Potential investment manager for an Alberta pension plan—here are the facts

As discussions around Alberta’s potential withdrawal from the Canada Pension Plan (CPP) continue, commentators have bombarded Albertans (and Canadians more generally) with sometimes misleading rhetoric, which can undermine the public’s understanding of this key issue. Albertans—and Canadians broadly—need facts to make well-informed decisions.

One key issue has been the potential investment manager for an Alberta pension plan. Specifically, commentators have implied that by leaving the CPP, Albertans retirement funds would no longer be managed by the Canada Pension Plan Investment Board (CPPIB) but rather by the Alberta Investment Management Corporation (AIMCo), which manages several public funds and pensions in the province.

This is not necessarily the case. The province has the option to retain the CPPIB as its investment manager, contract with AIMCo, create a new provider, or contract with the private sector. Put simply, an independent Albertan pension plan has options other than contracting with AIMCo.

But for argument’s sake, let’s assume AIMCo was chosen as the investment manager for an Alberta pension plan. There’s quite a bit of confusion regarding AIMCo that should be clarified. Perhaps most commonly, critics of AIMCo emphasize that the CPPIB has averaged 10 per cent annual returns over the past decade, higher than AIMCo’s 7.2 per cent.

While true, the CPPIB rate of return is distinct from the rate of return earned by contributors to the CPP. Put differently, an individual’s rate of return is not the same as the fund’s rate of return because of the way the CPP was originally designed. Some of the commentary written on this issue has implied that the lower rates of return at AIMCo would influence the benefits received by Alberta retirees. In fact, the retirement benefits Canadians receive from the CPP, and from a comparable Alberta pension plan, are based on several unrelated factors including how many years they’ve worked, their annual contributions and the age they retire. This is key since the CPP and a potential Alberta pension plan are largely based on current workers paying for current retirees, or what’s known as a pay-as-you-go system. Estimates suggest Canadian workers born in 1993 or later can expect a real rate of return of just 2.5 per cent from the CPP.

Given the pay-as-you-go nature of the plan, the key for the CPP, and one assumes for an independent Alberta pension plan, is that the fund earns a rate of return that allows for sustainable payments to retirees over time. The current required rate of return for the CPPIB is 6.0 per cent, which both it and AIMCo exceed.

Moreover, AIMCo, unlike the CPPIB, is constrained by the investment policies of each individual pension fund that it manages. Indeed, unlike the CPPIB, AIMCo is responsible for managing the funds of numerous pension plans, each with their own investment objectives, risk tolerances and asset mixes AIMCo must follow.

For instance, the Management Employees Pension Plan, one of AIMCo’s largest pension funds, requires that 20 per cent to 45 per cent of the market value of the plan’s assets be invested in “inflation sensitive” investments, which include real estate, renewable resources and other assets that may have lower returns compared to alternatives such as investments in private equity. These constraints can limit AIMCo’s overall rate of return, while the CPPIB, unencumbered by the investment policies of other pension funds, has the flexibility to invest according to its core objective, which is to maximize returns adjusted for risk. Put differently, Albertans could grant AIMCo the same flexibility—it all depends on the investment policy implemented if an Alberta pension plan were created.

Finally, opponents also argue that the CPPIB fund’s size (more than $575 billion) makes it superior to any potential provincial fund. Yet the evidence suggests that despite its size, the CPP is not a low-cost pension plan. In fact, according to an analysis by Philip Cross, former chief analyst at Statistics Canada, the CPP’s cost at 1.07 per cent of assets was higher than the other analyzed pension plans, which ranged from 0.34 per cent to 1.02 per cent. And the CPP’s costs have skyrocketed from $4 million in 2000 to 4.4. billion annually, largely due to an increase in staff and compensation. For perspective, the CPPIB had only five employees in 2000; by 2020 it employed nearly 2,000 people. And critically, these changes have not increased the fund’s net returns.

Ultimately, it will be up to Albertans to decide if they want to opt out of the CPP for an Alberta pension plan, but to make that decision, they must be armed with facts. That includes clarifying some misunderstanding on two potential investment managers—CPPIB and AIMCo.