Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 12 - Evidence
OTTAWA, Thursday, February 26, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:05 a.m. to continue its study of the governance provisions contained in the Canada Pension Plan Investment Board Act (previously Bill C-2).
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Pursuant to the order of reference adopted by the Senate on Thursday, February 12, 1998, the committee has before the governance provisions set out in the Canada Pension Plan Investment Board Act. I welcome our witnesses today from the Canadian Labour Congress.
Gentlemen, please proceed.
Mr. Richard A. Martin, Secretary-Treasurer, Canadian Labour Congress: Mr. Chairman and members of the committee, we thank you for allowing us the opportunity to appear before you today. Issues of pensions, and in particular the Canada Pension Plan, are of major importance to the Canadian Labour Congress and have been so throughout its history. I chair the committee on pensions in the Canadian Labour Congress, with Mr. Baldwin's knowledge and assistance. It is a big topic of discussion within our committee all the time and within our executive council. We are particularly interested in issues related to the CPP because we regard it as being an especially valuable source of retirement income for our members and the Canadian public in general.
We understand that your chief interest in these hearings is the role, mandate and structure of the proposed CPP investment board. I also understand you have a related interest in issues of accountability. In preparation for this meeting, I have sent copies of the CLC submission to the House of Commons Standing Committee on Finance on Bill C-2, as well as two supplementary notes that we prepared for that committee. The submission includes passages dealing with your specific area of interest as well as with other CPP issues. Bearing in mind that a wide range of CPP issues will be before Parliament on a regular basis in the future -- which we are very happy about, I might add -- I thought it would be worthwhile to provide our full submission.
I will summarize some of the key points in our submission that deal with the investment board and accountability. We will be happy to answer questions on those issues once we have completed our presentation.
One of the concerns that the CLC identified about building up the CPP investment fund is that it may lead to a misunderstanding about the issues and the basis of the CPP's long-term financial viability. Specifically, we expressed the concern that building up the fund might lead people to believe that the financial viability of the plan rests on the rate of return of the financial assets of the fund. In fact, however, the CPP remains in large measure a pay-as-you-go pension plan, and its financial viability rests primarily on buoyant income and employment growth in the future. The possibility of misunderstanding the basis of the CPP's financial viability seems to be reflected in the powers and objects of the proposed investment board. Bill C-2 sets out the objectives and powers of the board and mentions only one specific object, namely, to invest its assets with a view to achieving a maximum rate of return without undue risk of loss.
The language would seem to reflect the false view that the CPP's financial viability rests primarily on investment returns. Moreover, the objectives of the board include a general statement that the board should manage the fund in the best interests of contributors and beneficiaries. Certainly this should include the interests of the beneficiaries in having gainful employment prior to retirement. Bearing these considerations in mind, the Canadian Labour Congress proposed that the board's objectives should be recast so it would be charged with the responsibility to maximize Canadian income and employment growth in a manner consistent with the risks and returns of workplace pension plans.
The CLC also argues that it is important that the proposed investment board not be dominated by investment professionals. At best, they can contribute to one aspect of the interests of the plan contributors and beneficiaries, namely their interest in investment returns. The board should be broadly representative of the plan's contributors and beneficiaries. The expert advice needed by the board on various issues can be readily hired.
Bill C-2 included a number of proposals that were supposed to contribute to the enhanced accountability of CPP decision-making and ongoing operations. A number of these ideas, including the proposed move to a regular three-year review of the CPP contribution rate, are certainly good from the CLC's perspective. Unfortunately, the good ideas are coupled with some wrong, or in our opinion totally unworkable, ideas.
For instance, Bill C-2 includes a proposal to fully fund future benefit improvements, which will serve as a practical barrier to benefit improvement and which is inconsistent with the general financing arrangements created by Bill C-2, and it establishes two mutually exclusive objectives for CPP financing, namely, to stabilize both the contribution rate and the fund expenditure ratio. In the CLC's view, it is only the former that is really relevant.
Most regrettably, Bill C-2 does not address some deep-seated problems of political accountability. All of the public documentation on the CPP issue that has been produced by the federal government over the past several years has been totally preoccupied with the issue of program expenditures. The question of whether retirement incomes are adequate now and will be in the future was never addressed in the government's documentation, nor was the question of the CPP's role as a source of income. This unbalanced presentation of issues prevents informed debate. It is totally unacceptable to us. We have made proposals that would formalize the need to provide the public with information on both the CPP expenditure projections and assessments of retirement income prospects and the CPP's role in providing retirement income. Gender impact analysis would be part of the proposed requirements.
Finally, we have made proposals that address our concern that the process of federal-provincial negotiations on the CPP is too closed to public scrutiny and is hence a barrier to political accountability. It is particularly important that there be an opportunity for public parliamentary hearings before the federal government reaches agreements with the provinces on CPP issues.
We have covered briefly what we put before the House of Commons committee, in particular our comments on the proposed CPP investment board and the issues of accountability. We will be happy to answer any questions.
Senator Callbeck: I have a question on the make-up of the board. You said that the members should not be dominated by experts or pension experts. What qualifications would you look for in people to appoint to the board?
Mr. Martin: We were not talking about pension experts; we were really talking about investment experts. Their mind-set, as we understand it, is basically to maximize the fund rather than to take a broad look at the social issues affecting the beneficiaries and the contributors. We say yes, there is room for them, and they have to be there, but the general public, including ourselves from the labour movement, should have the opportunity for representation on the board.
