Proposed Alberta Pension Plan has underwriting, political risks: report

A potential Alberta Pension Plan would expose Albertans to material underwriting risks and the potential for political involvement in decisions about the plan’s investment policy, according to a new report.

The report — authored by Keith Ambachtscheer, founder of KPA Advisory Services Ltd. and adjunct professor at the University of Toronto’s Rotman School of Management — also estimated the set-up and operating costs of the APP would run into the hundreds of millions.

Alberta Premier Jason Kenney said in November the province would consider whether to withdraw from the Canada Pension Plan and start its own pension system.

Read: Alberta will study already ‘compelling case’ for its exit from CPP: Kenney

Looking at the underwriting risks, Ambachtscheer disputed the conclusions in papers by the Fraser Institute and the C.D. Howe Institute that the APP could operate with a contribution rate of between six and eight per cent — lower than the CPP’s existing 9.9 per cent — because the province’s three million members are largely younger than the 17 million members of the CPP. As those papers put it, Albertans make 16.5 per cent of total CPP contributions while only drawing 10.6 per cent of CPP benefits, to the tune of a $2.9-billion contribution gap.

“This kind of static gap analysis cannot tell the whole story, as it does not address an important question about the future,” wrote Ambachtscheer.

The amount of young workers migrating to Alberta to work in the province’s oil and gas industry over the last 25 years and the province’s higher wages have contributed to its current CPP contributor status. But workers have been leaving the province as climate change-related policies, a lowering demand for oil and gas and the lack of pipelines to get those products to foreign markets have battered the fossil fuel sector.

Read: The Alberta Pension Plan is no slam dunk: memo

If this trend continues for the next 25 years, noted the report, the base contribution rate to an APP would have to be two per cent higher than the amount suggested by the Fraser Institute and C.D. Howe studies for the plan to remain sustainable, similar to the Quebec Pension Plan, which today has a base contribution rate of 10.8 per cent.

“The country-wide CPP contributor base offers important diversification benefits to Alberta CPP participants,” wrote Ambachtscheer. “Dropping the APP’s starting contribution rate two to four percentage points below the base CPP’s 9.9 per cent rate would expose APP members to underwriting risk in the form of potential benefit reductions, higher contribution rates or some combination of the two sometime in the decades ahead.”

The government would also have to address many important issues before starting the plan, noted the report, including whether APP benefits would be identical to CPP benefits, as well as how past service would be resolved for Canadians who worked in Alberta but have moved to other provinces or abroad for work or retirement. In addition, it said the resolution of those questions would have an impact on the APP’s share of the CPP’s financial reserves.

Read: The problem with an Ontario pension plan

The province would also have to build the plan’s support system infrastructure, which would need to be able to accurately collect contributions, create earnings records and calculate and pay out benefits. Looking back at government documents on the now-abandoned Ontario Retirement Pension Plan, the report noted two years of development costs before the plan could become operational sat at $70 million.

The report also addressed the annual costs of operating the APP, which it pegged at between $260 million and $525 million.

The APP’s assets would most likely be handled by the Alberta Investment Management Corp., which currently manages more than $100 billion in assets. While the report said the AIMCo would do a “competent job” of managing Albertans’ assets, it noted a risk in legislation that governs the investment manager. While the AIMCo operates at arms length from the provincial government, Alberta can issue directives that it must follow.

The report pointed to comments from former Wild Rose Party leader Danielle Smith, who argued in an interview with the Canadian Broadcasting Corp. that Albertans should have their own pension plan to combat the “divestment mood [from oil and gas] in all of the pension funds across Canada and internationally” to illustrate concerns that the AIMCo could be asked to support the provincial government’s agenda, although Kenney and Alberta Finance Minister Travis Toews have called those fears unfounded, the report noted.

Read: Can CPP have a provincial bias?

“Would [the APP’s] assets be managed ‘at arm’s length’ or would they be used to shore up a potentially declining oil and gas industry?” asked Ambachtscheer. “The latter outcome would expose APP members to a double jeopardy possibility of falling APP contributions and asset values at the same.”

The report pointed to Norway’s national endowment fund, which doesn’t invest in the country and has started to exclude fossil fuel investments worldwide to avoid the risk of Norwegians’ financial assets being invested in the same country and industry that’s both a major source of employment and government revenue.

“Why compare the financial behaviour of a sovereign country to that of a province of a federation?” the report said. “The reason is to point to the reality that creating an APP will require political decisions to be made regarding its investment policy.”

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