The problems with a $334-billion transfer from CPP to Alberta

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The Alberta government has released a consultant’s report that includes an estimated $334 billion in asset transfers from the Canada Pension Plan (CPP) fund to a new fund to be established for the Alberta Pension Plan.

There are three different problems with this number. First, the CPP Law’s provisions regarding asset transfer are not particularly clear. Second, this number is calculated using data by state of residence, whereas CPP operates based on the state of employment. Last but not least, this transfer represents 53% of her CPP funds, which seems too large considering Alberta only accounts for 16% of her CPP contributions.

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CPP method calculation formula

The CPP Act’s withdrawal provisions were introduced in 1965, when all Canadian provinces except Quebec agreed to participate in the Canada Pension Plan for the first time. Ontario in particular was not fully convinced of the benefits of moving to a national plan, so her CPP Act of 1965 included a money-back guarantee, allowing the province to change its mind. Ta. That’s what the Alberta government is proposing.

After 60 years of contributing at the same rate and receiving the same benefits as everyone else, the Alberta government is asking Albertans to reverse their decision to enroll in the first place. What used to be similar to a 60-day money-back guarantee is now a 60-year money-back guarantee.

The CPP Act formula provides for a return of investment income attributable to contributions, less related benefits and administrative fees. What is not mentioned in this formula is important. You cannot deduct investment income such as benefits or fees. The consultant’s report notes that a literal interpretation of this formula would lead to an asset transfer of $747 billion, more than the total amount of the CPP fund.

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The Consultant has elected to deduct benefits and fees before allocating hypothetical investment income at the rate actually earned by the Fund. This freedom reduces the estimate to $334 billion, excluding the small additional benefit improvement transfers added to the CPP in 2019. Even with this modification, the formulas will not add up. If all states with above-average growth rates in their working-age populations elected to transfer assets, the formula would result in total asset transfers in excess of the total assets in the CPP fund.

In his research report on the Alberta Pension Plan, Trevor Tombe writes that Alberta’s entitlement to investment income under the Act means that the total amount of investment income realized is attributable in proportion to contributions. Then it suggests. This interpretation of the law has the desirable feature that the sum of virtual asset transfers to all states equals total assets. Tombe concludes that the asset transfer using this interpretation of the law (and a few other minor differences) would amount to what he calls $150 billion.

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data problem

When an individual applies for a pension, either Service Canada or the Quebec Pension Plan (QPP) administrator (depending on where they live at the time) provides a complete history of their pension benefits by province of employment. Determine benefits from both plans based on. Reported on T4 slip. The administrator pays the total pension amount together, and the CPP and her QPP settle the pension contributions each year.

In their report, consultants used publicly available data by state of residence to calculate $334 billion in asset transfers. The formal actuarial opinion states that “the data on which the calculations are based are sufficient and reliable under the terms of this report.” The reference to contract terms means that for the actuary, the data isn’t really enough, but they’ve done the best they can with the data they have and the budget, and the client says they don’t want to waste any more time. It’s a polite way of saying something. Improve.

This is a situation where professional standards require actuaries to report both quantitative and qualitative aspects of obstacles to obtaining adequate data. Consultants analyzed interstate migration statistics and quantified the impact. They found that the potential for wealth transfers could be as high as $262 billion on a small scale and as high as $362 billion if the necessary data by employment region were available. Using interprovincial migration data does not address individuals who maintained residence or family ties in their home province while working in Alberta. An example of this is the oil sands factory construction camps in the Fort McMurray area. Therefore, with correct and complete data, an asset transfer even smaller than $262 billion could be possible.

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fairness

This brings us to the final question. The money-back guarantee approach to calculating asset transfers retroactively calculates contributions and benefits already paid. This system is based on the premise that contributions are used to pay current benefits and that Alberta contributions should only be used to pay Alberta pensions. As workers move to Alberta, Albertans are contributing more than required by the province’s stand-alone pension plan. The asset transfer contemplated by the CPP Act would retroactively eliminate liability of Alberta contributors to current beneficiaries in other provinces, including the parents and grandparents of new Alberta workers. .

If the result is unreasonable and the formula was never intended to be applied in this way, the solution is to amend the CPP Act and replace it with a fairer formula. The principle that formulas must be changed when unreasonable results occur is a fundamental principle that Alberta Premier Daniel Smith has stated that Alberta is committed to “building better and more constructive relationships with other regions” on issues such as equal pay. This seems to be what he meant when he said, “This is the beginning of dialogue.” national program.

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One obvious alternative to the CPP Act’s formula would be to allocate assets in proportion to the benefit obligations transferred to Alberta. This is a widely used technique for selling private sector pension plans. This means that asset transfers will be calculated in advance of pensions paid based on Alberta’s history of contributed income, rather than working backwards to benefits and contributions already paid. This approach would result in approximately $100 billion in asset transfers.

The second approach used in private sector pension plans is to transfer assets equal to the accounting liability or payment obligation of the transferred pension. This approach results in much larger asset transfers.

A third approach is to determine asset transfers in a way that avoids disruption for Alberta or the rest of the province by keeping the steady-state contribution rate or target asset-to-liability ratio the same as in the new plan. Existing plan. This last approach could result in even smaller asset transfers, especially if Alberta’s working-age population is assumed to continue to grow at its current pace.

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So, in summary, the appropriate value for an asset transfer from the CPP Fund to the Alberta Fund would be in the range of $100 billion to $747 billion. There are many moving parts to this calculation, most of which are ignored. Of course, there are other issues to consider besides the size of the asset transfer, but until this issue is resolved, it will be difficult to focus on them.

The purpose of the consultant’s report was to “help answer the important questions Albertans are asking about the costs and benefits of such a move,” but it also allows Albertans to make an informed choice in a referendum. Further efforts are required to reach this position.

Doug Chandler is a Calgary-based actuary and associate research fellow at the National Institute on Aging at Metropolitan University of Toronto.

Bonnie Jeanne Macdonald is a Halifax-based actuary and director of financial security research at Toronto Metropolitan University’s National Institute on Aging.

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