What are the qualifications? Certainly you need someone who understands the Canada Pension Plan. I think you need someone who also has an understanding of the private sector pensions but is not necessarily an expert on investment. You need someone who will bring a broader perspective to the operation of the fund and we think greater accountability.
Senator Callbeck: What about regional representation? Do you think that is important?
Mr. Martin: I think regional representation is important because, as we mention in our brief, the whole issue of employment has to be taken into consideration. Obviously issues of employment vary from province to province and different parts of the country, as well as resources and that type of thing.
We also think there must be women who have a specific interest in the gender issue as it affects older women across the country. That is also an important aspect.
Senator Callbeck: How long would you set the term, and would you allow these individuals to be reappointed?
Mr. Martin: I do not think we have addressed that, but I would say that certainly three years or thereabouts would be appropriate.
Senator Stewart: I am interested in the goals you have in mind for the investment board. You prompt the question whether you really believe that what is being done now, that is, the change that is being effected, is desirable, or whether Parliament should have stayed with the old system where premiums were collected and the money was invested, if one would use that term, to some extent for regional economic development, to create jobs, as you say, as well as to pay out pensions. Are not the goals that you have in mind achieved by the old system rather than this new regime?
Mr. Martin: My colleague Mr. Baldwin might have a few things to say about that, but I will try to address some of your issues.
We have not taken a strong position against this new proposal except as to the make-up of the board. We also underline that we must be clear that the future of the plan should not be expected to rest on just investment income, that it will still be on a pay-as-you-go basis. We have to take a strong look at the contribution rates and the payouts, not only now but in the future. When we talk about investment, it just cannot be the fellows in the red suspenders once again. They should be looking at economic development and growth, not just investing in mining stocks because mining stocks are going up. They should be looking at how many jobs a company they wish to invest in has created. Ethical investing in companies and projects is important, and the CPP could set a very good example in this country.
Finally, to try to reply to you, yes, people do not understand that the old plan was very helpful to regional development because the provinces borrowed money. People seem to think the provinces did not pay it back, but the provinces have paid it back. They also paid a reasonable rate of interest on it. It was not given to them free. It went into infrastructure development. It was not bad, and I think it accomplished many of the things that were needed. However, the new system can also achieve some of that.
Mr. Robert D. Baldwin, Director of the Social and Economic Policy Department: The question is: Was a mistake made? Hopefully, you have had a chance to read through the submission we made to the parliamentary committee. For better or worse, we expressed a lot of ambivalence about increasing the size of the fund since early 1996, when the federal government indicated that it wanted to do that.
There were two cases to be made for increasing the fund. One was that it reflected what a lot of people believed needed to be done. As we have said, that is not unimportant. If people do not feel the plan is secure, then the plan, to some extent, is not providing the sense of security it should provide.
The other case to be made for it is based on the economic circumstances of the last 17 years or so, which I hope won't last much longer. It is a situation where returns on financial assets are running strongly ahead of rates of real economic growth. It is an unfortunate combination of events for job creation. There is a case to be made for building up the size of the reserve fund. As we pointed out in the brief, though, there are a lot of reasons to be nervous about building up the fund, including the fact that it is clearly breeding some misunderstanding about where the financial security of this plan really rests.
The security does not rest on financial returns even with the new, larger fund. It will rest primarily on rates of income and employment growth. Basically, it is still a pay-as-you-go pension plan. Short-term negative economic effects will arise from building up the fund. Those effects have not been adequately canvassed to date.
There is some question about whether or not the Canadian securities markets can actually absorb the funds that will accrue in this larger fund. You will face a lot of pressure to lift the foreign investment limit on pension fund investments in part as a result of this.
There is a lot of misunderstanding about the relationship of this new fund to long-term rates of savings and investment. Without going into detail, I think there is a false belief in many quarters that increasing the rate of savings under this CPP fund will automatically lead to greater investment and economic growth. There is no foundation for this belief but, at the same time, it is not a clear-cut call one way or the other. My personal bias is that the pre-Bill C-2 arrangements would have been viable for many years to come. I also understand there were other views on the matter, but I do not think it was a clear call.
Senator Angus: The witness said, "There is no basis at all." In what way? The folklore is that the fund will stimulate growth; it will be a big boon to the economy; it will be a massive thing, and so on. You say there is absolutely nothing in that.
Mr. Baldwin: There has been a hotly debated issue about the operation of public pension programs since the mid-1970s. At that time articles were published purporting to demonstrate that the United States had sacrificed a substantial amount of economic growth and investment as the result of the operation of their version of OAS and CPP, which they combined into one program.
Since that time, a number of studies have looked at the same issue. There is no conclusive evidence on this issue. To underline this point, you may be familiar with a report put out by the World Bank a few years ago called "Averting the Old Age Crisis," which trumpeted the policy conclusion that we should be promoting more savings through the pension system in order to promote investment in economic growth. If you actually read the text that covers this issue, you find that the World Bank acknowledges that there is no clear evidence on this issue one way or the other.
Senator Angus: May I deduce from what you are saying that you are opposed to any change in the 20-per-cent rule?
Mr. Martin: Yes. As Mr. Baldwin pointed out, we think there will be enormous pressure to increase the rate.
