As the bickering begins over how much of the Canada Pension Plan fund Alberta would be entitled to if it pulls out of the national pension scheme, there is a fast-growing pool of money managed by CPP Investments on which all appear agreed the western province would have a much smaller claim. 

The separate investment pool run alongside the CPP fund’s core assets since 2019 is part of an “enhanced Canada Pension Plan” created when Ottawa and the provinces agreed to overhaul the scheme, a change that included additional phased-in contributions and additional benefits down the road. By the beginning of 2027, this additional CPP pool is projected to grow to around $92.5 billion from just over $11 billion in 2021, according to the latest report from the Office of the Chief Actuary, which reports to the federal government on pension plans and social programs.

That pool of funds was not the main focus of reaction to a report by Lifeworks, made public by Alberta Premier Danielle Smith’s government on Sept. 21, which stunned many with the conclusion that Alberta could walk away from involvement in the CPP with a $334-billion asset transfer. The report used a formula to determine Alberta would be entitled to 53 per cent of the base CPP fund’s projected value of nearly $636-billion by January 2027, the year by which the province could realistically start its own separate pension.

However, when it comes to the additional post-2019 CPP fund, including contributions and investment returns, the Lifeworks report notes that Alberta would be entitled to only about 17 per cent — or $16 billion of that $92.5 billion in 2027. That’s because assumptions that Albertans have historically paid more than their fair share into the CPP due to factors such as the province’s younger population, high employment and better-paying jobs would not have the same impact on returns generated over a relatively short timespan.

The ability of provinces to exit the fund is not in dispute. When CPP was created in 1966, the nine provinces that joined were given an out clause allowing them to withdraw at any time and go it alone with a provincial pension plan, as Quebec had done by not joining the national scheme in the first place. 

Doug Chandler, an independent research actuary and associate fellow of the National Institute on Ageing, said this was essentially a “money-back guarantee” that is now likely to play out very differently for the two asset pools within CPP, given their different characteristics.

“The additional benefits are quite new and so a money-back guarantee on the additional contributions that started in 2019 works pretty well,” he said, adding that the asset transfer could be compared to a private sector company transferring the pension assets associated with a unit it was selling.

Additional CPP, funded through phased-in contributions to pay for the gradual increase in benefits, has a lower-risk profile than the base fund and an asset mix that is a blend of the core fund’s diversified portfolio of equities, fixed income, real assets and absolute return strategies and a supplementary pool comprised solely of fixed income.

The Chief Actuary’s report published at the end of 2021 projected that the additional CPP fund created in 2019 would grow to nearly $199.6 billion by the end of 2030. By 2050, it is projected to reach $1.3 trillion.

Chandler said the impact on this growth if Alberta pulls out of the national pension scheme would be minor.

“All the numbers would be, what, 17 per cent smaller, but the pattern would be the same…. For the next decade or so, assets for additional benefits will ramp up very quickly,” he said.

“The additional benefits are just getting started and will be fully funded — so assets, liabilities and funding for the remaining provinces should grow much as before.”

As a result, the additional CPP pool would make up a larger percentage of the total fund than currently contemplated — CPP as a whole was projected to reach more than $3 trillion by 2050 in the Chief Actuary’s latest report — given the larger impact Alberta’s departure would have on the base fund.

However, Chandler said that shift would not offset the challenges an asset transfer on the order of $334 billion, as floated by the Alberta consultant’s report, would pose for future CPP benefits. 

“Assets and liabilities for both base and additional benefits would be smaller going forward, not only because of the assets and liabilities transferred to Alberta at the outset, but also because fewer Canadians would be participating in the CPP in the future,” he said.

In the case of the base benefits, the Lifeworks consultant’s report estimates that the target ratio of assets to expenditures — a measure of benefits security — would be reduced to 5.1 years from 8.4 years for the residual CPP after an Alberta withdrawal. Meanwhile, Chandler said, the “steady state” funding method in place for CPP since the 1990s means there is no built-in requirement for extra contributions to build assets back up to the current ratio.

“So assets for base benefits in the residual CPP would remain lower indefinitely,” he said.

Clara Vargas, senior vice-president of Canadian structured finance at DBRS Morningstar, said the two CPP fund pools would be affected by Alberta’s withdrawal in different ways because their characteristics and risk profiles are not the same. 

Still, a reduction in assets driven by the province’s departure from the national scheme, combined with a change in the demographic profile of CPP without that province’s younger population, could lead to changes in CPP Investments’ risk appetite and asset mix.

“(This) would have an impact on expected returns,” she said.

Nevertheless, she said the fund, even if reduced in size as suggested by the Alberta consultant’s report, would remain large enough to pursue an international strategy to diversify by geography and asset classes to support long-term growth.

“We expect that even with a lower asset base under management, CPP Investments would retain the scale and global clout that would allow it to continue to source attractive investment opportunities and maintain a global and diversified asset portfolio,” Vargas said.

How much Alberta will walk away with if the province pulls the trigger on withdrawing from CPP is contentious and observers have predicted the matter will be subject to negotiations and could wind up before the courts. 

Michel Leduc, senior managing director and global head of public affairs at CPP Investments, the pension management organization that invests on behalf of the CPP Fund, called the asset transfer amount cited in the Alberta consultant’s report “impossible,” given the composition of the national pension scheme. If Ontario and British Columbia followed Alberta’s lead, the fund would be drained and the remaining provinces would owe money to the ones withdrawing, he 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,” Leduc said in a Sept. 21 interview.

• Email: bshecter@postmedia.com

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