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The Standing Senate Committee on Banking, Trade and Commerce has the honour to present its

TWENTY-SEVENTH REPORT

Tuesday  June 15, 1999


Your Committee, to which was referred the Bill C-78, An Act to establish the Public Sector Pension Investment Board, to amend the Public Service Superannuation Act, the Canadian Forces Superannuation Act, the Royal Canadian Mounted Police Superannuation Act, the Defence Services Pension Continuatinuation Act, the Royal Canadian Mounted Police Pension Continuation Act, the Members of Parliament Retiring Allowances Act and the Canada Post Corporation Act and to make a consequential amendment to another Act, has examined the said Bill in obedience to its Order of Reference dated Thursday, June 3, 1999, and now reports the same without amendment, but with observations and two letters which are appended to this report.

 

Respectfully submitted,

 

MICHAEL KIRBY
Chairman


APPENDIX

BILL C-78, THE PUBLIC SECTOR PENSION INVESTMENT BOARD ACT:
OBSERVATIONS OF THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE

During the Standing Senate Committee on Banking, Trade and Commerce's hearings on Bill C-78, the Public Sector Pension Investment Board Act, 33 witnesses identified a number of issues of contention including: the management of the pension plans; the ownership and disposition of pension plan surpluses; survivor benefits for same sex conjugal partners; consistent application of legislation to all employees and retirees whose pensions are affected by Bill C-78; the right of pension plan members to have access to information about their pension plan; and the degree of consultation prior to the proposed changes. As well, the Committee received testimony about the proposed removal of the Canada Post Corporation’s employees from the Public Service Superannuation Act.

The Committee is concerned by the intensity of the unease of the witnesses about various measures in the Bill and by the undue speed with which this Bill has been rushed through the legislative process. Although Bill C-78 is being reported without amendment, the Committee feels compelled to express its disappointment about the process and its concern about how these pension plans will be managed in the future. This is the reason for these observations.

While some of the Committee’s concerns arise specifically from its examination of Bill C-78, others reflect observations and recommendations made during the Committee’s study of Bill C-2, which established the Canada Pension Plan Investment Board. Many of the observations that the Committee makes below involve the degree of transparency of the Investment Board, as well as its responsibility and accountability to plan members. The Committee is disappointed and discouraged that most of the recommendations made in its March 1998 report with respect to the CPP Investment Board have not been included in Bill C-78 with respect to the Public Sector Pension Investment Board. The Committee urges the Government to give serious consideration to the recommendations contained in both this and in the March 1998 report, with a view to having them apply to the investment board proposed in Bill C-78.

The Committee has received a written undertaking, dated June 14, 1999 (see attached) from the President of the Treasury Board on behalf of the Government to resume discussions with federal public service unions with a view to establishing a joint pension management board and a risk-sharing agreement. Many of the Committee`s concerns would be allayed if agreement is reached on this issue. Consequently, the Committee will be closely monitoring the extent to which its recommendations are implemented. Indeed, the Committee intends to request that the President of the Treasury Board appear as a witness before the end of the year to report on the progress made on implementing the recommendations detailed in these observations.

 

A JOINT PENSION MANAGEMENT BOARD

Bill C-78 establishes a Public Sector Pension Investment Board to manage the investment of employer and employee contributions in financial markets. Bill C-78’s proposal for an investment board is a significant departure from the joint management board structure purportedly agreed to by the Treasury Board and representatives of federal public service employees and retirees in negotiations prior to the Bill's introduction.

Several federal public service unions told the Committee about their lengthy discussions with the Treasury Board on modernizing the Public Service Superannuation Act. In November 1992, the President of the Treasury Board asked the Advisory Committee on the Public Service Superannuation Act to review the superannuation plan, including its management and financing. This Committee tabled two unanimous reports in January 1995 and December 1996. The latter report included responses to questions the President had asked about some of the recommendations made in the 1995 report.

This joint process led to agreement between the Treasury Board and representatives of federal public service bargaining agents and retirees in a number of areas. However, discussions broke down in December 1998 when, according to several of the Committee's witnesses, the Treasury Board linked the establishment of a joint pension management board to employee and retiree representatives giving up their claim to the surplus that has accrued in the federal public service pension plans. However, since that time, the President of the Treasury Board has indicated a continued interest in a joint pension management board. Many of the Committee's witnesses reiterated their ongoing support for this initiative. The President of the Treasury Board was adamant however, regarding the resolve with which the Government will defend the entitlement it believes it has to the surplus.

Recognizing the desire of both federal public service unions and the Treasury Board for a governance structure involving joint pension management and considering the government’s written undertaking to resume discussions on this issue, the Committee recommends that:

the Treasury Board immediately resume discussions with representatives of federal public service employees and retirees with a view to concluding a mutually-acceptable joint management and risk-sharing agreement respecting the public service pension plans. This agreement should resemble the understanding reached between the parties before discussions broke down in December 1998, and should make clear the relationship between the joint pension management board and the proposed Public Sector Pension Investment Board.