Senator Angus: Exactly. As this huge fund starts to grow, the limited capacity of this market -- that is, if it is confined to 20 per cent -- raises the whole issue of the passive versus the active investment policy as well.
Mr. Martin: You are correct. I think there is a great fallacy out there. In the last few years there have been spectacular gains on the stock markets, but this is not a world of reality and there will be a levelling-out in the not too distant future. Or there will be a trend upwards on the markets in Canada to unrealistic levels that have no relation to the real value of a company or anything like that because of the large amounts of money that will be seeking it.
In mutual funds, all the investment people say, "Do not expect double digit returns any more." We think at some point in time that will be the case across the broad stock market. Consequently, that will have a detrimental effect on the economy and, perhaps, on the Canada Pension Plan investments.
Senator Angus: What the witness is saying also contradicts another point that he made. You stressed the issue of political accountability, which I would like to address after Senator Oliver has asked his questions. I should like to find out exactly what you mean by that.
If you do not believe in removing the 20-per-cent rule, or increasing it to 30, or gradually phasing it out -- whatever model one would advocate -- this, again, will lead to more political interference. We have a limited market in Canada, and a 20-per-cent foreign investment limit, and then along comes this huge institutional investor who is being forced to deal in Canadian investments. It seems to me -- and, I think some of my colleagues who were on the committee during our hearings last week or the week before will agree -- that this will lead to more political interference. That is exactly what you are against. Do you see that contradiction?
Mr. Martin: No, I don't.
Senator Angus: We will try to point it out later.
Senator Oliver: I agree with Senator Angus. That is one of the points I wanted to address.
I am interested in your comments on conflict of interest and I also want to talk about the concept of having an investment, maximizing return, and trying to avoid risks with that investment.
First, in terms of conflict of interest, I was fascinated with your comments, which I found on page 12. You talk about the board that will be dominated by investment professionals who will regularly be in a conflict of interest situation. What would you recommend be done about that situation, as you describe it in your brief? How can the conflict be avoided?
Mr. Martin: It will be very difficult. It goes back to the statement that the board should not be made up of only investment specialists. The Canadian public and certainly some institutions should have seats on that board.
Senator Oliver: Let us say there are 12 people on the board and three are investment professionals. According to you, they will always have a conflict. What is your recommendation?
Mr. Martin: There will have to be a sharp clearing house before they are put there. You could have an investment specialist, for example, from a university that understands investment but it is not actively involved in a company or organization that is actually investing. You could have an academic who is knowledgeable about but not involved.
There are many others who would be appropriate. Mr. Baldwin is our expert in the Canadian Labour Congress. He is not actively investing any of our money; I am supposed to be doing that. He would be able to provide that expertise on the board. There are others, in some cases actuaries, who could also be involved.
We are saying that active investment counsellors or dealers will have a conflict of interest if they are on the board because they may direct investments of the Canada Pension Plan into securities that they are dealing with, which would help drive up the price of that stock. There is an enormous potential there for conflict of interest. You will have to draw members from the broad public.
Mr. Baldwin: I think the issue is really important and not unrelated to the issue raised by Senator Angus. One of the things that is most striking about the equity portfolios of workplace pension plans is how small those portfolios are. Typically, even in a large firm, you might find a portfolio with securities of only 40 or 50 different firms. When I ask people in the business what portion of assets are tied up in TSE companies, I am regularly told it is 80 or 90 per cent, which tells you there is an awful lot of pension fund investment activity focused on a very small number of firms.
The reason for the strong statement in the brief is it will be very hard for anyone who is an active participant in the pension fund management business to sit on this board and not realize that the board's transactions are also affecting the value of portfolios that this person manages for someone else. I think that that goes beyond the kind of very personalized notion of conflict of interest that is covered in Bill C-2. It is something that, as a group, you may want to pursue with other witnesses who are closer to this action than we are.
If you want a concrete proposal, the other thought that has crossed my mind is that there are retired business people, who are not active players, but who retain the expertise you might want to use on the board.
I think it will be hard for someone who is in that business on a daily basis to avoid being struck from time to time by the thought, "If we do that, then my client so and so is" -- and you can fill in the rest. It will be very tough.
Senator Oliver: Any 12-member board, for a fund of say $100 billion, is not going to sit around and make decisions on individual stocks. They will certainly have a lot of advisors, would you not agree?
Mr. Baldwin: Right, and Bill C-2 provides for the creation of an investment committee but, as I say, the universe we are dealing with here is not really huge. I think you will have trouble finding active players who have no interest at all in asset allocation decisions. I presume your board would be making decisions at that level; if not the full board, certainly your investments committee. Given what I said before about the small range of stocks in which people are investing, your asset allocation decisions will have clear reverberations that board members will understand, on stock prices, for example.
Senator Oliver: My job is not to disagree with you. I am just trying get your view on something that is troubling me.
My second concern relates to the business of maximizing return and what you say they ought to be looking at, and that is depending primarily on buoyant income and employment growth and the economy as a whole. Those are the concerns you feel that they should be looking at. Let us assume that you were a trustee and qualified to invest funds, and I gave you a thousand dollars to invest for me and I said, "There are only two things I want you to do: maximize my return on that thousand dollars and avoid serious risks. I do not want to lose my money." That is your mandate. You then assume certain fiduciary duties and obligations as a trustee of my funds. You cannot then start looking around at employment and the amount of money and so on. You are bound by the mandate you have been given -- just as the CPP investment board will be bound.
