Pension funds and provincial dreams – or nightmares – Winnipeg Free Press

Opinion

It was Christmas time – December 20th, to be exact – so it might have passed a little bit under the public radar.

Not long after being elected, Alberta Premier Danielle Smith began campaigning to have her province separate from the Canada Pension Plan and start an Alberta Pension Plan. In an effort to build public support for the plan, she relied on a study the Alberta government had set up to see how much that province should be allowed to withdraw from the CPP.

The figure was astronomical: the claim was that Alberta could withdraw $334 billion from the CPP, more than half of the CPP’s assets. That would be a huge windfall for Albertans, and Smith used that analysis to anchor her drive to create the new pension fund, discussing things like lower pension contribution rates and even a one-time payout to Albertans from the funds.

But Canada’s chief actuary looked at the legislation and the math used in the Alberta study and discovered a small flaw.

A multi-billion dollar mistake.

The formula for a province leaving the CPP looks like a simple one: the amount transferred to a province leaving the fund is A + B – C – D.

A is the direct contributions to the scheme from employers and individuals in the province since the creation of the CPP, B is the investment income derived from those contributions, C is the benefits paid to beneficiaries of the departing province from the CPP, and D is the proportion of total administrative costs that can be attributed to the province leaving the CPP.

Simple, right?

The problem is with the letter B.

Alberta’s consultants interpret B to mean that Alberta is entitled to the total investment income on compounded returns of the Albertan’s net contributions to the fund, less the benefit amounts paid to the Albertan and the Albertan’s share of the administrative costs.

The chief actuary, meanwhile, views the legislation as meaning that Albertans would be able to withdraw a share of investment income and interest based on the total aggregate share of contributions made by Albertans over time.

If the Alberta method was correct, and if other provinces left the fund on the same terms, the fund would owe significantly more to individual provinces than the CPP fund actually has. (The Alberta calculation suggests that even though Albertans contributed 16 percent of the CPP’s contributions, Albertans deserve 53 percent of the CPP’s total holdings. The math is fascinating.)

It is clear that this is unsustainable.