Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 54 - Evidence, June 8, 1999
OTTAWA, Tuesday, June 8, 1999
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-78, 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 Continuation 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, met this day at 9:30 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, today is the first of three days of hearings on Bill C-78 which deals with public service pensions.
We will hear first from officials from the Treasury Board and then from Mr. Ambaschtsheer.
Please proceed.
Ms Sharon G. Hamilton, Assistant Secretary, Secretariat, Pensions Division, Treasury Board of Canada: I will give you a quick overview of this rather large and technical bill. Basically, this bill sets up a pension investment board for the public sector pension fund in the future, and makes changes to the major public service pension plans, especially those for the federal public service, the Canadian forces, and the RCMP.
The changes will deal with the financial arrangements for the programs. There are to be changes to the prescriptions for employee and employer contributions and to survivor benefits under the programs.
The Senate has already seen other changes to the pension programs in Bill C-71. Those changes improve two aspects of the benefit design of the pension plans. The government has also indicated that it will be introducing a dental plan for pensioners under the public sector plan.
The first 52 clauses of Bill C-78 establish a pension investment board charged with the responsibility of investing employee and employer contributions made in the future to the pension plan. This pension investment board has been modelled very much on the Canada Pension Plan Investment Board. The difference is primarily that this investment board is investing pension funds related to an employer sponsored pension plan. Therefore, it has a slightly different constituency with which it must concern itself, and somewhat different reporting expectations.
The bill provides that the board consist of 12 directors to be appointed by the Governor in Council on the recommendation of the President of the Treasury Board. Those recommendations are to be made from a list of candidates proposed by a nominating committee which is also established under the proposed legislation. The nominating committee consists of representatives recommended by the advisory committees under each of the three pension plans. The advisory committees are composed of employee, employer, and pensioner representatives. The nominating committee will include representatives of employee interests and a representative of pensioner interests. The duty of this nominating committee is to find suitable candidates to act as directors of the investment board.
The directors are not to be connected in any way by employment to the government, nor are they to be recipients of pensions. The idea is to establish a board that can operate at arm's length from government and government influence in terms of its investment responsibilities.
The objective set by the legislation for the board is to manage the assets of the pension plans in the best interests of the contributors and the beneficiaries; to invest for a maximum rate of return without undue risk of loss; and to invest, bearing in mind the funding, the policies and the requirements of the pension plans. They must look at the design of the pension plans and the population they cover.
As part of their responsibilities, the board will have to establish written investment policies, standards, and procedures for each of the funds established. There is a separate fund established for each of the three pension plans. They must monitor the officers and employees whom they engage to carry out those investment policies. They must operate according to a code of conduct and observe conflict of interest requirements. Also, they must prepare financial statements on their activities.
The standard set for the directors is to act honestly and in good faith; to exercise the care, diligence and skill of a reasonably prudent person; and, if they bring a special knowledge or skill to their role as a director, they must employ that special knowledge or skill.
The board will, of course, make by-laws to govern the management of its business. It must provide copies of its by-laws to the ministers responsible for the three pension plans and make them available to the public. The board is required to establish audit and investment committees, to establish and adhere to policies, standards and procedures of a person of ordinary prudence, and to ensure that their investment managers follow these standards.
They must produce financial statements. There is significant detail in the bill on what must be included in their financial statements. There are, as well, explicit requirements for the auditor's report that must be produced.
With regard to reporting, the board must provide the minister with quarterly financial statements and an annual report on their operation. That report is also to be made available to plan members and to be tabled in Parliament.
As well, the board must meet at least once a year with the advisory committees for the three pension plans to discuss their activities and procedures with the members of those committees.
In terms of additional audit and review, the President of the Treasury Board may appoint an auditor for a special audit, if he feels that is necessary at any time. At least once every six years, the minister must cause a special examination to be made of the activities of the board. As well, the Auditor General is given the right to any information that he requires from the board.
Basically, those are the requirements and powers that are proposed for the Public Sector Pension Investment Board. The remainder of Bill C-78 deals with amendments being made directly to the three main pension statutes and to some other pension statutes for some very particular purposes.
I will now go through in some detail what is in the proposed amendments to the Public Service Superannuation Act. Essentially, parallel changes are proposed for the Canadian Forces Superannuation Act and the RCMP Superannuation Act. Thus, I will only note where there is a difference between what is proposed for the public service plan and what is proposed for one of the other plans.
In terms of the Public Service Superannuation Act and the other two plans, new employee contribution requirements are being put in place. The current contribution rate for employees is 7.5 per cent of salary, less what is being contributed to the Canada Pension Plan. The proposal is that, for the period from January 2000 to the end of 2003, employees will contribute to their own pension plan 4 per cent of salary on that portion of salary that is also subject to Canada Pension Plan contributions, and 7.5 per cent of salary over that amount. Essentially, that will freeze the contribution rate for the pension plan at the 1999 level.
Beginning in 2004, the employee contribution rate can be set by the Treasury Board ministers. There are some limitations put on what the Treasury Board ministers can do. Essentially, they will not be able to increase employee contributions by more than 0.4 per cent over the rate that was applicable in the preceding year. They will not be able to increase the employee's share of the cost of the pension plan to a level in excess of 40 per cent, which is the historical ratio that has been paid by employees under the pension plan.
As well, there are changes proposed to survivor benefits under the pension plans. Two things are happening here. First, in the past, the approval of payment of survivor benefits to persons other than legal spouses -- in essence, to common law spouses -- was subject to the approval of Treasury Board ministers on an individual basis. That discretion is being removed. The payment of benefits to a spouse or a survivor who is cohabiting in a relationship of a conjugal nature with a plan member may take place. The test will be an objective one; and the survivor benefit will be payable either to a legal spouse, a married spouse, or, in another case, to a person with whom the plan member has cohabited in a relationship of a conjugal nature.
Further changes to the pension plans relate to improving the mandate of the present advisory committees under the pension plans, giving them the responsibility to review and to provide advice to the ministers for each of the three plans, and ensuring that a pensioner representative has a seat on those advisory committees.
There are significant changes to the funding and financing arrangements of the pension plans. The assets of the current pension plans are held internally in government accounts. The intention is that for service up to the end of March 2000, those assets will continue to be internally accounted for in separate superannuation accounts. After that, new employee and employer contributions will be deposited to a pension fund. That pension fund will be placed in the hands of the pension investment board to invest in accordance with the prescriptions set out in the pension investment board legislation.
Senator Austin: To be clear, does that mean that the current accounts will remain in consolidated revenue?
Ms Hamilton: They will, except that there is provision that portions of those accounts can be transferred to the pension investment board for investment. That is a determination that will be made by the Minister of Finance. Those transferred funds will be held in separate funds by the investment board for investment purposes.
The existing superannuation accounts would continue to be the source of benefits to employees for past service. The investment fund would be part of those superannuation accounts. It is just that that part of the assets would be held in an invested fund.
Senator Austin: Who will manage those funds which are held in consolidated revenue?
Ms Hamilton: They would continue to be held internally and credited with interest in accordance with the regulations.
Senator Austin: Only contributions beginning in the year 2000 would be the subject of the new board's management function; is that right?
Ms Hamilton: Yes. There is also the possibility that if the Minister of Finance wishes to transfer part of the past accounts, then he or she may do so.
The new legislation also makes provision for dealing with surplus in the pension plans. It deals with it in two different ways. For the existing superannuation accounts, provision is made for the government to reconcile the balances in those accounts by debiting amounts from those accounts to bring the balances in the accounts in line with the recorded liabilities of those accounts.
In terms of surplus that may develop in the future pension funds, a range of choices will be available. Those surpluses can be dealt with either through reductions in employer contributions, employee contributions or a combination of the two, or they can be withdrawn from the pension funds by the government. That would be a Treasury Board decision.
Senator Austin: To state the obvious, the actions of the new board have a guaranteed floor in terms of liability. The government continues to be liable to the recipients of pensions who paid the full amount; is that right?
Ms Hamilton: That is correct.