The Committee is hopeful that, once discussions resume, the parties will be able to quickly conclude an agreement on joint pension management and on the relationship between the management board and the proposed investment board that will satisfy both the Treasury Board and federal public service employees and retirees. Moreover, recognizing that uniformed members of the Canadian Forces and the Royal Canadian Mounted Police and retirees do not bargain collectively, the Committee asserts that some mechanism must be found to formally include them in these discussions.

If no joint management agreement is reached, some Committee members are of the view that additional safeguards ought to be introduced, including appointing the Auditor General as the primary auditor of the fund and ensuring that a majority of board members have significant pension fund expertise, not just financial expertise as stated in the Bill.

 

 

OWNERSHIP OF THE PENSION SURPLUS

A majority of Committee members accept the argument that because employers are liable for any pension fund shortfalls that may arise with defined benefit pension plans, they are entitled to receive any surpluses which arise in the fund in return for the risk they bear, provided the payment of promised pension benefits is not endangered. A future sharing of any surplus should only occur if there is a commitment to share any potential shortfalls.

A minority of Committee members are of the opinion that the employer should not have unilateral access to the present pension plan surplus, and that the disposition of surplus assets should instead be negotiated between plan members and the employer. From this perspective, these Committee members urge the Treasury Board and federal public service unions to continue discussions about a division of the surplus between the employer, and thereby taxpayers, and current plan members and retirees. This division could perhaps reflect their relative percentage contributions to the pension plans.

With respect to the federal public service pensions, the Treasury Board believes that because it bears the risk associated with these defined benefit plans, it is entitled to any surplus assets in the plans. The President of the Treasury Board told the Committee that deficits in the federal public service pension plans that have occurred in the past have required extra contributions by the employer. He noted that employees’ contributions have never been affected by plan deficits, and that the promises made by the Government in the public service pension legislation do not include a promise to share surpluses.

Employee and retiree representatives, on the other hand, argue that they are entitled to at least a part of any surplus. In their view, the surplus exists because of such factors as the public service wage freeze and employment reductions. As well, support for employee entitlement is based on the view that pension plans are a component of employees' deferred compensation package.

A number of witnesses told the Committee that, during the 1980s when the "6 and 5" program was in effect, federal public service retirees suffered a permanent loss in benefits. They suggested that a small part of any surplus in the plans could be used to rectify this loss. Committee members are concerned about this issue, and welcome the President of the Treasury Board’s commitment to examine whether anything can be done to assist federal public service retirees affected by the "6 and 5" program.

As well, some witnesses argued that removal of surplus funds could jeopardize the financial viability of the pension plans. In their view, surplus assets function as a "safety net" against such circumstances as underfunding, market corrections, errors in investment strategy and other unforeseen changes.

Most witnesses appearing before the Committee noted that the federal government is not subject to the provisions of the Pension Benefits Standards Act, 1985 that apply to pension plans sponsored by federally regulated employers. In the Pension Benefit Standards Act, 1985, an employer who establishes entitlement to the surplus may dispose of it as it sees fit. However, where the employer's entitlement to pension surplus is not clear, the Act provides that the employer can dispose of surplus assets only where it has the consent of at least two-thirds of plan members and at least two-thirds of former plan members. Many witnesses who appeared before the Committee to address the issue of surplus ownership recommended that the provisions of the Pension Benefits Standards Act, 1985 apply to the federal public service pension plans. A minority of Committee members support this recommendation and are of the view that the pensions of public servants ought to be treated more like a trust.

A majority of Committee members feel that it is important to ensure that the Government is subject to the standards set out in the Income Tax Act. For this reason, the Committee recommends that:

the federal government should ensure that the proposed Public Sector Pension Investment Board Act and its regulations are consistent with the Income Tax Act .

The Committee strongly holds the view that, whenever possible, the federal government should abide by the same obligations that it has imposed on private sector employers. This is a leadership role which should not be abdicated. Where this is not possible, we believe the federal government should make clear its reasons for differential treatment.

In the previous section of these observations, the Committee recommends the creation of a joint pension management board, which would lead to a joint sharing of risks as well as returns. We believe that issues about future pension surplus should be resolved by that board. From this perspective, the Committee recommends that:

the disposition of any future pension surplus in the federal public service pension plans be decided by the joint pension management board, notwithstanding any provisions in Bill C-78.

The Committee strongly believes that the parties, through the joint pension management board, should determine the appropriate disposition of any future surplus.

 

ACCESS TO INFORMATION

A number of the Committee's witnesses raised concerns about access to pension information by current employees and retirees. In response to these concerns, Treasury Board officials noted the various forms of reporting and public disclosure that would be required under Bill C-78.

In general, the provisions contained in Bill C-78 mirror those that apply to the CPP Investment Board. Bill C-78 would require an annual report to be made available to contributors. This annual report would contain information on the proposed Board’s: quarterly and annual financial statements; auditor’s report; a statement of objectives and the extent to which those objectives were met; a statement of objectives for the next financial year and for the foreseeable future; a statement of corporate governance practices; a summary of the investment policies, standards and procedures and a comparison of the most recent investment policies with investments actually held; a summary of the code of conduct; a report of any special audit; and any prescribed information or other information the Minister may require. As well, an annual meeting with the Advisory Committees for the three major public service pension plans would be required.

