The legal obstacles to Alberta's exiting the CPP

There are few better examples of cooperative federalism at work than the Canada Pension Plan (CPP). Fewer involve more complex legal, political, and economic challenges when a province wants to leave.

Jim Dinning, Alberta's ex-finance minister who helped secure the CPP and now chairs the Alberta Pension Plan (APP) Engagement Panel that champions withdrawal, describes it as a "gnarly policy issue." That may be an understatement.

The withdrawal process is mired in legal complexities that could take years of analysis, debate, and potentially a Supreme Court of Canada case to resolve. Legal uncertainties may also stop an APP from happening altogether—at least in the Government of Alberta's proposed form.

There are, of course, practical challenges and risks for an APP. Future demographic change, volatile investment returns, and interprovincial migration flows significantly affect its viability. But these are technical issues with measurable risks. 

The legal obstacles, two in particular, are far more intriguing.

First, to exit the CPP, a province must implement a "comparable" pension plan. Unfortunately, this term is undefined in the Canada Pension Plan Act. In early Parliamentary debates, Judy LaMarsh, then Minister of National Health and Welfare (and responsible for the CPP), remarked that the definition "would depend on the minister of the day and his or her definition of it," a stance another parliamentarian deemed "outrageous." But here we are.

This matters. In Alberta, the government envisions that an APP would boost benefits for retirees. Politically, it's unlikely an APP referendum would succeed otherwise. But higher benefits alone might be sufficient to consider an APP not "comparable." After all, differences in benefits could distort the migration decisions of retirees, a concern not present between Québec's plan and the CPP since their benefits are largely harmonized. Making adjustments between Québec and the CPP to account for mobility is also straightforward as a result. Higher Alberta payouts could upset this balance.

The second, and much more significant, legal challenge relates to the division of CPP assets if Alberta opts to leave.

Section 113(2) of the CPP Act outlines the procedure for allocating funds to the APP from the CPP, but the Act's language is vague. The lack of clarity leads to interpretations that differ by several hundred billion dollars, which has major implications. 

The government-commissioned analysis by LifeWorks suggests Alberta could claim $334 billion (or 53% of the total fund), while my analysis suggests it's closer to $120 billion (20%). With the larger sum, Alberta contribution rates could fall by nearly four percentage points, offering a significant short-term financial benefit for employees and employers. But with the smaller sum, contribution rates could fall by barely more than one percentage point, making the risk-reward tradeoff far worse.

The source of these different results is subtle, but important. 

A key part of the Act stipulates that a withdrawing province receive "part of the net investment return of the Investment Board... that is derived from the contributions". This wording allows for multiple interpretations.

Some suggest that a province should be in the same financial position as if it had never joined the CPP. This view, originally articulated by Ontario Premier John Robarts, aligns with LifeWorks' approach. They calculate Alberta's entitlement by accumulating the annual surplus of contributions by Albertans over plan benefits to Albertans, compounded over time.

This is not a plain reading of the Act, but the greater flaw in this approach becomes clearer when considering a different yet mathematically equivalent perspective. Essentially, income is "derived" from contributions since a proportion of each dollar contributed is saved in an income-generating fund. Since 1966, roughly five cents of each dollar has been saved (though this varies over time). But what proportion should be used to determine a withdrawing province's entitlement?

LifeWorks' approach implicitly assumes each dollar from Alberta is split differently between funding expenditures and savings compared to dollars from other Canadians. In contrast, my analysis assumes that each dollar contributed, irrespective of origin, is split identically between savings and funding benefits.

Historically, the latter interpretation is on firmer ground. 

Initially, the CPP's investment income was almost entirely from interest loans to provincial governments. Any national surplus of contributions over expenditures was distributed among provinces according to their respective share of total contributions. Consequently, a province's share of total CPP income "derived from the contributions" was equal to its share of total contributions. This was no accident. It is precisely the allocation you would adopt if every contributed dollar, no matter its origin, was similarly divided between funding current benefits and saving.

Therefore, the withdrawal language in the Act originally meant returning to a province what it paid in interest. In this sense, Premier Robarts was right. But this is no longer the case in the modern CPP, where surplus contributions are invested in a globally diversified fund of largely private securities, not provincial bonds. But the principle of equal treatment of each dollar contributed remains as valid today.

The CPP provides a stable and predictable pension for Canadians, with provinces participating in a national framework. Contributions from individual workers are not, and never have been, earmarked for benefits to any retiree or group of retirees. They are pooled. Apportioning investment returns should therefore be based on contribution shares, which is at odds with the Alberta government's preferred approach. 

Making matters worse, these are but two interpretations. There are many more, and further nuances embedded within each. There are also potentially absurd outcomes that some interpretations, such as making any withdrawing province whole, lead to. This includes apportioning more dollars between provinces than exists and the possibility of destabilizing the entire national plan.

The Supreme Court of Canada may (and perhaps should) eventually weigh in.

Regardless of how this gnarly debate unfolds, Alberta has started down a path that demands careful scrutiny, informed analysis, and prudent decision-making. The legal morass we're in, if not navigated wisely, could result in significant, unforeseen consequences that would impact millions of Canadians for generations to come.