Senator Austin: Therefore, the board can do no harm through its behaviour to the intended beneficiaries.
Ms Hamilton: The government will continue to underwrite the risks of adverse performance of the funds.
Senator Tkachuk: You do not want to leave the wrong impression. What would happen if the board does not do a good job and if it does harm to the taxpayer and to pensioners? For example, in the case of a deficit, the amount of money that you would be taking from the employees could be greater, perhaps, than it is today to make up for that deficit; is that not right?
Ms Hamilton: The employee contribution rate must be set by reference to the current service costs of the pension plan. If you have had a period of adverse experience but your ongoing normal costs for the pension plan have not changed, you can only set the employees' contribution rates by reference to the ongoing normal costs of your pension plan. You cannot take into account that you may have a deficit in respect of the past. You can only deal with their contribution rates in terms of the current service costs of the program.
One component that is in the amendments to the Public Service Superannuation Act, and not in the other two, of course, is the provision that the employees of Canada Post will become subject to a new pension plan to be established by the corporation as of October, 2000. A number of guarantees are built in with respect to what that pension arrangement must be at start-off. A year after it is in place, the pension will become a negotiable component of compensation with Canada Post.
There are, as well, some changes proposed to the supplementary death benefit, which is a life insurance coverage under Part II of the Public Service Superannuation Act. They will provide some not insignificant improvements in coverage for pensioners in particular, and reduced premiums for active public servants.
With respect to the Canadian forces and the RCMP, some additional flexibilities are being introduced that will allow, by regulation, some changes to be made to the benefit provisions of those programs to allow for improvements following consultation with plan members, and for the introduction of a reserve force pension plan for the Canadian Forces.
Finally, three other statutes are being amended as a consequence of the survivor benefit changes. Two are the Defence Services Pension Continuation Act and the RCMP Pension Continuation Act which are the predecessors to the current superannuation statutes for those organizations. The Members of Parliament Retiring Allowances Act is also being amended to change the definition of "survivor" to extend benefits to same-sex partners.
The Chairman: I have two questions. My first question deals with governance. Can you compare the governance provisions in this bill with the governance provisions this committee examined 18 months ago with regard to the CPP and those that we examined probably two and-a-half years ago with regard to the Pension Benefits Standards Act?
My second question is with regard to two issues related to the surplus.
First, can you comment on the extent, the number of years, the amount of money, or whatever data you have regarding the period of time in which the plan was in deficit and therefore presumably the government made up the deficit? I should like to get some sense of that. In every pension plan I have seen, that is almost inevitable at the beginning. Do you have some sense of the amount of money or the number of years?
Second, how does this issue with respect to the surplus compare to legislation, either federal or provincial, which deals with the use of the surplus for defined benefit plans, not defined contribution plans?
Mr. Bryce Peacock, Director, Secretariat, Financial Analysis, Treasury Board of Canada: On the first question dealing with the comparison with the Canada Pension Investment Board, essentially they are the same. As Ms Hamilton described, the nominating process is somewhat different. You do not have the federal-provincial dynamic with our pension plan. A nominating committee would be set up from the advisory committees for the three plans. They would set up a list of nominees for the pension investment board and, in turn, the President of the Treasury Board would recommend nominees to the Governor in Council. That would be one change. In the case of the CPP, of course, you have the nominating committee with provincial participation.
With regard to the CPP, what can be done in regulations to affect the investments of the board is rather broad. With respect to the Public Sector Pension Investment Board, there are three areas where the government can make regulations, and they have to do with derivatives. The intention is that there shall be no gambling -- leverage cannot be obtained through derivatives, although derivatives can certainly be used.
Regulations can be made in the area of passive investments. The intention is that, for the first three years, the new pension board will make passive investments.
Government access to the assets of the board can also be dealt with by way of regulations. The board will be required to hold a certain amount of government bonds in its portfolio, and that will be related to what the average outside plan holds in its bond portfolio.
As to the 20 per cent rule, there is a specific reference to that in the Canada Pension Act.
The Chairman: Do you mean the foreign property rule?
Mr. Peacock: Yes.
The Chairman: I wanted to ensure that we were talking about the same 20 per cent.
Senator Meighen: The one the government intends to change.
The Chairman: The one that should be 30 per cent.
Mr. Peacock: Our plans are subject to the Income Tax Act, out of which the foreign property rule arises, so there is no mention in our proposed legislation about that.
Finally, as Ms Hamilton mentioned, there is a requirement on the part of the board for an annual meeting with the advisory committees.
Your second question had to do with the standards legislation.
The Chairman: Let me tell you what I am trying to understand. Pardon my inherent suspicions, but I am trying to understand the extent to which the government has given itself a more favourable governance arrangement than is given to private sector plans under the Pension Benefits Standards Act. I am trying to understand whether that hypothesis is correct or false.
Mr. Peacock: In a general way, it will be following the Pension Benefits Standards Act.
If I could get right to the surplus issue, historically, pension plans in the private sector have been able to take their surplus out of their plans on the approval of the superintendent. I am referring to the plans subject to the Pension Benefits Standards Act. That applies if they are entitled to that surplus in the plan document.
Last year, you will recall, Bill S-3 went through the Senate, establishing a new authority whereby an employer who was not entitled to the surplus would be allowed to make a claim for the surplus. That is where you get into the area of going to the employees and asking for a two-thirds vote by the plan members, both pensioners and active employees. The difference is in the entitlement to the surplus and in the making of a claim to the surplus.
The government is establishing a methodology for withdrawing the surplus from the pension plans, the view being that the entitlement is to the employer and not to the plan members.
Historically, although withdrawals from the surplus could not be made, contribution holidays could be taken. In fact, under the Income Tax Act, contribution holidays were obligatory if the surplus was of a certain size. Taking a contribution holiday or withdrawing the surplus have somewhat the same effect.
Senator Stratton: If Bill S-3 required approval of two-thirds of the plan members of any private-sector plan in order for the employer to take surpluses, what would be the ramifications of Bill S-3 for the government? As I understand it, the government has the right to take the entire surplus without regard to the provisions implemented by Bill S-3. Did you consider that?
The Chairman: For the record, Senator Stratton referred to Bill S-3, which is the Pension Benefits Standards Act which I believe was passed in 1998.
Mr. Peacock: The issue, as I tried to explain, is that in Bill S-3, there is a difference between entitlement and claim by the employer. Where the employer is entitled to the surpluses, using the plan document or the trust agreement or whatever, the employer can withdraw the surplus entirely without reference to the employees. There must be notification but there is no requirement for a two-thirds vote.
Bill S-3 established a process whereby, if the employer was not entitled to the surplus directly, they could make a claim for it and, in so doing, meet the two-thirds vote requirement. It would be, in effect a negotiation with the plan members as to how the surplus will be used.
Senator Stratton: I understand that. My question was: Did you consider the ramifications of Bill C-78 with respect to Bill S-3? Would it have any impact on Bill S-3? In other words, if the government has the right to walk off with a surplus, would there not be court challenges from the private sector who could state that the government, through Bill C-78, took the surpluses from the public service unions without recourse and, suggest that this is a precedent that allows them to do the same thing?
Mr. Peacock: Yes, we were aware of Bill S-3 when we were drafting this bill. The basic position of the government on this, as the minister has said on a number of occasions, is that the plan members are not entitled to the surplus. Therefore, Bill C-78 establishes a methodology for dealing with the surplus and reducing it in an orderly manner. Again, the concentration is on the word "entitlement" rather than "claim." The view of the government is that there is no legal claim on the part of the employees. At the end of the day, of course, courts can rule on that. We were certainly aware of Bill S-3 when we were drafting this bill.
Senator Stratton: Did you not consider that private sector companies could challenge Bill S-3 in court on the premise that, if the federal government can do it, they can do it? Did you seek a legal opinion on that point?
