberta’s withdrawal is substantially greater once financial risks are factored in.

There are other risks. For the provinces that remain behind, the CPP’s funding position could be worse, making the contribution rate more dependent on population and real wage growth. In other words, if fertility or immigration rates are less than the actuary’s assumptions, contribution rates would need to rise faster. For Alberta, if supported by a large asset transfer, its lower contribution rate would be more sensitive to investment risks.

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Even if Alberta abandons its proposal, now is the time to resolve just what Section 113(2) of the Act should say. The chief actuary should suggest a mechanism for future asset transfers that is less controversial and less disruptive — one that would not encourage opportunistic withdrawals by other provinces in the future.

Doug Chandler is a Calgary-based actuary and an associate fellow of the National Institute on Ageing, Toronto Metropolitan University.

Bonnie-Jeanne MacDonald is a Halifax-based actuary and the Director of Financial Security Research at the National Institute on Ageing, Toronto Metropolitan University.

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