Don Thurston Blog

You Can Fool Around With Highway Signs But Leave My Pension Plan Alone

The Government of Alberta is evaluating a withdrawal from the Canada Pension Plan. Assets now in place would be transferred into a plan created in Alberta or incorporated into one now in place. The most critical issue is the effect on the benefits now accruing to the beneficiaries.

A suggested positive might emerge from an actuarial point of view. Among other considerations are incomes generated by the pension plan members and their age. Often observed….proponents sight the younger and the relatively higher incomes of Alberta based contributors. The “Alberta First” motto propels this and other issues relative to participation in Canada’s place in the federation.

The Canada Pension Plan embraces unique and distinctive characteristics. A board made up of directors from across Canada provides diversity of opinion and independence. Their responsibilities are organizational, governance, setting policies, outcome measurement and thorough communications to all the stakeholders.

Canada Pension Plan Investment Board’s current policies are relevant. Their mandate excludes government influence. The investment policies is one of return only and does not embrace responsibility to contribute directly to the Canadian economy. Operations are robust and well tested. The fund is large, very well diversified globally, welcomed as a partner and a leader in many instances. Pensioners throughout Canada are treated equally. The Canada Pension Plan manages exclusively for individual funds only; no external plans are part of their mandate such as other pools of capital from any government agency.

From a pension plan point of view the greater the breadth and depth of the economy that support the contributions the better. The Alberta economy is narrow and shallow compared to Canada which is broader, deeper and more diversified. Contributors’ incomes are less volatile and more predictable.

To be sure, history has been very kind to Alberta. The fossil fuel industries contribute very significantly to the economy and the citizens. Now more than ever before the essence of the industry is in a metaphoric state, with outcomes less predictable. This casts some uncertainty as to future personal incomes and to future incomes that support pension contributions

Pension plan fund management changes must be made by using a well fashioned and rigorous protocols, decided by employing an exhaustive process exclusive of any political motivation.

One reason may be a time-based mandate which requires a scheduled full review and may result in inviting other managers to provide their credentials.

Alternately new managers could be hired as a result of inferior returns, significant disruptions of the exiting manager’s organization structure, failing to adhere to agreed on investment policies, inadequate reporting and a competitive fee structure. In any event awarding a new manager without due and independent judgement should never happen. The best interests of the pensioners is job one.

Pension beneficiaries contracted with CPP to manage their savings under certain conditions. The Province of Alberta is suggesting revising the contract

Difficult questions remain including cost comparisons, the extent of the complexities that surround dividing the existing funds, and providing mobility of beneficiaries and Canadian constitutional issues.

Policies that fashion the nature of any plan are fundamental, in particular the mandate… is it a change from a return only policy to one that participates in the economy of Alberta?   Have the existing pensioners been disadvantaged in any way because of the CCP? How will they benefit from a management change? Can a provincially based manager ever attain the quality and strength of the CPP organization?

Pension plan participants enter into a contract with an understanding of the terms and conditions. Now, uninvited, by any stake holder, the Province of Alberta is evaluating changes which are extensive and fundamental. This begs the question as to how changes are made to long standing contractual arrangements. Most particularly the only stakeholders of substance are the pension plan participants. This is a Canada wide initiative. Any changes influence every member regardless of their address either in Alberta or elsewhere.

An independently managed pension plan is an absolute necessity.  Add-ons that could influence the rate of return increases risk in an already risky world. Further, evaluation and a manager review system must be ensconced in the governance structure.

Three separate issues need addressing. Firstly, tried and true protocols are in place in the selection of pension fund managers. This extends into evaluation of existing managers on an ongoing basis and if deemed appropriate by the governing board of directors, replacements will be recruited. This is a rigorous, time consuming process with a great deal at stake for the existing managers(s) and the prospective new manager(s). Pension recipients must have absolute confidence that their elected board has power and the responsibility to conduct this process on a regular basis. Excellent agencies are available as assistants.

The second issue is the current political overtone that is driving the evaluation. Policies are determined by the regime in place and forever changing with little or no time line. This is the worst scenario that any pension manager can be subject to.  Investment policies must only be set and revised with the long term in the forefront. Political motivations do not deliver that luxury.

A third issue is the amount of funds under management….the higher the amount, the more prestige is awarded to the management. A merger with an existing organization would immediately attract admiration but little else.

Turning now to the issue of performance. In this regard the CPP 2022 performance is in the top decile of similar sovereign funds around the world. A complete analysis in this regard is available at Mercer/CFA.

In a nutshell a thorough evaluation of a sovereign pension plan must capture a time honored family of variables. While demographics are relevant they are only one consideration out of many.

Pension plan participants deserve a clear and unbiased review of their long-term benefits, an Alberta based manager that demonstrates superior results over the same time period, and definitive policies that will guide the plan long into the future.

Politically motivated changes have no place in the pension plan world.

Thanks for reading!

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