Alberta Premier Danielle Smith wants money. She wants Scrooge McDuck, swimming-pool-full-of-cash amounts of money.
Ms. Smith wants what Quebec and Norway have built over generations, at the $424-billion Caisse de dépôt et placement du Québec and at Norges Bank, a US$1.5-trillion fund fuelled by oil and gas royalties. The Premier’s vision is to establish a massive sovereign wealth fund, run out of Edmonton, dedicated to providing pensions for Albertans and capital for Albertan politicians’ pet projects.
Last week, the Premier rolled out a report from Telus Corp.’s T-T Lifeworks unit that explains how she plans to raise the cash. She wants to withdraw the province from the Canada Pension Plan and, in the process, take more than half the fund’s assets, even though Alberta is responsible for only 16 per cent of contributions to the CPP.
This would shift $334-billion from federal to provincial coffers, for Ms. Smith to use in starting an Alberta Pension Plan.
Every investment professional in the country knows this concept, as envisioned by the Premier, is a really bad idea. If Ms. Smith barrels ahead, all Canadians (outside Quebec, which does not participate in the CPP) will be poorer. Including Albertans.
Here’s what money managers would tell the Premier, if she slowed down to ask. The larger the fund, the easier it is to post superior performance.
Scale allows a larger fund to lower costs, which translates into better results. Over the past decade, the Canada Pension Plan Investment Board (CPPIB) averaged 10-per-cent annual returns, well above the 7.2-per-cent yearly gains posted by the Alberta Investment Management Corp. (AIMCo), which oversees public-sector pensions and other funds in the province. With $575-billion in assets, CPPIB is roughly four times the size of AIMCo.
Gutting the CPP to start another, smaller fund would hurt performance at both asset managers, and result in higher contributions and lower benefits not only for Albertans, but also for residents of eight other provinces.
Even if Ms. Smith is successful in creating a provincial pension plan – and federal regulations do allow Alberta to exit the CPP – the resulting fund would be far smaller than what the Premier is promising.
The CPPIB estimates that any transfer amount owed to Alberta if it withdrew from the CPP would be closer to the share of contributions the province has made since the plan’s inception. That would be around 16 per cent of the CPP’s assets, or about $100-billion.
Ahead of a promised provincial referendum on the issue, Ms. Smith is selling the Alberta Pension Plan as a way to cut employee and employer contributions, while increasing benefits.
The math behind the marketing is in the Lifeworks report: For the next two decades, Alberta will benefit from a relatively young work force, who will contribute more than they draw in pensions. As the population ages, demographics will erase the province’s advantage.
Within 30 years, Alberta’s pension economics will look the same as the rest of Canada’s. As any policy wonk knows, pensions need to built to last for generations, not decades.
Finally, as Ms. Smith attempts to create a provincial piggy bank, she needs to consider how the bright minds at Norges Bank run one of the world’s largest funds.
Because Norway is an oil-driven economy, the country’s sovereign wealth fund spreads risk around by not investing in energy companies. And to diversify away from the risk of having too many eggs in the tiny country’s own basket, Norges Bank commits virtually all of its money to foreign stocks and bonds.
If future governments decide to use Alberta’s pension savings to prop up provincial businesses, politicians would be defying basic risk-management practices, and the common sense experience of anyone who has lived through the boom and bust of the province’s resource-driven economy.
In moving to loot the CPP, Ms. Smith is showing she is an Albertan before she is a Canadian. The Premier wants to tear apart an efficient pension system that benefits most of the country. For workers and pensioners, any benefits from a provincial sovereign wealth fund would be temporary. If a referendum does happen, Albertans should nix their Premier’s Scrooge McDuck concept.