Explainer: What’s at Stake as Alberta Aims to Separate from the Canada Pension Plan

By Maiya Keidan

TORONTO – Canadian Finance Minister Chrystia Freeland is poised to contest Alberta Premier Danielle Smith’s proposal for the province to withdraw from the Canada Pension Plan (CPP) during a meeting with her provincial and territorial counterparts on Friday.

The CPP is currently facing significant scrutiny following threats from Smith’s conservative administration to exit the scheme. Both Prime Minister Justin Trudeau and Conservative Party leader Pierre Poilievre have expressed their opposition to this plan.

What is the CPP?

Established in the late 1960s, the Canada Pension Plan is a national pension system that collects contributions from workers’ paychecks. The Canada Pension Plan Investment Board, created in 1997 to manage its assets, now oversees approximately C$575 billion ($415 billion) for over 21 million Canadians, making it the largest pension manager in the country. It’s worth noting that the primarily French-speaking province of Quebec operates its own pension plan and is not part of the CPP.

Workers and their employers contribute a total of 11.4% of an employee’s earnings—ranging from C$3,500 to C$64,000—into the CPP, with eligible retirees able to start receiving benefits at age 60. Over the past decade, CPP Investments has reported an annualized return of 10%, while the Alberta Investment Management Corporation (AIMCo) has achieved a return of 7.2% during the same time frame. AIMCo has not been viewed as a prospective vehicle for a new Alberta pension plan.

Why Does Smith Want to Exit the CPP?

Smith believes that establishing a new pension plan for Albertans could yield greater retirement benefits and lower premiums. She is advocating for the transfer of C$334 billion, or 53% of CPP’s assets, into a new provincial pension system by 2027, as suggested by a study commissioned by the Alberta government.

However, various sources, including CPP Investments, have questioned the accuracy of this figure, deeming it excessively high. Smith has stated that the province will provide a definitive figure for the asset transfer prior to holding a referendum.

A province can initiate a withdrawal from the CPP by issuing a written notice, which would activate a three-year period during which the federal government must assess whether Alberta has developed a comparable pension plan for the asset transfer. If the proposed plan is deemed not comparable to the CPP, there would be no obligation to transfer any assets.

What Comes Next?

The Alberta government is currently collecting feedback through an online survey and town hall discussions, slated to conclude by May 2024. This will precede a potential referendum in 2025, regarding the province’s withdrawal from the CPP.

Concordia University professor Patrik Marier has expressed concern about the nature of the pension-related questions that might be posed in the referendum, as they could complicate its outcome. Meanwhile, University of Calgary professor Trevor Tombe mentioned that the Alberta government might pursue negotiations with the federal finance minister, who is tasked with determining Alberta’s share of CPP assets according to the Act. However, he considers it "unlikely" that an agreement would be reached.

What If Alberta Proceed with an Exit?

Should Smith be unable to finalize the calculation of assets to be withdrawn from the CPP prior to a referendum, any determinations would need to be resolved through political negotiation or legal channels. Tombe highlights that the language of the Act contains significant ambiguity.

If Alberta were to claim more than 22.5% of the assets, contributions to the CPP from other provinces would require an increase, as estimated by Tombe. A scenario in which Alberta claims the proposed 53% could destabilize the fund, providing a strong incentive for provinces such as British Columbia and Ontario to consider exiting the CPP as well. This situation could create urgency for either of these provinces to act first.