Ms Hamilton: We do not have a legal opinion on whether the Pension Benefits Standards Act would, somehow, be susceptible to a challenge as a result of the passage of this bill. I must say, I had not thought that that would have been an area of possibility. The point Mr. Peacock was trying to make was around the government's certainty and assurance that, legally speaking, it is entitled to the surplus. Therefore, that is a parallel situation to the Pension Benefits Standards Act where the employer has a clear entitlement to the surplus. However, in terms of the impact the other way, that was not part of our legal advice at that point in time.
Senator Austin: It is my understanding that, under the federal Pensions Standards Act, in any case of withdrawal of surplus by an employer, there needs to be an approval by the Superintendent of Financial Institutions. Is that correct?
Mr. Peacock: Yes, that is correct.
Senator Austin: Therefore, in no way can the employer jeopardize the security of the fund.
Mr. Peacock: That is correct.
Senator Austin: In this case, the withdrawal would be by the Minister of Finance.
Mr. Peacock: Well, it would be by the president of the Treasury Board, yes.
Senator Austin: The Treasury Board would approve such a withdrawal.
Mr. Peacock: Yes.
Senator Austin: There is then a parallel system of review within the government itself. In one case, you have the Superintendent of Financial Institutions. In this case you have the Minister of Finance making a submission to the Treasury Board for review. Is that correct?
Mr. Peacock: Yes, that is correct.
Senator Tkachuk: In setting up the board to govern the money in the pension fund, you seem to have followed much the same legislative process as the government did when it established the Canada Pension Plan board. You may remember that, during that time, there was quite a bit of debate in the Senate regarding the governance provisions of the CPP board. The Senate Banking Committee made some recommendations to the Minister of Finance regarding governance provisions.
Were any of those recommendations considered? Did you refer to the Senate Banking Committee report when you set up the governance provisions on this pension plan board?
Ms Hamilton: Yes, we did.
Mr. Peacock: We were aware of those recommendations. I believe there is a response from the Department of Finance on those recommendations. The CPP has a tri-annual review at which they planned to review those recommendations.
Would you like me to go through those particular recommendations?
Senator Tkachuk: The reason given by the Minister of Finance for not implementing many of the recommendations was that he had to consult with the provincial Ministers of Finance in his tri-annual review before considering whether to incorporate those provisions. In this particular case, the minister does not have that excuse, so why were they not followed? The Minister of Finance did seem to agree with many of them.
Mr. Peacock: Yes, he did, with the proviso, as you just mentioned, that they would be reviewed in two or three years.
Senator Tkachuk: Just to be clear, he stated in his letter that he could not incorporate the recommendations because changes required a consultative process with the Ministers of Finance in the provinces. In this particular case, since he has excluded the employees from this whole situation, why would the government not simply have adopted those recommendations?
Mr. Peacock: I do not think that was the full reasoning on the part of the minister. For example, one of the recommendations was the foreign property rule, as I understand it, and we do not have any control over that in setting this up.
The Senate raised the issue of active management in two or three years. As I mentioned at the outset, it will likely be in the regulations that we will have passive management for about three years and then after that active management. I am talking about equities.
The Senate referred to the possibility of there being 15 directors on the board; the proposal here is for 12. In that context, we looked at other boards such as the Teachers' Pension Board which has nine directors, OMERS with 13, and OPSU with 10. Again, we would take the same position of waiting to see what happens in two or three years, keeping an eye on the CPP board. We can always have a debate on the number of directors.
One of the Senate recommendations was the referring of the annual report of the CPP board to a committee in the Senate or the house. The reply in that instance is that that is up to Parliament. The annual report of the pension investment board, just as the reports on the various pension plans, are all referred to Parliament, and then Parliament deals with them. They are usually referred to a committee.
Senator Tkachuk: Did they incorporate any recommendations from the report of the Banking Committee?
Mr. Peacock: I do not believe there was a precise one. Basically, the bottom line was that the Senate was supporting the general thrust of the board and its set-up. The board will be looking at the various recommendations as to reporting requirements and things of that nature.
Senator Meighen: On the question of boards, Mr. Peacock, as you may know, the Standing Senate Committee on Banking, Trade and Commerce recommended that a majority of the board have expertise in pension fund management. Interestingly enough, OMERS has opted for a so-called lay board, non-expert, and the Teachers' Pension Board has gone with a so-called expert board. Not wishing to be unkind, you seem to have come squarely down the middle with a provision that says that it is desirable that a sufficient number of board members have financial expertise. I am wondering what that means. Could we do either as sort of a hybrid?
Mr. Peacock: The legislation reflects the words in the act setting up the CPP board. Therefore, you want to ensure that you have sufficient financial knowledge and expertise on the board, as well as other relevant experience.
When the nominating committees are establishing their nominees for the board, they will want to look at the whole gamut or list of criteria. The list would describe the kind of skills and abilities that you would want on a pension management board, without having it all necessarily spelled out in the legislation. The words "relevant experience" to us would include what you mentioned -- knowledge of pension plans, if not actual experience in running a pension plan.
In setting up the board, you want a mix of skills, people who exercise good judgment, people with experience overseeing a large business, and that sort of thing. That would all be taken into account by the nominating committee in establishing their list of nominees. As you know, it is in the interest of everyone to have an outstanding board in this instance.
We are talking about a pension investment board only. When you talk about Teachers' and OMERS, they are dealing not only with the investment side but also about the administration, that is, the running of the plan. You can get into slightly different slants when you talk about a lay board versus an expert board. In this case, we are talking about a board that is solely responsible for investing that money in the markets with the clear vision, as set out in the bill, of maximizing return without undue risk.
Senator Meighen: It just struck me that "sufficient" is a rather vague term. If you were seeking to discharge that responsibility, how would you know you had discharged it? If you had used the word "majority," that is one thing, but "sufficient" is different. I guess if the returns are not good, you could deduce that you did not have a sufficient number of experts.
Mr. Peacock: After the fact, we may know better, but we are setting a framework with guidelines and following the words that have been used in other legislation. We were making a judgment call. You cannot get everything down in words because once the words are there, as you know, lawyers or other people may be interpreting them this way and that way.
Senator Oliver: In the drafting of the corporate governance provisions of this bill, did you consult widely with people who are expert in it to understand what current corporate governance principles were? If you did consult, did you take those consultations into consideration in the drafting? I am thinking of people like Mr. Ambaschtsheer and so on who are recognized experts in this field.
Did you also actually consider the recommendations of this committee in relation to the corporate governance provisions of pension funds? If not, why not?
Mr. Peacock: We did not get into the consultation process for the CPP. In effect, they had already done that for us in setting up the CPP board.
I am glad you mentioned Mr. Ambaschtsheer. He is, of course, appearing before you today. I understand he is pleased with the set-up of the board. However, he can speak for himself.
At the same time, we are well aware of the work of this committee. I happen to be a director of the ACPM, as is Mr. Ambaschtsheer. We are well aware of all the initiatives in the area of governance. The proposed legislation is structured, as Ms Hamilton outlined it, with the requirements of the directors. It outlines the information that we must provide and the oversight they must provide to management. The must produce their statement of investment goals and policies and ensure that they are adhered to and their performance is measured, and that sort of thing. There is also the requirement for a special examination at the end of six years, with the government being able to require special audits and so on. With the governance of this plan as it is set out in the legislation and the obvious requirements that the board has, we expect the people appointed to this board to be highly professional and competent. They will be well aware of what is required. This will be a public board. The information is to be tabled through an annual report in Parliament. We will have employees. All plan members will be watching this very carefully, as will the government. In my role at Treasury Board, I will be watching to ensure that they are well governed.
I believe that, next year, this committee will carry on another study of governance. We will be watching the proceedings of this committee very closely.
Senator Tkachuk: Why were these provisions included in this bill and why was there not a discussion in Parliament on how the law could be applied overall, within the Government of Canada, to meet the provisions that were outlined by the courts?
From what I understand from all the letters I have received, the gay community does not support this bill at all. A couple of the gay members in the House of Commons, who have admitted that they are gay, have voted against this bill because of the other aspects of the bill, namely, the ones we are discussing now, the governance provision and the $30 billion. Why was it included in this particular bill? It is causing confusion in the debate.