Mr. Martin: That is what we are trying to address in our brief. It has to be more than just maximizing the return. It has to have a broad social objective in addition to that. We are not talking about insignificant amounts of money here. It can have a profound impact, negative or positive, on the economic outlook and prospects for Canada.
A previous senator's question in terms of regionalization and addressing issues of employment and income in regions of Canada, and targeting specific industries, leads me to speak about ethical investments. You must look to see if companies have a good record on the environment, labour relations and community relations, all of those types of things. Investing the CPP fund can be a strong force for good, or for bad. We are saying getting a good return should not be the sole mandate of the board.
Senator Oliver: As Senator Stewart implicitly said to you, under the old system they used to aim for more than just a good return. The federal government used to lend that money out to the provinces to help them out, at a low rate, and so we, the potential beneficiaries, have suddenly found that there was not enough money there. They tried that and it did not work.
Mr. Martin: This huge debate continues. People have to understand it is still going to be a relatively pay-as-you-go system in spite of this. We do not want the citizens, our own members, saying, "We are scot-free now. All the future requirements of the Canada Pension Plan will be covered by investments." They will not. They will still have to be covered to a great degree by the contribution rate, and that rate will depend upon the levels of employment and the size of incomes. We are saying it is dangerous to separate them and say that this will be the new refined Canada Pension Plan when the fact is it still has a major mandate to have the public involved and to consider things such as employment levels and all those things we talk about.
The Deputy Chairman: Do you select your membership on the basis of ethical companies, the membership that belongs to the Canadian Labour Congress? People may work in an industry that may not reflect proper environmental policy. Do you choose your membership that way, or is that not a question you want to answer?
Mr. Martin: The answer is no. We select our members where we get them.
The Deputy Chairman: I understand that. So in the selection of the portfolio, do you not see a contradiction when you make political decisions that are, as you may say, environmentally or socially correct? You might be investing in companies where one part of your membership would be working. Would it be fair to your membership to avoid companies that, while they may have a strong membership, are not considered by you to have social or environmental policies that fit your investment package and are therefore denied the opportunity of investment by the Canada Pension Board? Would not that be unfair to your own membership?
Mr. Martin: We are always loaded with contradictions. All society is loaded with contradictions, and we are no exception. However, the Canada Pension Plan will not be the sole investor in stocks. There is still a lot of private money out there that will be investing in these particular companies, including union pension funds, which are invested in various ways. We do not think it would necessarily be discriminatory.
To be candid, we have a large discussion inside the labour movement about the whole issue of ethical investment and the role of labour on pension boards and at what level we should be involved. Should we be trying to control the pension funds totally or jointly? There is a wide range of views about that in various unions and within the Canadian Labour Congress. Our general view is that we certainly want a say in the management of those pension funds but whether it should be total control varies from union to union.
Senator Angus: Gentlemen, I thank you for coming before us. As you know, these are somewhat extraordinary hearings that we are holding, following the passage through Parliament of Bill C-2 and the suspension of the coming into force of these initial 52 or 53 provisions. These hearings give us a better chance to bring to the attention of Canadians some of the problems with this legislation. Therefore, on this side at least, we very much welcome your appearance.
Perhaps you could elaborate a bit. As you say, you have used strong language in your brief. In particular, in your opening comments in reference to two or three provisions, you used the phrase "totally unacceptable to us." Given the broad base of Canadians that you represent, I feel we need to flesh this out a little more because we will have an opportunity, on this committee, to report back to the Senate and to possibly influence the way things are handled, especially with respect to the board.
Government officials were before us in Toronto just a week ago. They acknowledged that they would give every consideration to the suggestions we make.
First, let us deal with the issue of political accountability. You used that expression and it can mean a million things. I can understand the accountability of a group of fiduciaries to their constituency, but what do you mean by the larger term "political accountability"?
Mr. Baldwin: We have had an ongoing concern over the last several years about the way the CPP issue has been presented, or not presented, to the Canadian public.
There are two parts to the concern I wish to express. First, we have had ample documentation of future CPP program expenditures that have never been balanced in the public documentation with data that would allow people to get any insight into the question of whether the incomes of retired Canadians are adequate now or whether they will be in the future. As a subset of that, no information has ever been provided to Canadians about the role of the Canada Pension Plan in providing those incomes, whether they are adequate or inadequate. As a result, in our view, the public presentation of the issue has been totally unbalanced.
We have made some very concrete recommendations about how to redress that problem. One element in the regular triennial review of the contribution rate should be an assessment of the retirement income conditions of today's elderly and the retirement income prospects of the future elderly, with a specific focus on the role of the CPP. There should also be gender analysis.
We have also said that every time amendments to the Canada Pension Plan are tabled, they should not only be accompanied by the actuarial reports that have been required since the CPP was founded, but also by an assessment of the impact of the benefit changes on retirees now and in the future, with the appropriate subsets.
From our perspective there has been a problem in having the CPP issue framed in a reasonable way to allow people to make choices about whether the pay-as-you-go contribution rate of 14.2 per cent is okay or not. People are simply told it is not.
Second, some of the mechanics surrounding federal-provincial negotiations and where Parliament gets to intervene in this process have been a problem.
