Provincial pension plan not without its risks
In the midst of a collapse in oil prices and a global recession, who wants a new Alberta pension plan?
The Fair Deal panel certainly does, recommending Alberta withdraw from the Canada Pension Plan (CPP) and set up a provincial initiative to replace it.
Premier Jason Kenney says there are “persuasive arguments” for the idea, although he wants more analysis completed and has instructed finance department officials to examine the issue further.
Some Albertans downright oppose the notion.
Ultimately, the public could decide the thorny question in a provincewide referendum — another recommendation from the panel — if the UCP government decides to move the idea forward next year.
It’s no simple matter.
And the financial trouble created by the COVID-19 pandemic and sharp drop in oil prices illustrates the volatility and risk that could batter a smaller provincial pension plan navigating a turbulent economic storm.
The province’s Fair Deal panel report was released Wednesday with a key recommendation advising the province to “develop a comprehensive plan” to create an Alberta pension plan (APP) and withdraw from the CPP.
“The panel recommends vigorously exploring this option and conducting the due diligence needed to assure Albertans that benefits and risks are understood and can be positively managed,” the report states.
But what’s the rationale for Albertans leaving the security of a well-funded national program for an untested provincial one?
Well, with higher income levels in the province than the rest of Canada, a younger population and historically higher employment rates, “Albertans contribute disproportionately to the CPP,” the report said.
A younger population means there are relatively more people contributing to the plan, and fewer people drawing pensions, than in other parts of the country.
In 2017, Albertans collected 10.6 per cent of CPP expenditures but made up 16.5 per cent of total contributions — leading to a net contribution of $2.9 billion.
“As contributions to the CPP are planned to increase over the next five years, Albertans’ subsidization of the CPP will likely continue to grow.”
The report said pulling out of the national program could see the provincial contribution rate fall to as low as 5.85 per cent from the CPP base plan rate of
9.9 per cent, while keeping benefits at a comparable level.
“This could be used to reduce Albertans’ premiums while maintaining or increasing benefits paid to pensioners over time,” the report states.
This conclusion is similar to an internal study prepared last year by the Alberta Investment Management Corp. (AIMCO), which said if a provincial plan were adopted, the sustainable pension contribution rate would drop to 7.21 per cent or lower.
However, other issues, including net population migration, labour-market participation and wages, would affect those assumptions.
“Consider a scenario where the Alberta energy sector collapses and results in a significant net migration of working-age people out of Alberta,” cautioned the AIMCO report.
“Under this scenario, Alberta may have been better off remaining in the CPP.”
You don’t have to look far to see the problems already caused by the pandemic and feeble oil prices, with layoffs confirmed Wednesday at Ovintiv (formerly Encana), while pipeline giant Enbridge said about 800 employees have taken voluntary retirement, buyouts or accepted leaves.
The panel said some Albertans thought the province’s contributions were unfair and that withdrawing from the CPP “would deliver a clear message to Ottawa.” It also heard concerns from many seniors who “unequivocally told the panel: make sure pensioners are protected!”
It’s also unclear how much backing there is for the concept.
A poll conducted for the panel in March found 42 per cent of Albertans agreed “somewhat” or “a lot” that establishing a pension plan would help improve the province’s place in the federation, while 54 per cent said “not very much” or “not at all.”
“That is not wide support. That is not going to win a referendum,” said Lisa Young, a political scientist at the University of Calgary’s School of Public Policy.
“That really speaks to a bit of a sense of anxiety when you are asking people to bet their retirement on this.”
Young noted the demographic advantage Alberta now enjoys could change, pointing out that Newfoundland and Labrador had the country’s youngest population in the 1970s and ’80s before the cod fishery collapsed.
If government analysis shows there is a net benefit to replacing CPP, Kenney said a referendum on the issue could happen during the municipal elections in October 2021.
The premier also pointed out Quebec has managed its own provincial plan for decades.
“I don’t understand why Albertans think we are somehow less capable of managing our own money than Quebecers are. I frankly find that notion insulting,” he told reporters.
While Quebec has its own provincial pension program, no province has opted out of CPP since it was established and issues such as portability would need to be ironed out.
Having the Canada Pension Plan Investment Board or AIMCO manage Alberta’s pension investments would be another key matter to consider.
But in such uncertain times, are Albertans prepared to assume more risk?
A report this year by pension expert Keith Ambachtsheer said the province would be “taking on material underwriting risks” by creating its own plan, as the countrywide CPP contributor base offers diversification benefits to Albertans.
Ambachtsheer, an adjunct finance professor at the University of Toronto and director emeritus of its International Centre for Pension Management, said Wednesday he was surprised by the panel’s APP recommendation, but welcomed news the finance department will conduct further analysis.
“You can’t just look at the potential rewards,” he said.
“Hopefully Albertans, before this gets to a referendum, will get the straight goods, not just about the potential rewards but about the risks.”
Are Albertans willing to gamble their pensions in these uncertain economic times, columnist Chris Varcoe asks.