Ms Hamilton: It is up to the government to decide what it will propose in a particular piece of legislation.
Senator Tkachuk: Perhaps you could explain that part of the bill to me. We will ask the minister why it was included in this particular bill. It says that it contains neutral language, however, it does not because, in the proposed section 25(4) it states:
For the purposes of this Part, when a person establishes that he or she was cohabiting in a relationship of a conjugal nature with the contributor for at least one year immediately before the death of the contributor, the person is considered to be the survivor of the contributor.
What does that section mean; and what is a conjugal relationship?
Ms Joan Arnold, Director, Secretariat, Pension Legislation Development, Treasury Board of Canada: First, while we were drafting the bill, the decision was taken, in close consultation with the lawyers at the Department of Justice, that the neutral term "survivor" would be used. It does not then call for or have a redefinition of the word "spouse" in this bill. The drafters considered the word "survivor" to be a neutral term.
Second, you ask: What does a relationship of a conjugal nature mean? This terminology, "conjugal relationship," is used in quite a number of federal statutes on family law across the country. Recently, the Supreme Court of Canada in the M. v. H. case laid out quite clearly the indices of a conjugal relationship.
Senator Tkachuk: What was it?
Ms Arnold: Specifically, the court endorsed the approach that was taken by lower courts and spoke about the characteristics that they said were generally accepted, and those would include shared shelter, sexual and personal behaviour, services, social activities, economic support and children, as well as the societal perception of the couple. The court said that it was recognized that these elements may be present in varying degrees and not all are necessary for the relationship to be found to be conjugal.
I could go on if you wish.
Senator Tkachuk: No, that is fine.
How would one know about a sexual relationship? Why do they use the word "conjugal" as opposed to word "dependent"?
Ms Hamilton: The court is saying that there are a number of elements that can constitute a conjugal relationship in terms of the legal definition of that word. While sexual behaviour may be one of those, there are a number of other components, some of which we were just elucidating.
Senator Tkachuk: If two brothers were living together and one was dependent on the other, let us say one was disabled while the other supported him, would that be a conjugal relationship?
Ms Arnold: I assume it would not. I cannot make that assumption.
Senator Tkachuk: If a sexual relationship has nothing to do with it, would it be a conjugal relationship, would it not?
Ms Arnold: No, the court did not say that a sexual relationship had nothing to do with it, it said that it was one element.
Senator Tkachuk: That element must be satisfied, otherwise the person is not considered dependent, right?
I ask that because the courts will be discussing this in the future if we do not get the language down properly now.
Ms Arnold: The courts have already defined it.
Senator Tkachuk: I have a problem with this, not because I have a problem with same-sex people receiving survivor benefits, but I have a problem with the way this is written. I am not a lawyer, and I am confused. If, as an ordinary citizen, I am confused about it, many other people will also be confused about this legislation. You seem confused about it as well.
Ms Arnold: I am confused?
Senator Tkachuk: Define what will happen, then. You just told me that, in the example of two brothers living together, with one being dependent, with them meeting all of the criteria except the sexual relationship, they would not get the same-sex benefits.
What is the definition? What would cause a person to get benefits?
Ms Arnold: At this point, the government is adopting the approach that they will be awarding these benefits to persons in these types of relationships as the Supreme Court has outlined. The government is not moving toward awarding benefits in relationships that are dependency related.
Senator Tkachuk: The relationship has to be of a sexual nature.
Ms Arnold: It is not really different from the situation now.
Senator Tkachuk: Please explain.
Ms Arnold: At the present time, we award benefits to married couples.
Senator Tkachuk: Marriage is different.
Ms Arnold: We award benefits to common-law partners.
Senator Tkachuk: It is the same thing. They are just like married couples.
Ms Hamilton: We have, for decades, had provisions that provide for survivor benefits to opposite-sex partners in a common-law relationship. We have had, as have most other pension plans over the years, developed tests and evidence that we look for in order to determine whether or not this is a relationship of the nature that was contemplated by the legislators.
Senator Tkachuk: Society has determined that there is a certain responsibility in marriage, one to the other, and to the next generation. Therefore, society has made provision because oftentimes a spouse stays at home to care for the children of the marriage, and the other will provide the household income. If there is a death in the family, the other person would get survivor benefits.
If two men lived together, how would anyone know that they are having conjugal relations?
Ms Hamilton: They normally have friends, relatives, family members who know about their relationship.
Senator Tkachuk: Do they watch?
Ms Hamilton: They would know the nature of the commitment they have to each other.
As I say, for a very long time we have been dealing with opposite sex couples who are unmarried. Based on objective evidence, such as financial records or address records, plus the testimony of friends, neighbours and relatives, we have been able to conclude whether there is a relationship of a conjugal nature. The test will be the same in dealing with persons of the same sex.
Senator Tkachuk: What is a conjugal relationship -- sexual intercourse?
Ms Hamilton: No.
Senator Tkachuk: Did Bill and Monica have a conjugal relationship?
Ms Hamilton: I am definitely not going there, senator.
Senator Tkachuk: I will not go any further on this point. However, it seems to me that same-sex relationships, the question of marriage, and the question of dependency are important social issues that should be discussed in another forum. I think both the gay community, the heterosexual community and the religious community have problems with this and would all want this to happen. I am asking these questions because this debate has not yet taken place.
I do not want the courts to decide this issue. I am concerned about the courts deciding these issues for parliamentarians. Even though I may ask what you consider to be an embarrassing question, I do not think it is embarrassing because the judges and lawyers will be asking those questions.
This will cause a drain on pension funds. Same-sex relationships are unique and must therefore be discussed in a unique way. That is why I asked those questions.
Ms Hamilton: I am not embarrassed by your questions, senator.
Senator Bolduc: I have a technical question.
Subclause 3(3) of the bill states:
Directors, officers, employees, and agents and mandataries, of the Board are not part of the public service of Canada.
In French, that is translated as:
[Translation]
...ne font pas partie de l'administration publique fédérale.
[English]
I do not understand why you used the words "l'administration publique" and not "fonction publique" in the French version.
Ms Arnold: I think it may be because we used "public service," small "p," small "s." That may be why it does not say "fonction publique."
Senator Bolduc: I am not sure that is technically correct because it is certainly part of the public administration of Canada.
The Chairman: Recognizing that that is a legal drafting question, and since the minister is returning on Thursday, perhaps you could give us a definitive answer on Thursday.
Ms Hamilton: Yes. We will consult the drafter.
Senator Stratton: Testimony before the House of Commons Standing Committee on Natural Resources and Government Operations on May 24 indicates that Mr. Kevin MacDougall, a representative from the RCMP Divisional Staff Relations Program, said that at a 1998 pension advisory meeting, RCMP members were told that nothing would happen to the RCMP pension plan without prior full consultation. Mr. MacDougall then testified two months later that on January 21 they were told that the legislation was drafted and they would have no opportunity for input.
Can you confirm that there were no substantive consultations with the RCMP when the legislation was drafted? Was a promise made to the RCMP in November?
Ms Hamilton: I can speak to the question of consultations with the RCMP.
There is an advisory committee for the RCMP, as there is for each of the other pension plans. Over the years, I know that Treasury Board members have occasionally briefed the advisory committee on the issues underlying the pension plans and some of the concerns with which the government has had to deal.
At Treasury Board, our interaction and consultation would be with management at the RCMP. They would normally deal with the advisory committee.
In terms of some of the elements of Bill C-78, there were no consultations. The consultations we had with the public service unions, for example, did not include the question of sharing the existing surplus, which I know was one of the questions Mr. MacDougall had raised. From the perspective of the government, that issue was not on the table.
I know there are a number of areas where the divisional representatives of the RCMP would like to see some changes to their pension plan. Future changes to the plan are always a possibility. They mentioned themselves that they wanted to have further discussion and consultation within the RCMP on some of the points in which they were interested. Presumably those recommendations would then find their way through the advisory committee to the Solicitor General, who would put them forward as proposals for consideration by the government as future changes.
