I wasn’t going to write again on the Alberta Pension Plan and what has become the controversial LifeWorks report saying Alberta should get half the Canada Pension Plan’s assets if it sets up its own APP. It’s so obvious that since 1966 Alberta has carried the load for the rest of the CPP provinces (i.e., not Quebec, which has its own plan) that I didn’t think I’d have to. Besides, even LifeWorks acknowledges the numbers need refining. Its model essentially tracks the CPP’s actuarial report, but a more careful treatment of Alberta-only actuarial assumptions and interprovincial migration requires access to confidential CPP data. No one has done that exercise yet.

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Jack Mintz: Alberta taking half of CPP assets is a reasonable place to start Back to video

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Yes, to the horror of Central Canadian and some Alberta pundits, LifeWorks’ estimated asset transfer equals roughly half of CPP’s assets. Section 113.2 of the Canada Pension Plan Act makes quite clear that if a province withdraws from the CPP it is entitled to an asset transfer equal to: its contributions, plus associated investment returns, minus administrative costs and pension benefits paid — all since 1966.

As LifeWorks and other experts acknowledge, how exactly to calculate Alberta’s share of administrative costs and investment income is not entirely clear. (Though administrative costs are miniscule, at just 0.5 per cent of contributions, accumulated investment income is big: it now exceeds accumulated contributions). A literal reading of the law suggests investment income owing might be based solely on past contributions multiplied by the rate of return on investments. That would result in an asset transfer of $637 billion in 2021 or 117 per cent of CPP net assets. But that calculation in effect indexes contributions though not benefits or administrative costs, which makes little sense.

One thing the legislation clearly does not say is that the transfer is based on Alberta’s population or contribution share. Michel Leduc of CPP Investments should have left the federal response to politicians and not said: “A province that accounts for only 16 per cent of total contributions can’t legally or realistically be allowed to claim more than half the assets.” But why not, if the province has been the biggest net contributor? The University of Calgary’s Trevor Tombe estimates the transfer would be 25 per cent of CPP assets, which he gets by assuming that 16 per cent of the investment income would be apportioned to Alberta based on its gross contributions (even though Alberta’s share of the net contributions made to CPP is much larger than 16 per cent). That is a middle ground, but it’s neither legislatively- nor actuarially-based.

With the honourable exception of Colby Cosh’s article in Saturday’s NP, commentators have ignored the legislation and ridiculed LifeWorks’ estimates as wonky. But its calculations are based on a legal interpretation that is consistent with the CPP Act. It estimates Alberta’s net contributions from 1966 to 2021 at $59 billion. Investment income on that totalled $220 billion, for a grand total of about $280 billion.

To get a feel for the numbers, the chart shows CPP aggregates for 2021. Alberta’s share of contributions to both the “basic” and “additional” CPP plans in 2021 was 18 per cent, while its share of benefits and administrative costs was only 13 per cent, which is less than its population share of the CPP provinces (15 per cent).

But look at Alberta’s net contribution. It paid in $10.0 billion and got back only $6.8 billion (including its payment of administration costs) in 2021. That’s $3.3 billon. But the entire net contribution made by all provinces, including Alberta, was just $1.8 billion. Alberta’s net contribution was therefore 176.5 per cent of the total net contribution to the plan for that year. In 2021, the other CPP provinces were net beneficiaries of Alberta’s largesse. And that has been true since the CPP started. Given Alberta’s consistently outsized role in paying for the plan, it’s really not surprising that it would get 55 per cent of the plan’s assets if it left.

This is not the result that was anticipated in 1966 when CPP began. The plan started out underfunded, with payouts well in excess of contributions and investment returns (though even back then Alberta was a small net contributor). The big change happened after CPP was reformed in 1997 to make it self-funding. Higher payroll taxes and a new approach to investing — in a wide range of assets rather than only in provincial bonds — enabled CPP investment income to grow rapidly. But since the 1997 reforms Alberta’s net contributions have also risen rapidly.

At the time of the 1997 reforms, the rules regarding a province’s withdrawal could have been changed. But they weren’t. So, those are the rules we have. It would obviously be unfair to change them at this late stage — though unfairness hasn’t stopped Ottawa before. If last-minute amendments do take place, some sort of compensation will be in order for a province that has borne so much of the cost of making CPP fully funded.

Financial Post