Notwithstanding the provisions of Bill C-78, the Committee views the concerns of the witnesses as serious, and believes that current and former plan members should be provided with as much information on their pension plan as is practicable. All documents commenting on the Board, its operation, administration, and investments should be made available in a variety of easily understood formats. These documents should include statements of the Board’s investment policies, standards, and procedures, conflict of interest guidelines, financial statements, and the Annual Report. For this reason, the Committee recommends that:

the federal government require the joint pension management board and the proposed Pension Investment Board to provide federal public service employees and retirees with a comprehensive range of information on the operation of their pension plan, as well as their personal entitlements. Access to this information should provide an assurance that discretionary powers are being exercised in an appropriate manner.

Transparency and accountability are important in establishing confidence, and the Committee believes that providing information to employees and retirees is essential in this regard. The Committee urges the Government to examine the recommendations made in its March 1998 report regarding transparency and accountability of the CPP Investment Board, as well as recommendations contained in other reports of this Committee.

 

THE CANADA POST CORPORATION

Bill C-78 would remove the Canada Post Corporation from the Public Service Superannuation Act, and would enable the establishment of a separate pension plan for Canada Post employees. However, the proposed legislation requires that the provisions of the plan(s) would not immediately be a negotiable issue.

The Committee believes that there is no justifiable reason why Canada Post and the unions representing its employees cannot begin to negotiate the provisions of their pension plan(s) immediately. This is a particular concern given the provisions of the legislation that ordered Canada Post employees back to work in December 1997, and requirements related to the timing of the notice to bargain. However, the Committee recognizes that Canada Post and the unions representing its employees could negotiate the pension plan(s) as a separate agreement, or through re-opening any collective agreement after it has been signed.

Some witnesses indicated ways in which employees could be negatively affected if they cease to fall under the Public Service Superannuation Act. Notwithstanding the provisions in Bill C-78 that would require the establishment of retirement compensation arrangements as a means of ensuring that benefits are not reduced, the Committee believes that Canada Post employees should not lose any rights or benefits by virtue of the transfer of their pension plan(s) from under the Public Service Superannuation Act to a comparable plan. As a result, the Committee recommends that:

the federal government ensure that the employees of the Canada Post Corporation do not experience reduced benefits or rights by virtue of the removal of their pension plan(s) from the Public Service Superannuation Act. In particular, the federal government should examine such areas as: pension entitlements for annual incomes exceeding $86,111; the accumulation of pensionable service between the ages of 69 and 71; an actuarial reduction waiver in the event of involuntary termination; interest on member contributions; limitations on the buy-back of pre-1992 service; the crediting of pre-1996 leave without pay in excess of Income Tax Act guidelines; and survivor benefits.

The Committee urges the unions representing employees of the Canada Post Corporation to contact the Committee in the future should they feel they have lost rights or benefits as a result of the transfer.

 

A STATUTORY REVIEW

Bill C-78 would establish a Public Sector Pension Investment Board to invest employer and employee contributions to the federal public service pension plans. The Committee believes that, since the creation of the proposed Board and the investment of contributions by it would be such a significant change from the current situation, the operation of the proposed Board, as well as its investments, communication vehicles, etc., should be reviewed after an appropriate "start-up" time to ensure that the proposed Board is operating as planned. This is particularly important given the Committee’s concerns about governance and accountability. For this reason, the Committee recommends that:

the President of the Treasury Board initiate a Parliamentary Review of the operation of the proposed Public Sector Pension Investment Board no later than three years after the coming into force of Bill C-78.

 

SURVIVOR BENEFITS FOR CONJUGAL PARTNERS OF THE SAME SEX

The Committee also received testimony about the proposed extension of survivor benefits to conjugal partners of the same sex. Some witnesses suggested that Bill C-78 should not provide same-sex survivor benefits at this time. Instead, they suggested that the federal government should address the issue of same-sex benefits in a more comprehensive manner through omnibus legislation. Parliamentary scrutiny of this legislation would permit a thorough examination of the legal, philosophical, moral, religious and societal implications of same-sex benefits.

The Committee is concerned that the term "conjugal" may not be defined and interpreted consistently across federal legislation, and that inconsistencies could lead to increased litigation. Moreover, we believe that the issue of benefits for conjugal partners of the same sex should be addressed in omnibus legislation.

In considering such legislation, the Committee believes that there are a variety of other relationships involving economic dependence that should be considered as eligible for benefits, including elderly parent(s) being supported by a child(ren), one sibling supporting another sibling, etc. Therefore, the Committee recommends that:

the federal government give serious consideration to the extension of benefits in situations where economic dependence exists.

 

CONCLUSION

The Committee believes that the implementation of the recommendations outlined above, and the resumption of discussions between the Treasury Board and federal public service unions with respect to a joint pension management board in accordance with the President of the Treasury Board’s letter to the Committee on behalf of the government, will lead to a sound, transparent, and financially sustainable pension regime for the federal public service.


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