With Bill C-78, a number of flexibilities will be added to the RCMP pension plan that will allow for some changes and some improvements in the portability aspects of pensions for members of the RCMP. Those changes will be made by regulation only after the consultations have taken place.
Senator Stratton: Are you saying that management in the RCMP was consulted at the time? Perhaps that is a more appropriate question to put to the minister.
Ms Hamilton: Over the years, there has been a sharing of information.
Senator Stratton: With respect to this bill.
Ms Hamilton: This bill follows a consultation process that has gone on for some time between with public service unions and Treasury Board representatives. During that process, we were keeping the RCMP informed of the areas that were being explored. I believe those were passed on to the RCMP's advisory committee.
Senator Stratton: Mr. MacDougall stated that a definition of consultation is far different from being informed. Being informed is not consultation in his view, I would expect. In my view, being informed about what the government is doing is not consultation. Consultation is, rather, to sit down, consult with, and get the opinion of both the management and staff of the RCMP. That would be an appropriate thing to do.
Were the military consulted? I am not asking whether they were informed. Were they consulted?
Ms Hamilton: There is an advisory committee for the military as well. They were informed. "Consulted" would not be an unfair description of that process. In the end, when decisions were taken by the government, it was at that point that the process was terminated.
Senator Stratton: By your definition, there were consultations but no consensus was reached. As such, the government then decided to take certain decisions. Is that correct?
Ms Hamilton: Essentially, that would be the case. As you know, the consultation process with the public service unions did not result in an agreement. Although there was considerable agreement on many dimensions of that process, there was not a final agreement overall.
Senator Callbeck: I want to clarify the various steps that will be taken to nominate the board of directors to the investment board. There is a nominating committee. The names submitted to the nominating committee come from the advisory committees of the three plans.
Is that correct?
Ms Hamilton: Yes.
Senator Callbeck: I assume that these advisory committees are made up of the representatives of the employees, the employers, and the pensioners.
Will it be done on an equal basis?
Ms Hamilton: It is on an equal basis for the military and the RCMP.
The proposal for the public service plan is that there be six employee representatives, six employer representatives, and one pensioner representative.
Senator Callbeck: Am I correct to assume that the names put forward by the nominating committee must be agreed to by all parties?
Ms Hamilton: An independent chair will be appointed by the minister.
Senator Callbeck: I am asking whether all the names submitted to the nominating committee must come from these advisory committees.
Ms Hamilton: The advisory committee on the public service plan will make recommendations to the minister. The minister will appoint two members, one of whom must represent persons employed in the public service. The Minister of National Defence will appoint two members, after he has received recommendations from the advisory committee for that pension plan. Two members will be appointed by the Solicitor General, after he has received recommendations from that advisory committee. As well, one member will be appointed by the minister to represent pensioners. It will be a person who is in receipt of a pension under one of the pension plans.
Senator Callbeck: The names come forward through the President of the Treasury Board.
I read somewhere that a pensioner or an employee cannot be a member of the board of directors. Why was that decision taken?
Ms Hamilton: The reason for that is to ensure that the board will operate at arm's length and independently. In other words, the board will not comprise representatives of constituent interests. It will be a board whose members have fiduciary responsibility. The board must make investment decisions that are in the best interests of the plan members.
In the case of this plan, there was a desire to have an arm's length relationship from both parties, both the government and the plan members.
Senator Callbeck: How many names will the nominating committee be required to submit to the President of the Treasury Board, or has that number been established?
Ms Hamilton: It is not specified. Obviously, they would need to submit at least 12, since there are 12 directors to be appointed. There is no upper limit on the number that they may submit.
Senator Austin: Mr. Chairman, I wish to focus on one area. It is an area about which I have received a good number of letters from current and past public servants.
I wish to refer to a letter from the Public Service Alliance of Canada dated May 26, 1999. The writer is Howie West, who is described as a member of the Nova Scotia PSAC Pension Fightback Committee. This letter has been circulated to all senators.
Mr. West states that the consultation committee, which is a committee of Treasury Board and others, including representatives of the plan members, met from February 1998 until December 1998:
...at which time negotiations broke down and Treasury Board announced it would act unilaterally. The disposal of the surplus and the appointment procedure for the board were the only issues still in dispute.
My colleague Senator Callbeck has discussed the appointment procedure for the board. I wish to ask a few questions with respect to the surplus.
Further on in the letter from Mr. West, there is a history of how the surplus was created. I will generally review what is said in the paragraph. It states:
...surpluses started to accumulate in the plans in 1991. Previous to that there had been some deficits, but none equivalent to the present surplus level. By 1993-94 the employer contributed only 14% while 75.15% per cent of the money came from interest earned.
Is that a correct statement of facts?
Mr. Peacock: I have not checked the percentages. However, with most mature plans, such as ours, the amount going into the fund would be represented principally by interest earnings, yes.
Senator Austin: Therefore, you think it is approximately right.
Mr. Peacock: Yes.
Senator Austin: He goes on to state:
In 1991 there was a pension holiday.
Is that correct?
Mr. Peacock: No. I think he might be referring to the switchover. Until 1991, the government matched employee contributions a year in arrears. In 1991, it went to a current basis. Thus, in 1991-92, the government put in its contributions for that year. In addition, it put in a credit of $506 million, which represented the matching contributions in respect of the employees in the previous year.
Senator Austin: That was to bring it current, was it not?
Mr. Peacock: Yes, so there was not really a contribution holiday.
Senator Austin: Then he goes on to state:
Actuaries in the 1980s estimated a contribution rate at 4% of salary. They had anticipated that salaries would go up. As salaries go up the cost of benefits go up too because they are based on a percentage of salaries. Instead, the government imposed the wage freeze on public servants. There were no wage increases since 1991. If salaries are frozen, benefits are frozen. Therefore the anticipated extra costs of benefits did not materialize, and a surplus was created.
Is that a fair summary of what began to create the surplus?
Mr. Peacock: Go back to basics. The cost of any pension plan is related principally to the economic factors that affect it. We are talking about an indexed pension plan, so the factors are the rate of investment return, interest, salary increases, and inflation. In the 1970s, there existed the poorest of all possible worlds for pension plans. There were high salary increases, high rates of inflation, and low rates of return. It was at that time that we had our major deficits. That has now switched around completely.
Senator Austin: In the 1990s, the situation was reversed.
Mr. Peacock: Yes, in the 1980s and the 1990s. In our own plan, we have a notional long-term bond portfolio. We invest the excess money in the accounts every three months in long-term bonds. In the early 1980s, bonds were earning 15 or 16 per cent.
The plans as a whole have been earning 10 or 11 per cent interest. It is now down to about 9.3 per cent. That is expected to continue with the current low-interest rates because you have this built-in bond portfolio. The principal factor would probably be high rates of interest. Obviously, low inflation and low salary increases have an effect as well.
Senator Austin: They created an unanticipated lower level of benefits.
Mr. Peacock: In that sense, yes.
Senator Austin: Therefore, that has assisted in the creation of the surplus.
Mr. Peacock: That is right. It is the reverse of the 1970s, when higher benefits were anticipated. Now you have lower benefits anticipated. As well, our assets are invested in these long-term bonds, notional as they are. The effect of all of that is the surplus.
The other factor, of course, is that, despite the surpluses, the government, by virtue of the legislation, is required to fully fund the pension benefits that are earned by employees. The effect is that you keep putting money in every year to fund the current service costs, the benefits currently being earned by employees. At the same time, you have a surplus. The interest on that surplus builds, which is why that surplus keeps getting bigger and bigger.
Senator Austin: I understand that that is the current situation. What actuarial calculation should be made as a result of the unpredictability of what took place in the 1980s and 1990s? The actuarial calculations were based on assumptions about the economy, and those assumptions were not correct. What assumptions are being made today about the economy of the next decade or so? Is it still at the 4 per cent level?
Mr. Peacock: For salary increases?
Senator Austin: Yes.