Senator Angus: On that point, you did indicate that in your view there has not been sufficient transparency as regards the provincial negotiations and what underpins some of the agreement that was reached.
Mr. Baldwin: That is absolutely correct. We believe it is appropriate for there to be some kind of parliamentary hearings before that negotiating process gets underway.
We understand from our own experience in collective bargaining that you cannot do all this bargaining in the open, but unions very seldom go into bargaining without telling their members what it is they are trying to achieve. In the CPP case, we were well into the process when we heard that there were some very tight parameters surrounding the whole thing. Then the process disappeared behind closed doors. Eventually there were parliamentary hearings, and both members of Parliament and people like ourselves were told, "You dare not change a comma here because this has all been agreed to."
Senator Angus: They said, "It is a done deal and has to get through by December 31."
Mr. Baldwin: That has a familiar ring to it.
It is important for there to be an open process at the beginning. We think the agenda for the discussion should be a matter of public record so people can decide whether they think it is important to intervene or not. We think the participating governments have some responsibility to say something to their constituents about what objectives they are trying pursue.
By the way, all of that was recommended to the government prior to the very beginning of this process.
Senator Angus: Was it recommended by you folks?
Mr. Baldwin: Yes. I do not think we ever heard back.
Mr. Martin: We had a meeting a considerable time ago with Finance Minister Martin. We raised a lot of these issues with him and members of the Department of Finance. We said that there is a great vacuum in terms of the Canadian public's understanding of what the Canada Pension Plan does and what its future holds.
We do not think the government has been very helpful to itself -- and it does not matter which government is in power -- in properly explaining the role of the Canada Pension Plan and its future. Rather, they are getting people excited that it is about to go bust.
As an example, I was having a meeting with a very well-educated individual from Environment Canada, and he commented that he had better buy a lot of RRSPs because he could not depend on the Canada Pension Plan. I was appalled and asked him where he got his information. Well, he is garnering his information from statements basically made by the Reform Party and the negative press.
I think you will find that the younger people in the country have no confidence that the Canada Pension Plan will be there in the future. They believe it will be bankrupt and that the money is unwisely invested.
Only the government can fix the perception held by the Canadian public. The government must be transparent about this in its negotiations. The government must tell the Canadian public where the money is invested and they must make available the actual projections.
I find that the finance community is not very helpful in this regard. I am talking about the private sector. It is in their interest to undermine, as far as I can see, the whole aspect of the Canada Pension Plan. This becomes a self-interest issue. They would love to see Preston Manning's idea of having mandatory RRSPs. Wouldn't that be delightful? We will be forced to put money into the private sector to secure our old age.
We obviously reject that proposal, but if that proposal is to be defeated, the government must properly explain what the Canada Pension Plan is all about. They must also be transparent, along with the provinces, on future negotiations.
We are pleased, as we said in our brief, that there will be a review every three years, which is important.
Senator Angus: "Political accountability" is what you have just described. It applies to the scheme of the legislation and to the issue that has led to the new bill and to the ongoing issue.
I should now like to focus on the more narrow subject of the appointment of the board. As you know, there was a press release by the government last year appointing a nominating committee. I think you are familiar with that. The committee will be chaired by Michael Phelps, CEO of Westcoast Energy Inc. The nominating committee was set up, and indeed they have already nominated 20 people, 12 of whom will be picked. Are you familiar with that?
Mr. Baldwin: I am familiar with the fact that a nominating committee was set up. I was not particularly encouraged by it.
Senator Angus: They listed the people. There is a representative from every province on the committee. They appear to be senior individuals, and I think we should presume that they will make good nominations. However, what seems to be strikingly absent from that process is a set of guidelines or terms of reference as to how one nominates and selects these directors.
If I understand your evidence well, that was your complaint. You are not saying that there should not be three or four or even five experts on investment; you are saying we should not have guys from Bay Street who have conflicts of interest and are managing private funds at the same time. However, it would not be bad to have retired people. I think you are also saying there should be constituencies, if you will, and, in a way, a kind of stakeholder-type board that is generated as a result of guidelines.
We are able to come back and make recommendations. As Senator Oliver suggested, it would be very helpful to us if you had specific proposals. You say that you have made them. Are they all set forth in this brief?
Mr. Baldwin: The question of the board's composition is only touched on briefly in there. In fact, you have unwittingly paraphrased almost everything that is there, except that we did draw attention to the fact that the language that established the Canada Pension Plan advisory board, which has been eliminated through Bill C-2, was quite specific in saying that the advisory board should be made up of representatives of employers, employees, and the self-employed. That is the only precedent language we have upon which to rely.
We also drew attention to the fact that Bill C-2 says the board should include people with financial expertise, but there was no limit on the number. Our reaction was that if you are talking four or five out of twelve people, that may be reasonable. If you are talking about 12 out of 12, that is totally unreasonable. We did not specify what the number ought to be, but you might want to take that up.
Senator Angus: You are very concerned about the backgrounds or the profiles of the individual directors. It has nothing to do with politics in that regard, just simply that as a business proposition or as a good selection of directors, you feel the framework is not there.
Mr. Martin: Yes. There is a great deal of discussion about the role of civil society in our governance these days.
Senator Angus: Are you speaking of the general rules of corporate governance?
