The political appeal of "Premier Smith’s plan to withdraw from CPP" -- whether we like it or not

Have you forgotten the "All Politics is Local" rule?

According to one of my morning newspapers, Alberta Premier “Danielle Smith’s plan to withdraw from CPP would leave all Canadians – including Albertans – poorer.”

To start with, I have no hard data to suggest a flaw in this analysis. Globe & Mail business journalist Andrew Willis is as experienced a hand as you’ll find in the profession today, and he certainly has access to sources that are better than mine.

What I do feel comfortable opining on, though, is the likely visceral, political appeal of Premier Smith’s thought bubble. Canada is a complicated land, as we are reminded of on a daily basis. One must accept that there are thorny topics that continue to cause friction within our Federation: equalization payments, pipeline routes, regional carbon emission caps, labour mobility, proportional representation, and so forth.

For decades, the inter-provincial “fairness” of CPP was never on that list.

Some early commentators rejected Alberta’s math out-of-hand, but I’m not sure they fully appreciate what’s going on. You might think this is just another example of a “Western Grievance,” but Alberta politicians needed to look no further than Quebec — ironically — for inspiration.

For almost 60 years, the Caisse de dépôt et placement du Québec (CDPQ) has managed the retirement investments of the Province of Quebec. Over that time, the CDPQ has navigated dozens of market crises, both small and large, generating an impressive asset base of $424 billion over that period. The Alberta Premier’s office surely noticed that while CPP is sitting on a healthy investment sleeve of ~$575 billion, the CDPQ team has assembled a pool of capital representing ~42% of Canada’s combined universal retirement savings plans (CPP + CDPQ as at June 30/23) — despite the fact that Quebec’s population represents about 23% of Canada as a whole. (editors note: ~42% of the combined assets, but just ~23% of the combined population? Fascinating, but the $424 billion pool includes more than just the Quebec Pension Plan, so don’t get too excited by the headline number!)

In its most recent quarterly report, CDPQ announced that it handily beat its benchmark over the past 10 years (7.9% vs 7.0%); something every investor yearns to do. What must be hard for Premier Smith to ignore, and that armchair commentators can’t deny, is that CDPQ’s investment managers delivered that superior return while having a specific focus on the Quebec economy. The following excerpt is from CDPQ’s 2nd Quarter financial report:

In Québec, CDPQ maintained a good level of activity despite a particularly low volume of transactions observed worldwide.

While CPPIB’s mandate is to invest globally, without fear of interference from Canadian politicians or any romantic “Let’s Build Canada” considerations, CDPQ’s own mission is much more tailored to the economic needs of the Province. That may explain why CDPQ has been such an ardent supporter of local venture capital funds (including those with a Life Science / Biotech focus), or urban transit, to name two examples. And, despite the overweight “Quebec Inc.” investment approach, things appear to be going swimmingly on the performance front.

Several national media reports quickly focused on dueling actuarial reports as to how much of what we might correctly rename as the English Canada Pension Plan “belongs” to the people of Alberta. That’s entirely appropriate. Much like the perennial discussion around the fairness of Canada’s provincial equalization scheme, where Quebec has received ~$65 billion (63% of the aggregate payments received by “have-not” Provinces) over the past five years, as some Alberta newspaper columnists regularly trumpet, your view on the matter might be at least somewhat dependent on where you live and work.

What’s also fair game, politically at least, is for Alberta’s government to look at the broad-based success of CDPQ with some envy. If CDPQ’s legal mandate includes a reference to encouraging it to prudently serve the growth capital needs of Quebec’s entrepreneurs and domestic job creators, while CPPIB is forbidden from taking that into consideration where B.C., Alberta or Ontario firms are concerned, some might say that it would be prudent for Alberta to ask itself how it will defend the unique capital pressures within the provincial economy during the multi-decade “decarbonization” that the Federal Liberal government has vowed is already upon us.

As commercial banks and other financing entities come under increasing pressure to exit the oil and gas market, an Alberta Pension Plan could certainly backfill any capital outflows that are on the immediate horizon. For those of you who follow me on Twitter, it wasn’t that long ago that I posted photos of environmental protestors illegally blocking the streets around RBC’s Toronto headquarters to whine about that fine institution’s oil and gas loan book. Every Albertan politician must be aware of the pressure these highly-regulated and carefully scrutinized institutions are under (via CBC):

Environmental advocates have been pushing banks to phase out fossil fuel funding as a way to make it harder to build new oil and gas projects and to accelerate the transition to net-zero emissions.

Greenpeace Canada senior energy strategist Keith Stewart said in a statement that RBC becoming the world's largest fossil fuel funder shows bankers can't be trusted to do the right thing on climate change, so they need to be regulated to do so.

While institutions such as JP Morgan and The Royal Bank of Canada appear to be resisting pressure to dramatically reduce their exposure to the very economic sectors that serve as the backbone of Alberta’s economy and wealth, others haven’t been so brave — perhaps for their own commercial or ESG reasons. And, unless other large institutions fill the lending gap that’s created when one bank reduces its overall loan O&G book, the sector will experience an increase in the cost of capital, compounded by a permanent decrease of an availability of capital. Which means that some good Alberta-based projects won’t get funded at all, while other entrepreneurs will find it more expensive to proceed with new initiatives, relative to other verticals — making it harder (or more punitive) to raise equity as a result.

None of this comes “cost-free,” even now.

Mr. Willis also pointed out that smaller pension plans may well have higher costs than needed, and CPPIB gets top marks from independent Analysts for both its governance and cost structure. While reducing fees by investing at scale makes sense, it might not sway even a Conservative provincial government if they fear that a perfect storm of regulatory squeeze, tougher bank credit models, higher bank loan pricing, increasingly scare equity, European institutional investor sentiment (i.e. ESG), not to mention regular protests from environmental groups, will make it increasing difficult for Alberta-based energy firms to finance their businesses over the next 5, 10 and 20 years.

The argument that Alberta would take on undue investment risk by over-indexing its “Alberta Pension Plan” portfolio via local oil, gas and pipeline projects is rational on an intellectual basis. While CDPQ has found success with this approach, you could easily argue that the terminal value of many O&G projects is harder to gauge than a transit system in Montreal, for example. That said, it may well be that preserving the provincial economy over the next twenty years takes precedence for the current Alberta government over what future employees and employers might have to contribute to payroll deductions in, say, 2050. At the end of the day, I shouldn’t have to remind anyone that increasing contributions was what the late John MacNaughton, CM (CPPIB’s founding CEO) said was “the fix” to the solvency of the CPP earlier this century; investment performance — good or otherwise — doesn’t generally trump contribution rates.

There are moments in life when you look at a situation and think, “this is like the time that Dr. Henry Kissinger wanted to get North Vietnam’s attention, so he recommended bombing Cambodia.” I don’t think that applies here, even if Alberta can’t get projects such as the Energy East pipeline built, and has long-voiced concerns about Canada’s Provincial Equalization formula.

The institutional capital flow trend looks distinctly unfriendly to Alberta, and whether we like it or not, given the unappealing macro environment, it was only a matter of time before they looked at CDPQ’s multi-faceted track record and asked: why not us?

MRM

(this post, like all blogs, is an Opinion Piece; the post was updated at 0744 on Sept. 28/23 to make clear that CDPQ’s assets are not entirely dedicated to Quebec’s own Pension Plan.)

(Photo credit: Telegraphiste, Paris, 1950, by Irving Penn)