Mr. Peacock: In the actuarial reports for the plans, they are still in that range, in the long-term. Normally, actuaries look at the present situation. For example, currently, salary increases are in the 2 per cent range, so for next year they would assume that 2 per cent; their long-term assumption is 4 per cent, so they would gradually move it up in their assumptions.
The same thing applies to inflation, which is currently below 2 per cent or around there. Their long-term assumption is 3 per cent.
On the interest rate front, given our notional long-bond portfolio, the assumption by the actuaries is a 3 per cent real rate of return, which indicates 6 per cent in the long term. Meanwhile, they are well aware that currently the account is earning 9 per cent, so gradually their assumptions would go down over the years to 6 per cent. That is how the actuaries look at it.
Back in the late 1970s, they were assuming 5.5 per cent salary increases and something like 3 per cent inflation, so 2.5 per cent real salary increases. The actuaries look at what has happened in the past. Then they establish the average real rate of return and the average real rate of salary increases. They also try to look forward, as best they can, to see how much the situation will have changed. That is why the normal standard is to have actuarial reports every three years. At that time, in any actuarial report, you will see a reconciliation between what was forecast in the past and what is now the new forecast.
Senator Austin: What is the function of the new board vis-à-vis the actuarial standard that will be adopted?
Mr. Peacock: The new board is responsible solely for investments.
Senator Austin: So Treasury Board remains responsible for the actuarial work.
Mr. Peacock: The chief actuary does the actuarial report in consultation with the employer, represented by the President of the Treasury Board. In the future, the Solicitor General and the Minister of National Defence will be consulted.
Ultimately, the employer is responsible for deciding on the funding policy for the plan. It will be the responsibility of the pension board to be aware of the funding policies. Hence, they will want to consult with the employer and with the actuary to become aware of those funding policies, in order to set their own investment policies.
Senator Austin: Let me try to get to the nub of the dispute, as I understand it. On the one hand, the view of the government is that it is the guarantor of a specific payout. That is the entitlement of the employees. On the other hand, the view of the Public Service Alliance and others is that, as the government controls the rules of the game, they have been forced in the past to overcontribute, hence some portion of the surplus belongs to them as overcontributors. Would you comment on that second argument? The first one I understand.
Mr. Peacock: As you correctly pointed out, we are dealing with the defined benefit plan here. The benefits are guaranteed by the employer. In our case, they are set out in the legislation. The bottom line on the surplus argument relates to who is taking the risk. If things go wrong, as they did in the 1970s, the government is forced to take the risk. At the end of the day, the employees are getting the benefits that they were promised. That is really the argument.
Senator Austin: Then what is the purpose of creating the board and creating a fund when the government is taking all the risk? Why go through all of this exercise called Bill C-78?
Mr. Peacock: We have been trying to do this, senator, since 1975. It is the crowning achievement of our career, I suppose. I might say something different after the board has been in operation.
All of the provincial plans are invested, in whole or in part, as are all pension plans in the private sector. One of the criticisms of the pension plan for the public service over the years is that this very rich pension plan does not play by the rules that other plans follow, and that, if they had to invest in the markets, they would have to show more realism in what they are doing. The idea of investing money has a number of factors behind it. Investing should create an additional rate of return over the long run by using a diversified portfolio that would more readily reflect the actual value of the plan.
Another important factor is that the government is leaving the door open for joint management in the future.
Senator Austin: In this new structure, how will the benefits accrue to anyone but the government in the future?
Mr. Peacock: There is allowance in the bill, for example, if there is a surplus, to deal with it in three ways: withdrawing the surplus; lowering our contributions; or lowering employee contributions.
If you stay with the long-bond portfolio, it could be that, in the long run, there will be a very high cost to this pension plan, which will lead to criticism of the benefits under the plan, so in that sense it is protecting the benefits the employees have. We are hoping that in the future we will get into joint management. We will already have the board set up on the investment side. Hopefully, if the experience is positive, there will be even more incentive for the plan members to share in a joint-management and joint risk-sharing arrangement.
Senator Austin: Bear with me. The experience in the investment side could be positive, but the government has the power to withdraw the gains from the investment system because of the philosophy contained in this bill before us. How is this new board of any value to the public service?
Mr. Peacock: The plan members will, in the long run, see lower costs of this plan. There will be less criticism of that. There is the possibility, as set out in the bill, of contributions by employees not increasing. In the future, the Treasury Board ministers will set the contribution rate. If there is a very positive experience, then there is the potential of the employees benefiting directly.
Senator Austin: If I can summarize what you are saying, having lost this round, they are given at least the opportunity of having another round in the future with the Treasury Board. Is that a fair summary?
Mr. Peacock: Yes.
Senator Kelleher: I return to the distribution of the surplus and the rights of the employees to have some involvement. As I understand it, the legislation governing the private sector comes under federal jurisdiction and we have now put in place rules and regulations which give the employees some rights to have some say with respect to the distribution of the surplus. Is that correct?
Mr. Peacock: That is not entirely correct. As I explained at the outset of the meeting, if it is unclear in the plan document who owns the surplus, or whatever the arrangement is, if the employer does not have the direct entitlement to the surplus, then there is now, as a result of the bill that went through in 1998, a provision for the employer to make a claim for a surplus and, in effect, get into a consultation/negotiation with the plan members. The requirement is for a two-thirds vote by those plan members in support of a distribution of the surplus.
There is no such requirement if there is an entitlement to the surplus on the part of the employer. The other factor is that the employer can take contribution holidays, without any consultation with employees, which would, in effect, lower the surplus.
Senator Kelleher: What is the rationale for giving some rights of this nature to the private sector plans and not to the federal government plan? Why is the sauce for the goose not sauce for the gander?
Mr. Peacock: In the private sector, many plans were under trust arrangements. When they were set up, no one anticipated that there would be surpluses. They were stuck in limbo. This debate has been ongoing for a long time. The employers did not have the right to take out the surplus although they could take contribution holidays which had the same effect. I believe the Pension Benefits Standards Act was amended to help private sector employers resolve those situations.
Senator Kelleher: You are saying that, in the private sector, if it is clear in the wording of their plan that the employer has the sole right, then that right has not in any way been diminished or affected by any new federal government legislation?
Mr. Peacock: No, it has not.
Senator Tkachuk: You mentioned earlier that, at some future time, the government may look at joint management. It seems to me you have accepted the principle of joint management. Why is it not in the bill now?
Ms Hamilton: Obviously, this bill is coming forward without full agreement of the employees and the plan members. There is a certain amount of feeling that a jointly managed pension arrangement is a very significant change. Presently, the government is the sole sponsor and is totally responsible for the deficits. The government holds, in effect, total power over plan design changes. To completely revise that base and consider jointly shared power and responsibility for the pension plan, and jointly sharing the risks of deficits, requires fundamental understandings and agreements on both sides, otherwise, there are some potential pitfalls should there be a period of adverse experience in the future. You do not want to be in a situation where one party feels it was imposed on them without its consent.
Senator Tkachuk: They do not have to share the risk then if they are not on the board.
Ms Hamilton: This legislation does not change anything in terms of the risk of deficits. If deficits emerge, either with respect to service under the existing plan or service under the new pension fund, the government remains responsible and must make additional contributions to the superannuation plan to cover the costs.
Senator Tkachuk: Plan members will not.
Ms Hamilton: They will not.
Senator Bolduc: That applies up to 2003, but after that will they have to do that?
Ms Hamilton: No. Again, contribution increases can be imposed on employees only if the fundamental ongoing costs of the pension plan change. Then there can be a contribution increase brought in for employees. If there is a liability with respect to the past because of adverse financial experience, you cannot increase the present employees' contributions to cover that shortfall from the past. That will remain the government's responsibility.
Senator Tkachuk: If the actuarial reports change five years from now, and if it looks like there will be a deficit in the future, then you can raise the contribution amounts.
Ms Hamilton: If the actuary is of the view that, in fact, the current service cost is not correct, that because of changing economic assumptions over the long term the current service cost has in fact changed, then you may look at a contribution increase at that time.
Senator Tkachuk: How much will be taken away and how much will be left?