Mr. Martin: Correct, I am talking about this and how you involve society. It should not be a closed shop with only government and business involved. When you talk about the make-up of the board, we certainly think you should have representatives of women's organizations, and it is probably appropriate that you have some environmentalist organizations. We certainly think we have a role to play, as we represent so many million Canadian workers, and not only from the aspect of where the money is being invested and so forth.
It should be understood that changes to the Canada Pension Plan can and usually do have a tremendous impact on the private pensions that we negotiate in the workplaces. Sometimes that is ignored. All of those pension plans are affected by changes to the Canada Pension Plan in terms of what the levels will be, when they come into effect, early retirement, and that type of thing. That is sometimes ignored if there is only the one pension plan operating, but we do have a tremendous number of them in the private sector.
Senator Angus: I was going to get to that in a moment under the heading of multiple funds. Just to finish off on the issue of the board, one of our concerns is that it is a kind of an open Order-in-Council type of appointment. In the first year you will have the three-year, running-in period where everyone will be feeling their way around the issues of passive investing and building up the fund for the future and shake-down crews, if I can use that expression. Our concern is that thereafter people will fall back to sleep, and the appointments will just be political, without regard to some of the matters that concern you. Do you share our concern?
Mr. Martin: Yes, I do.
Mr. Baldwin: I think it is worth noting too that a wide range of practices is followed in getting people onto various advisory boards in addition to boards with executive authority. I found from my own experience with the Canada Pension Plan advisory board, that with one or two notable exceptions like myself, the appointments were largely partisan, no matter who was in government.
Senator Angus: That is what we are concerned about.
Mr. Baldwin: That issue aside, there are other precedents that you can look to, and you may want to think about following up on that. I think, for example, of the Canadian Labour Force Development Board where the appointees to the board are formally Order-in-Council appointees, but they are all named by organizations representing various constituencies. For example, there are eight business nominees on this board, and the names are brought forward by a group of business organizations that have an active interest in the board's work.
Senator Angus: It is a tricky thing.
Mr. Baldwin: It is, but it is important. It becomes an important issue if you are worried about them simply being partisan appointees.
Senator Angus: On this issue of the composition of the board and the guidelines for the nominating committee, this in your view needs to be substantially tightened up?
Mr. Martin: Yes, it does.
Senator Angus: You represent working Canadians, people who are not only contributors but ultimate beneficiaries of the plan and the fund, and so you have a very particular interest in it. It seems to me the only striking analogies to this type of fund are the OMERS and Teachers' in Ontario. As you may know, people who run those funds have come to talk to us, and they have expressed substantial concerns as well. Do you see an analogy there? They are two different models, as I understand. The OMERS have one model, and the Teachers' is more of a stakeholders operation, along the lines you are describing. I might have it reversed. I would appreciate your comments on that, because perhaps we can learn something from their experience and apply it.
Mr. Martin: I think the Teachers' one is a good example of what not to do. Basically, the Ontario Teachers' Federation and the Canadians Teachers' Federation and the affiliated groups like the Ontario Secondary School Teachers and the Ontario English Catholic Teachers have taken strong exception to the way that the teachers' pension is being operated. They have virtually no say in terms of where the investments are.
Senator Oliver: They have raised the ethical investments issue.
Mr. Martin: Precisely. I am talking not only in terms of labour relations but also of environmental impact. For example, they invested in the Bayshore shopping centre. I was kidding them and said, "That is a great investment. That will do your members an awful lot of good and create a lot of jobs. What the heck is that all about?" Their pension fund should be used for the issue of job creation and not for just maximizing returns. We think that one follows the other. If the board of governors, who does the investing, has a social concern, it will not only do the correct thing in terms of the whole economy, but it will probably end up making money. We do not have a lot of track experience in Canada on ethical investment, but there is more experience in the United States. As it turns out, ethical investments are making better returns in most cases than the traditional way of saying, "Well, you just have to make the top buck there."
Our own experience is that at one time everyone was saying, "You have to put all that pension money, or a lot of it, in southeast Asia." At this time, they are sure happy they did not. But investors were making that recommendation without any concern about working conditions in Asia, sweatshop labour, child labour conditions, the environment, all that type of thing. Now they have taken a real kick in the pants, obviously, and losses.
Senator Angus: I want to get to that particular suggestion in a moment. The Teachers' is a good model of what not to do, in your view. Are there lessons to be derived from OMERS?
Mr. Martin: I am not really familiar with the governance of OMERS.
Senator Angus: In looking around for other models on the Canadian scene, we could look to the CN pension fund. Do you have any knowledge of that? I presume that many of your members are beneficiaries of that fund. It is not a stakeholders' operation, as I understand it. It is done pretty much in-house, with quite strong views, in an active way, and has great returns. How do you feel about that?
Mr. Baldwin: The working example that will probably end up being closest to what will emerge is the Caisse de dépôt et placement.
Senator Angus: It is certainly not independent of government.
Mr. Baldwin: Okay, but I think that comes closer to the model that you will end up looking at over time than any of these other funds.
The other thing you must bear in mind in thinking about the models you have referred to is that the funding basis for OMERS, the teachers' plan and the CN pension plan is a full advance-funding basis. That is the basis on which they operate. Investment returns play a much more profound role in financing those plans than will be the case with the Canada Pension Plan, even with this enlarged fund.
