CBC News answers questions about how the Canada Pension Plan works and what Alberta could do

The government of Alberta’s plan to potentially create its own retirement plan and pull out of the Canada Pension Plan has prompted questions, concerns and confusion from any part of Canada that includes members of the existing CPP.

At CBC News, readers, listeners and viewers have sent in questions or commented about what’s proposed and what’s to come. Here’s some of what you wanted to know.

What exactly is the CPP, anyway?

The Canada Pension Plan began in the late 1960s as a nationwide pension scheme that took contributions from workers’ paycheques to provide pensions upon retirement.

Both employers and employees have been required by law to contribute to the CPP, except in Quebec where a separate QPP — the Quebec Pension Plan — was set up concurrently with CPP.

Combined, employees and employers paid 11.4 per cent of a worker’s wages into CPP in 2022, based on annual income between $3,500 and $64,900. Retirees can receive a pension starting as early as age 60. Contributions have gone up from just above 10 per cent in 2019 to closer to 12 per cent by 2023.

“You all contribute with the understanding that when it comes your time to retire, you can expect your own steady stream of income where the risks are being managed directly by the plan,” explained Sebastien Betermier, associate professor of finance at McGill University and executive director of the International Centre for Pension Management.

For CPP members, those risks have been managed by the Canada Pension Plan Investment Board (CPPIB), an entity created in 1997 that is independent of the Government of Canada.

The CPPIB manages $575 billion. According to its most recent annual report, it’s had a net average return of nearly 10 per cent per year over the last decade, usually referred to as annualized return in the industry. It’s also been ranked one of the top managed pension funds in the world.

CPP funds are “kept separate from government funds” and neither provincial nor federal governments can access the money in the Canada Pension Plan.

Betermier said his personal opinion is that the CPPIB would not want to have to sell off investments to be able to pay out Alberta for a theoretical departure.

“The best way to generate efficiency as an asset manager is to invest over the long term….  What you do not want is a situation where from one year to the next, you’re losing a big chunk of your capital because that’s going to require you to sell quite a few of the assets,” he said.

How come Quebec can have their own pension plan but no one else can?

The federal act that created the Canada Pension Plan allows provinces to leave.

So, first of all, other provinces can have their own pension plans. In fact, any province that is not part of CPP must offer a comparable pension plan.

Alberta is permitted to leave if it chooses, by giving three years’ written notice.

As for why Quebec has its own pension plan?

“Quebec is not part of [CPP] because Quebec opted out at the beginning,” said Edmonton-based lawyer Dennis Buchanan, who has publicly opposed the proposal to separate from the Canada Pension Plan.

Buchanan said it’s fair to describe Alberta leaving the Canada Pension Plan as a type of metaphorical divorce. Quebec didn’t have to divorce the CPP because it never got married, so to speak.

“Alberta ends up having to go through a process for exiting [the CPP] because we’re part of it. Quebec was never part of it,” he said.

Buchanan expects that if the government of Alberta tries to proceed with leaving the CPP under current demands that could amount to withdrawing more than half the value of the plan, it will end up in the courts and litigated.

“I don’t see the federal government or the other provinces being OK with that,” he said.

How would Alberta pulling their funds out impact other people’s pensions?

The multibillion-dollar question — that has no clear answer — is just how much “their funds” would be.

The Government of Alberta, citing a report it commissioned by TELUS-owned Lifeworks, claims it would be entitled to more than half of the CPP’s assets — or $334 billion by Jan. 1, 2027.

However, their calculations have been disputed by independent experts such as University of Calgary economist Trevor Tombe, who said if both Ontario and Alberta used the LifeWorks formula to leave the CPP, they’d withdraw more money than currently exists in the plan — a “potentially absurd outcome.”

In an analysis Tombe wrote last month, he said there is not enough publicly available data to definitively assess what an Alberta exit would mean, along with uncertainty about how the law would be interpreted.

“There’s fundamental ambiguity in the language of the act,” the economist told Reuters.

However, Tombe has also said in interviews with both CBC News and Reuters that CPP contributions could increase for Canadians outside of Alberta if it leaves the plan.

Even if Alberta took less than it is suggesting — say, more than 22.5 per cent of the plan’s existing assets — CPP contributions from everywhere else in the country may have to increase.

And if Alberta were to take the 53 per cent proposed in its report, that could destabilize the fund entirely and would “dramatically” increase incentives for British Columbia and Ontario to also leave the CPP — and to do it quickly.

Do benefits follow if Alberta Pension Plan members leave Alberta?

Maybe.

This would be subject to negotiation between Alberta and other jurisdictions after leaving the plan. While CPP has agreements with other plans, including Quebec, Alberta would be negotiating from scratch after departing the plan.

“It’s very unclear how portability might be affected if Alberta pulled out of the CPP,” said Bill VanGorder, chief advocacy officer for the Canadian Association of Retired Persons.

VanGorder, who is based in Halifax, used the example of someone who worked in Alberta but lived — or planned to live — in Nova Scotia in retirement, saying at this point it’s unknown whether employment hours or contributions in one region would count toward a full pension in others.

Why is CPP so low? We can’t live on it

Experts say the CPP was never intended to be a complete retirement income on its own, and that Canadians should not have this expectation, regardless of a potential Alberta separation from the plan.

“It’s supposed to represent about 25 per cent of your earnings [from] while you’re working,” said Bonnie-Jeanne MacDonald, director of financial security research at Toronto Metropolitan University’s National Institute on Ageing.

According to MacDonald, the rest of Canadian retirement is meant to be funded by employer pension plans, private savings such as RRSPs or TFSAs, and the government’s Old Age Security plan.

MacDonald admits that because a large majority of Canadians do not have access to an employer pension plan or to sufficient private savings, a stable CPP is of critical importance to all members.

Will Alberta pensions go up if the province leaves CPP?

One of the potential benefits of an Alberta Pension Plan, as claimed by the United Conservative Party government, is the potential for increased benefits paid to Alberta seniors.

Experts say this — like everything else at this point — is unclear but it may be unlikely in the long term, according to Bonnie-Jeanne MacDonald.

She pointed out that the amount of benefits paid out is going to be directly connected with how much money Alberta withdraws from the CPP.

“The idea that by Alberta separating, they’re going to automatically be receiving higher pensions is a big assumption because nobody’s agreed to what that number should be. And that would really be the first step to actually start then discussing how much the pensions would change,” she said.

So what’s next?

Alberta has said it could hold a provincial referendum on withdrawing from the CPP as early as 2025, but Premier Danielle Smith has said she’d need a number on how much Alberta would be able to withdraw from the plan first.

According to the first major poll conducted since Smith began making the pitch to take Alberta out of the CPP, the proposal is widely opposed by Albertans.