Ms Hamilton: If the surpluses are debited from the existing accounts, there would be roughly $100 billion left in those accounts.
Senator Tkachuk: That amount is all for past service, so that is not affected by anything that happens. In effect, we are separating the funding for future service and past service. What is pertinent for past service, as you mentioned, is the existing account. After you have dealt with the surplus, that account would sit at around $100 billion. The government is solely responsible for that past service. There is no linkage between what happens to the service up to April 1, 2000 and what the contribution rates by employees might be in the future.
Was consideration given to splitting the funds; to splitting the surplus between pensioners, employees and the government? The government would take a portion of the amount that they wished to take, give another portion to the employees' pension fund to avoid future actuarial costs, and give the balance to the pensioners who are retired presently?
Was there consideration given to that or studies done on that by the department, or advice to the minister on that?
Ms Hamilton: Obviously, various options are examined whenever we are addressing an issue, but in terms of specific advice to the government --
Senator Tkachuk: Let us forget that. Was there consideration of that by the department when you were doing this crowning achievement?
Ms Hamilton: That is his crowning achievement.
Senator Tkachuk: You give us the crowning achievement; we will give you the $30 billion. Is that the way it works?
Ms Hamilton: We began this process many years ago with studies by the advisory committee at the request of the President of the Treasury Board about moving to a joint-management approach. That was not focused around the past and the surplus at that time; it was focused around what kind of joint-management arrangement could work for the future. There was no specific discussion, as part of those consultation processes, on sharing existing surplus.
The Chairman: I will make one concluding comment. I suspect you will be reporting back to the minister on your pleasurable experience this morning. In so doing, you might suggest to him that, in addition to whatever he is planning to say on Thursday, there are two specific issues that I think would be in his interest and ours to address.
First, you detected from both sides of the table a feeling that, in doing this legislation, government may have treated itself as an employer better than private-sector employers with defined benefit plans have been treated by government. In other words, government has used its legislative power to benefit itself as an employer in the way that it has not offered similar benefits to private-sector employers in a similar position.
Second, as I think you also detected from both sides of the table, and particularly from Senator Austin, is this package skewed entirely in favour of the employer or, to put it the way Senator Austin did, what assurances are there that employees will benefit from the package of changes proposed here?
The minister can decide whether to address those questions in his opening statement. If he does not, he will need to address them in answers, so it might be more useful if he put the issue on the table at the beginning.
Thank you very much for attending.
Senators, we have one more witness this morning. Mr. Keith Ambaschtsheer has appeared before the committee and has helped the committee considerably on our study of a year and one half ago on the governance of institutional investors. That study seems to have remarkable legs, in the sense that Senators Meighen, Oliver and myself, at least within the last few months, have been speaking on a study that is now a year and one half or so old.
Mr. Ambaschtsheer is one of the country's experts on the issue of the governance of pension funds. We asked him to attend today, particularly in light of comments he gave us on the CPP fund as well as the governance of other institutional investors -- and perhaps he could comment specifically on that question.
Thank you for attending today. Please proceed.
Mr. Keith Ambaschtsheer, President, Keith P. Ambaschtsheer & Associates Inc.: Mr. Chairman, as I look to my left and right here, I am unlikely to be contradicted by fellow witnesses this morning, which may or may not be a good thing. I will leave that for to you decide.
My sense of this bill is that it really does create a basis for a more flexible, responsive approach to what we might call post-employment compensation for government, military, and RCMP employees.
On the benefit side, I think you try to create methods for changing benefit design over time to reflect the times. The administrative side to benefits also needs to be updated on a regular basis. It also creates the opportunity to create another "best practice" investment organization of substantial size in this country. I think that is a good thing of its own.
I was involved in the CPP investment board deliberations. I wrote a paper, which I would be happy to share, with some of the background on the issues relating to creating a sizeable investment organization from a governance perspective and some of the capital market impact implications of creating such an organization. We may want to talk about some of that this morning.
In my opinion, this is all a good thing -- subject to two things. One has already been discussed this morning. It is what I would characterize as pension deal clarity. In other words, how clear is the contract between various stakeholders in the arrangements? On the one hand, you clearly have taxpayers. On the other hand, you do not have a homogeneous group. The group is comprised of pensioners and active employees that are either young or not so young, and they have potentially different interests in these arrangements. My experience is that the more clarity there is about the nature of the contract, and the more explicit and transparent it is, the less argument you have about surplus ownership. By definition, a good pension deal defines that up front and does not try to split it up after the fact.
When you think about the governance mechanism -- and my other requirement for a good organization is that it have strong governance -- I wonder about the people who are overlooking the $25 billion or $50 billion or $100 billion pool. Senator Austin alluded to this earlier. What is their mission? What is the purpose of the fund? What is it they should try to accomplish? If it is not tied to an explicit deal that is very clear, then I pity the people who have to ask that question, because they have to translate it into some investment policy. To do that well, you need some sense of what is the contract and the risk-free way of investing in relation to this contract.
By the way, now that we have index-linked bonds, the risk-free way to invest against an indexed-linked retirement system is these bonds. Today, you can look in the paper and read that the real yield is 4.2 per cent. That then becomes, if you like, the costing basis for funding the system.
On the investment side, do we want to try to earn a spread over this 4.2 per cent real? If we try to do that, who is at risk, what is the prospective spread that we might earn, and how do we implement whatever investment policy we create?
I must share some unease about the manner in which this deal has ended up being negotiated over the last nine years. There is no complete clarity about how this will work. How this all comes together is yet to be decided.
I will leave it at that and follow where you want to go.
Senator Kelleher: I am sure you listened intently when I asked my last questions of our friend Mr. Peacock. I was trying to get at the question of the surplus and the rights that the federal government has given employees under private-sector plans governed by federal legislation. Mr. Peacock said that it does not affect employers where their plan specifically states or specifies that the surplus is theirs. Is that correct?
Mr. Ambaschtsheer: That is right.
Senator Kelleher: Having said that, the minister has said that other pension plans incorporate ways and means for managing surpluses once they reach a certain size. He said that that is basically what the federal government intends for the public service plans. However, I stress, he said that, at present, the legislation does not address the matter of surpluses in many ways.
As I understand it, the federal plan at this time does not specifically address the question of surplus distribution.
Mr. Ambaschtsheer: That is right.
Senator Kelleher: If that is right, then why is the federal government not subject to the same sort of rules that they are foisting, forcing or otherwise legislating on the private sector plans? Why should the federal government say, "Do not do as I do, but do as I say," is that not what they are doing here?
Mr. Ambaschtsheer: I will give you an economic response rather than a legal response since that is my background.
If you look at the issue of surplus ownership from an economic perspective, it tends to arise because the assumptions do not work out. You go into one of these funded systems and you start at the beginning. You say, "My best guess," or you might put some conservatism in there, and say, "This is what I think price and pricing and wage inflation will do and what investments will earn. Based on these assumptions, the current service cost is 10 per cent of pay."
Then you go through time. You find out the assumptions are not likely to work out. Over time, the plan either develops a surplus or a deficit. Then you have these course corrections to make. That is the economic reality.
Senator Kelleher: I accept that. I do not have a problem with that.
Mr. Ambaschtsheer: The question becomes: What do you do with these accumulating surplus or deficits? From an economic perspective, the answer should be that the pension deal should specify what is to be done.
If you have one stakeholder group underwriting the risk, it is that stakeholder group who should also gain from underwriting the risk if things turn out better than expected. There should be symmetry between gains and losses in terms of who underwrites risk.
Clearly, if you do not have a pension deal that clearly defines who underwrites what risk, you have a problem.
Senator Kelleher: That is right. That is what we have got here.
The federal government stepped in and told the private sector that, where this occurs, they would give the employees some rights. However, when their own plan has the same problem, why do they not treat their employees in the same way as they told the private sector that they had to treat their employees?
Mr. Ambaschtsheer: I do not know the answer to your question.
Senator Kelleher: I am trying, like a good lawyer, to ensure that I have the case for asking those questions before I ask them.
