Danielle Smith's pension numbers suggest bumpy ride for contributors with cushions removed

When Danielle Smith says Albertans would save $1,425 a year in an Alberta Pension Plan and other Canadians would pay "only" $175 more, the Alberta premier is trying to excite one group of people and calm the jitters of another.

But if these are the numbers Smith is using, then she's adding an extra layer of bumps and uncertainty to a future that has Alberta outside the Canada Pension Plan and envisioning a world in which employees' contribution costs would bounce up and down from year to year.

To put it another way, Smith is boasting about a really great figure she can get Albertans onto for a variable-rate mortgage and a halfway decent one for other Canadians butshe's dealing in the less volatile world of pensions, which operate in a way that more closely resembles conservative fixed rates.

• Alberta to explore leaving CPP as report lays claim to $334B, more than half of fund

Her rhetoric is at odds with the cautious way CPP and other major pension funds actually act. If it was rooted in how CPP typically responds to risks or pressures, Smith would be telling other Canadians left in the CPP that they'd face an increase that's more than 60 per cent higher than what she claimed, according to economist Trevor Tombe's estimate.

This point about caution (or lack thereof) doesn't come from reading some contrarian report from the APP idea's detractors. It comes from aclose readingand comprehension of the very report Smith is deriving her numbers from: the Lifeworks feasibility report that her own United Conservative government commissioned.

Now, you might ask: if that report, and its eye-popping premise that Alberta is entitled to yoink 53 per cent of CPP's assets, is so widely questioned and criticized, is there any more merit to parsing the Lifeworks report than there is to speculating on what the green-cheese surface of the moon tastes like, or devoting 1,500 words to the merits of variousStanley Cup parade routes for this season's Calgary Flames?

This is the report Alberta's premier is using to make her case to Albertans, and digging into Smith's rhetoric and the Lifeworks study gives us signals about how much risk is embedded into the plan's chief proponent ideas on this.

It all takes some time to explain, and yes, there is some math involved. But not much! And I've tried minimizing the barrage of numbers.

The government's promotional materials for Smith's APP pitch state that its premiums "would save Alberta workers up to $1,425 every year while maintaining the same level of benefits for seniors." That number is straight from the Lifeworks report, based on the much lower contribution rates that Alberta could charge if it started its own provincial plan with one-third of a trillion CPP dollars in the bank.

Further, in Smith's recent letterto Prime Minister Justin Trudeau, she wrote: "the report estimated that the maximum increase to employee contribution rates for Canadians remaining in the CPP that would be necessary to maintain the current benefits and stability of the CPP in the event that Alberta withdraws would be only $175 per year."

• Danielle Smith's big-money sales pitch on Alberta pension plan hasn't worked yet

This $175 figure doesn't appear in Lifeworks' study. Rather, Smith's team has taken the $3,754.45 annual CPP pension charges for high earners at the current contribution rate of 9.9 per cent, and compared it to charges at 10.36 per cent. That's what Lifeworks estimated as a new break-even rate for CPP if Alberta leaves.

But comparing 9.9 and 10.36 isn't comparing apples to apples. While 10.36 is the "minimum contribution rate" that Lifeworks actuaries estimated would be necessary in 2027 so CPP could keep paying predictable benefits long into the future, 9.9 isn't that. Rather, it's what CPP calls a "legislated rate" that Ottawa and the provinces agree to set in advance to give CPP rate-payers some predictability in what they'll pay, while also preserving security for the fund. (That rate has been the same since 2003, though officials review it every few years.)

The CPP's legislated rate of 9.9 per cent compares to its own minimum contribution rate of 9.54 per cent, calculated in its chief actuary's last report in 2021. That bounces around from actuarial report to report, but has consistently stayed below the actual rate that CPP charges.

Why is it important, this gap between the minimum contribution rate and legislated rate?

Economist Trevor Tombe says the gap is like a cushion. It allows a pension fund to absorb developments like deep investment losses in a global recession, or major shifts in demographics, like employment, retirement rates or death rates, says Tombe, a University of Calgary professor who has extensively researched and written about the CPP/APP question.

"Operating without a cushion means that any adverse shock would lead to a higher contribution rate. And the goal of these plans is to try to avoid that," he says. "You want to pick a rate that you have a very, very high confidence in being able to keep without changing at any point in the future."

Theoretically, CPP could be charging contributions of 9.54 per cent right now, saving Canadians some decent coin. But that means that next time actuaries crunch the numbers the rate could gohigher

If a post-Alberta CPP wanted to revise its legislated rate with a similar sized cushion, it might bump up the figure to 10.80 per cent instead of 10.36. Tombe calculates it would cost Canadians up to $284, not $175 a 63 per cent jump above the figure Smith stated.

Going back to the mortgage analogy, consider the pension's legislated rate as a fixed-rate mortgage and the minimum a variable-rate mortgage. A variable rate might be cheaper for now but be prepared to have to pay more down the road.

In reality, CPP has been charging a sort of fixed rate for contributors. If Canadians left in the pension plan were only paying $175 more than they currently do, as Smith suggests in the Lifeworks scenario, they'd effectively be on a bumpier variable rate and using it assumes Ottawa and other provinces wouldn't reset a new legislated rate at some higher but more stable level.

So given that Canada's pension plan charges a rate that's separate (and ideally higher) than the bare minimum required and Qubec does too for its provincial plan, by the way one might expect Alberta would also fix its own rate, right?

WATCH|Prime minister takes jab at Alberta pension plan:

Trudeau addresses pension plan to Alberta delegation

12 months ago

Duration 2:50

Prime Minister Justin Trudeau took a jab at the Alberta government's pitch to embark on its own pension plan while talking about his government's track record on emissions, climate change and the economy.

But that isn't what the marketing from Alberta and Smith suggest, with the $1,425 in future annual savings. It's in the same bobbing boat as the premier's $175 figure meaning that it's based on Lifeworks' estimate of a 5.91 per cent minimum contribution rate, in a world where the APP starts off with a major windfall from the national pot.

In fact, the Lifeworks report itself notes Alberta might wish to give a new pension fund its own cushion: "Similar to the CPP, Alberta could include a buffer when determining the legislated contribution rates for an APP. This would take into account the uncertainty of the results and reduce the likelihood of having to increase contribution rates in the future."

A higher rate, and lower savings

Tombe says that given the greater range of volatility for a smaller provincial pension fund, Alberta would probably want more room between its legislated rate and break-even rate than the CPP.

But doing so would mean a higher initial rate, and lower savings than what Smith and provincial advertisements suggest.

There would almost certainly still be an advantage initially for APP rate-payers, even in a world in which Alberta doesn't grab 53 per cent of CPP assets as Lifeworks hypothesizes thanks to the province's younger-than-average and well-employed workforce.

But so many variables and risks might eat into any contribution edge over time: interprovincial migration, wage growth, inflation, investment performance, and whether Alberta wants to simultaneously boost benefits for pensioners, which is part of Smith's marketing pitch.

"Risk," a term used throughout typical pension literature, is a word hardly used at all in Smith's albertapensionplan.ca website or engagement offerings. Without worrying about such matters as buffers, cushions or risks, a provincial government can woo residents with the biggest dollar figures its actuarial report will allow, or try convincing Canadians who'd be left with a weakened CPP that it wouldn't be that much worse.