On the face of it, one might say that in a fully funded pension plan it makes sense to be exclusively preoccupied with the rate of return first because, for the most part, you are trying to draw on third-party income. Unless you are self-dealing through the fund, you are trying to draw on third-party income to pay the benefits of retirees which, in a national public pension plan, is an option that will be much more constrained.
Second, you are looking at a fully funded arrangement now. In fully funded arrangements, at one level you can say you should be exclusively preoccupied with the rate of your return. On the other hand, if there is no real economic activity underlying what is going on in the securities markets -- and we have seen altogether too many examples in the recent past of security prices getting way out of whack with underlying economic activity -- at some point people want to take their securities and cash them in for real income. So even in fully funded arrangements you should not be totally oblivious to the real economic activity that underlies the securities in which you are trading.
In a plan that will remain, even after Bill C-2, in a largely pay-as-you-go arrangement, the fundamental financial strength of the plan rests on buoyant employment and income growth. That is why we said that employment and income growth should be recognized in some way in the description of the objectives and powers of the board. We certainly have not advocated concessional investing. On page 11 of our brief you will find our attempt to reconcile employment and income growth, which is what we think should be the primary preoccupation, with the obligation to pursue a rate of return in the same way that a private workplace pension would. We say that the board's objective is to invest its assets with a view to making the maximum contribution to income and employment growth in Canada while keeping exposure to risk and achieving returns on investment at levels consistent with workplace pension plans.
So it is not a case of advocating concessional investment. We are just saying that when making your choices, make them with an eye on what the implications are likely to be for income and employment growth, because that is where the viability of this plan lies.
Senator Oliver: It is inviting them to be political.
Mr. Baldwin: Every value judgement, of which there are a zillion in making any kind of decision, is political. To extend this a bit further, even though I think the broad model of the OMERS' and Teachers' experience is not something you will emulate, you might try to learn from them what happens when a very large institutional investor -- which the CPP will become -- cannot express its satisfaction or dissatisfaction by selling its securities because they will suffer a penalty in terms of price if they do. Those large institutional investors must take a much more active interest in the daily operation of "investee" firms than is the case with smaller investors. If you have a chance to talk with the OMERS and Teachers' folks again, you may want to pursue that issue with them and figure out what that looks like when you transpose it to the CPP fund.
Senator Angus: Have you had a chance to read the regulations that the government has put out?
Mr. Martin: No, I haven't.
Senator Angus: It might be worthwhile to do so because I think that some of your concerns are addressed in them. I think it is quite significant that they are there and, to the extent that they do not meet the issues you are raising, we should deal with it.
Senator Kenny: You have said that you think the CPP will still be a pay-as-you-go operation in the future, unlike the other two funds you were talking about. Implicit in what you were saying is that there are funds that have a record of success in creating jobs. I am not sure I have ever seen any evidence anywhere that there is a fund that is a great job creator. I have certainly never seen any measurement that suggests this fund is a particularly good one because it creates a lot of jobs. Funds are not measured that way.
I am wondering why you are suggesting that the Canada Pension Plan, as it will exist in the future, should be thought of differently than other existing funds.
What is your response to that?
Mr. Martin: You are correct, but we are saying that it is about time job-creation should be used as a measurement.
First, we are talking about the money of Canadians. However, the other part of the answer is that it is in the interests of the fund to have a buoyant economy, to have job creation and to have good levels of income. By themselves, those are good things, but they directly affect the fund in the future.
Senator Kenny: I follow that circular argument, but I would be intrigued if you could point to any organization that can claim credit through its investments for creating jobs. I do not see folks suddenly saying that the government is good at creating jobs. We have come to the conclusion that governments may not be too terrific at creating jobs.
Mr. Martin: There are various opinions on that.
Senator Angus: It depends upon which government.
Senator Kenny: Of course it does, and it depends on which policies they are following. I should like you to elaborate on that because it seems to me that the crux of your argument is that in fact you can have a fund which, if it invests right, will create more jobs. If so, I would like to know where it is and to see the model.
Mr. Baldwin: I first want to acknowledge that I have never seen any data that tried to measure pension funds in terms of the extent to which they create jobs. However, if you were responsible for a large fund and you started out with that as an objective, there are some things that you might do that would not fit the typical mould of pension fund investing.
One of those things is to place a lot more focus on venture-capital investing than do most typical pension funds. You might do what I have seen done with some construction union funds; that is, focus on real-estate development to create jobs for union members and to fill niches in housing markets that typical developers are not willing to fill. You might decide to be a much more patient investor and in fact to be an active partner with investee firms, which most funds do not do.
If you want to move into a world where you are looking at investments that are subsidized, we have precedents in this country. There used to be a CMHC program that would top up rates of return on pension fund investments for funds that would invest in co-op housing. Even if we limit ourselves to a world with no subsidized investment, no concessional investing, there are probably things you would do as a fund manager that are out of the "typical" mould. You might also resist foreign investing on the grounds that you are not going to create any jobs here in Canada.
Senator Angus: One thing is clear to me. Last week we heard the difference between passive and active investing. It has been suggested by the government that, for the first three years, the CPP should just invest passively in the indices.
We heard the head of Teachers' saying this would be a bad idea and could create all kinds of problems. Certainly, it flows from what I have heard you say that you would be dead against passive investing. You think there should be hands-on active involvement to the extent of going to the companies and talking to them about ethical things.
I happen to agree with that. It should be more of a hands-on, active thing. However, I do see a contradiction. I hinted at it earlier and you said you did not see it. The Caisse de dépôt is a classic example. I am sure you will hear some questions from my colleague Senator Hervieux-Payette. We both live in Quebec and we have seen that fund used as an instrument of public policy in a variety of industrial sectors, the most notable being Steinberg's, which now has disappeared from the map and has thus skewed that sector.
I do not know whether that is good or bad but it certainly could appear to be imprudent interference by government in the management of pensioners' funds. Those are the pensions of Senator Hervieux-Payette and myself, and the situation is quite odious.
Yet I am hearing you gentlemen advocate that type of set-up. Am I getting it wrong?
Mr. Martin: No, you are not necessarily getting it wrong. It once again goes back to the direction of the board outlining what their objectives should be. Second, we clearly agree that we want active investment in terms of the whole ethical issue. However, there will sometimes be bad decisions made. It by no means guarantees that what we are advocating will be perfect 100 per cent of the time, but, on balance, it is a far better way to operate.
Mr. Baldwin's answer is quite correct. It will not operate, nor should it operate, like a so-called private-sector pension fund. There is a substantial difference in this whole operation because the private sector is there for specific beneficiaries and contributors. This is different from a publicly operated plan, which would hopefully not only take care of our future retirees but would also be involved in a positive way in the Canadian economy.
We are under no illusions that you will completely escape the political side of things. We are all political. Rather we look to minimize those kinds of crass political decisions that do not help the Canadian public or the pension plan. It is a hard road to walk but we must aim for that. We think these recommendations would help to avoid poor decisions because people representing all the various sectors of the economy will be basically watching each other and pointing out any improper investments or any lousy decisions on investment.
I think this open method will ensure that there are not many bad decisions. As you say, it is really a fine line and a delicate balance. I see a contradiction in terms, but I hear you and I understand. The policy decision has been made in this case by the government. For the moment, forget how we get to our goal. Forget how the directors are chosen. We are ad item there in our disagreement. The representation factor does not seem to work right. There are no appropriate guidelines, accountability or transparency. However, the policy decision that was made, rightly or wrongly, is that the fund should focus on maximizing returns, building up this fund, and learning from the lessons of the past so we will not get into a trap. I personally tend to agree with that part.
Senator Oliver: He is shaking his head.
Mr. Martin: We think it is a bad decision.
Senator Angus: I regarded myself as so aligned with the labour movement but now I see there is a difference.
Mr. Martin: I am not necessarily disagreeing with you. We are quite dismayed at this advance. It is a return to the language of "the good ole boys' club." That is not how we should be operating. We certainly do not advocate operating in that manner any longer. There is some criticism. We talked about the lack of transparency even in negotiating with the provinces. It is our money as Canadian citizens and, consequently, it should be above board and all in the open.
Senator Angus: Absolutely. We need to get over that hurdle and have transparency. We need people on the board who represent all the important constituencies and sectors, economically, social and so forth. Their role is supervisory. They will not be doing the day-to-day work. A vast bureaucracy will be developed, I am sure. Hopefully, there will be competent people in management chosen by the board in their wisdom.
After that, if they have a directive to maximize the return or to be in the first quartile and so forth, I would like that as a Canadian and as someone who will be a pensioner probably sooner than I would like. However, I do not like comments like the fund cannot invest in a certain firm, due to some specific investment that is not well liked politically, despite the fact that the firm is paying a huge dividend and tripling its stock value. I have a problem with that.
Mr. Martin: We keep repeating this. It is also in your interest as a future retiree, going back to the issue of the economy, to have as close to full employment as possible and good incomes. Both of these factors will have a direct impact upon the Canada Pension Plan in any event. We are saying that the CPP is a prime vehicle for job and income generation and for some of the things we are suggesting. Ethically, we think it is in the plan's interest to make that type of investment in the future. But they will also maximize their returns.
Mr. Baldwin: To follow up on that, every pension fund trustee wants his fund to be a first-quartile performer but you must remember again that this is largely a pay-as-you-go plan. Whether the returns are at the first-quartile break or at the third-quartile break, that will have an absolutely microscopic impact on the contributions that Canadians will pay to this plan.
A far bigger effect will come from the rates of income and employment growth. That is the point you must address. There is too much preoccupation with the investment board and finding the best professionals. It is a bit of a sideshow to the reality of how this plan is financed.
Again, I want to remind you; we are not calling for concessional investing. We are not saying that you should sacrifice returns. We know from the experience of ethically based mutual funds in Canada and the United States that imposing an ethical screen on the investment process does not necessarily force you to sacrifice returns.
Senator Angus: I understand that and there is a philosophical debate like the one on the 20-per-cent rule. We are on the opposite sides of that debate. I hope you come back when we start talking about the mergers of the banks. We will hear your views then.
Mr. Martin: We have a few things to say about that.
Senator Angus: Thank you for your comments.
The Deputy Chairman: For the record, how many members do you have?
Mr. Martin: We have 2.3 million members.
The Deputy Chairman: I take it you did not receive a letter from the advisory board nor were you consulted about possible nominees to the Canada Pension Plan board?
Mr. Martin: That is right.
The committee adjourned.