Mr. Ambaschtsheer: Let me give you one example of where you get lack of clarity. It relates to the nature of the pension deal and the last 25 years.
If the pension deal effectively guarantees the pension benefit in real terms, that is one thing. You can cost that out. If that is what is delivered, there is no risk, unless there is default risk. In this case the likelihood of default risk is not great.
Many private-sector plans do not have that real benefit guarantee; they have a nominal benefit guarantee.
Inflation does different things. It can be much higher, as it was in the 1970s. Then there was an interesting argument that it was the higher rate of inflation that diminished the real value of the benefit, and you ended up shifting things on the balance sheet in a way that was not fair. That is played out in the course. To some degree, our pension benefit legislation still carries the history of that sense of unfairness.
When dealing with pension contracts that are explicit in real terms, a different kind of issue arises because you do not have that inflation risk.
Senator Kelleher: We do not seem to have that here.
Senator Oliver: It is not explicit in real terms.
Senator Kelleher: Yes, it is not explicit in real terms that the federal government has any right to this surplus. It is not prepared to enforce upon itself that which it is has enforced upon others.
Mr. Ambaschtsheer: I understand your point. My point is that there is a much stronger basis for clarity about ownership, even after the fact, where you have pension contracts that are written in real terms and do pay rather than default.
Senator Kroft: As I understood it, you said that, if there is complete clarity as to the obligation of the government, of the employer, to deliver a benefit in real terms, then in your judgment that creates a presumption or a colour of right or at least a basis of argument for the fact that any surplus that results from having taken that risk belongs to the employer; is that correct?
Mr. Ambaschtsheer: That is the economic logic.
Senator Kroft: Senator Kelleher said we do not have that in this case. I want to be clear whether or not we do.
Mr. Ambaschtsheer: The economic logic is clear. However, what is being referred to is legislation in a different context that raises some doubt about that.
Senator Kroft: Is there clarity of obligation on the part of the government to provide a defined benefit in real terms under the status quo?
Mr. Ambaschtsheer: That is my understanding of the pension contract, yes.
Senator Kroft: If there is, on your economic argument, is there support for the entitlement by the government to the surplus?
Mr. Ambaschtsheer: Absolutely, yes.
Senator Kroft: I do not think that Senator Kelleher interpreted what you said correctly.
Senator Kelleher: Yes, I did. What I am saying to you, and what he agrees with, is that, while there is that economic argument, if you look at the plan, as written, there is no clarity as to who is entitled to the surplus. He agrees with that.
Mr. Ambaschtsheer: That is the legal argument.
Senator Kelleher: That is all I am saying.
The Chairman: I hate to referee between a legal and an economic argument, both of which I am inherently suspicious of.
As I understand it, Mr. Ambaschtsheer said, that the legal position is not clarified in the existing agreement, is a true statement. It is an equally true statement, according to Mr. Ambaschtsheer, that economic logic would say that, if you take the risk of the downside then you get the benefits of the upside.
That is why Mr. Ambaschtsheer was able to agree with both Senator Kroft on the economic argument and Senator Kelleher on the legal argument.
Senator Kroft: Senator Kelleher referred to there being no entitlement to this in the private sector. Would the honourable senator give me an example of where that entitlement is denied? Is it the fact that there is no clear legal direction?
Senator Kelleher: Yes, as I understand it, in the private sector, if an employer and an employee have a plan in place, and there is nothing clear in that agreement as to what happens to the surplus then, under the legislation the government brought in through Bill S-3, the government has given rights to employees in those cases to have a say in the disposition of a surplus.
Senator Kroft: That was contradicted by the entitlement.
The Chairman: The purpose of having Mr. Ambaschtsheer was to get his point of view. However, just so Senator Kroft is clear, the point that Senator Kelleher is making is that the Pension Benefits Standards Act, in cases where the ownership of the surplus and the liability for the risk was legally unclear, sets out a process whereby the ownership of the surplus gets decided, and it gets decided through a process in which both the employer and employees are involved. That is the ownership of the surplus in the sense of the right to take the surplus out.The right actuarially to decide to give holidays for both the employee and the employer has always existed in legislation. The law requires that you keep the plan actuarially sound; it does not require that everyone make contributions every year. Again, his comment was a legal one whereas your response was an economic one.
Do you wish to comment?
Mr. Ambaschtsheer: Let me stay on my economics track. When you follow through the Ontario teachers' story, they started out, in the 1970s, 1980s, with a deal that looks very much like the federal government deal. In the 1990s, they renegotiated that contract to keep the pensions whole in terms of promising a real benefit that had accrued. However, the active employees and the Ontario taxpayers are now joint venturers, if you like, in the future, and their contribution rates will rise and fall in line with how well investment results turn out against assumptions.
There is an example of where an explicit joint-risk reward deal has been negotiated and is in fact in force.
I should like to see that happen in this case because you end up with, I believe, more clarity about what it is all about and who benefits and who gains. From a governance point of view, the governors recognize that they have multiple stakeholders whose interests they are trying to balance and it gives a focus for the discussion and the articulation of investment policy, et cetera.
My concern here is this: There is this investment board that is sitting out there by itself; it is not obviously connected to the rest of the parts.
Senator Kenny: I even thought I understood my question, however, I am not so sure I do now.
We have a situation here, sir, where there is not a sharing of rewards and risks provided for in the agreement. There is no deal tied up in advance. We have a possibility where the government says that we will consider three options down the road; first, perhaps increased benefits; second; perhaps decreased premiums; or third, perhaps we will keep the surplus. The very fact the government is keeping the surplus with this piece of legislation gives you a pretty clear hint about how the government may act in the future.
If there is no sharing of risk and reward, why go to the market at all? Why are we not just funding this through the Consolidated Revenue Fund? The purpose of going to market presumably is to share risk and reward.
Mr. Ambaschtsheer: Right. Again, there is an economic argument, and that is the degree to which that there is a risk premium to be earned in how democratic capitalism unfolds. The other rule of thumb I will give you is that every 1 per cent of incremental return earned long term reduces the contribution rate required by 20 per cent. Let us say in doing your calculations the plan cost turns out to be 10 per cent of pay. If you can earn 5 per cent instead of 4 per cent, it reduces the 10 per cent of pay to 8 per cent of pay.
Senator Kenny: I hear you, but follow it along. Take an example, if you will, where you will pay it out of the CRF and the government then chooses to do different things with it, perhaps reduce the overall level of taxation. There may be all sorts of other benefits to the economy that would be vastly more than what you would have if it were just managed within the pension fund envelope.
Mr. Ambaschtsheer: Again, generally, the broadest issue is whether retirement systems should be funded or "pay go." That is the broadest issue. Economic argument, again, supports that, unless you have a situation where you have rapid economic growth and very low interest rates, funding does not make sense because just the "pay go" will carry you rather than having segregated assets.
Senator Kenny: If you do not have a sharing of risk and reward, funding does not make sense either, does it?
Mr. Ambaschtsheer: Sure. Right now, speaking as a taxpayer, if I am part of a process that underwrites the pension benefit guarantee, I should like to underwrite that guarantee at as low a cost to me as possible. I would rather pay 8 per cent of pay than 10 per cent of pay.
Senator Kenny: You cannot predict the inflation.
Mr. Ambaschtsheer: I cannot predict. However, if you do not, over the long term, have financial markets price risk in a way that there is a positive reward for it, the system does not work.
Historically, with regard to the risk premium earned for earning equity returns -- by the way more outside Canada than inside Canada over the last 20 years -- over the very long term the spread between stock returns and bond returns has been approximately 5 per cent. When you go back to my computation of how much lower the cost is in funding systems with investing the money in equities, if you can earn an extra 5 per cent, that is incredible.
What we must be careful of is not to carry that 5 per cent historical into the future. This is probably a very bad time to make that assumption.
Senator Oliver: Is not one of the inherent dangers in the current legislation the fact that, where there is uncertainty vis-à-vis the surplus, the government can merely, by regulation, define it to the exclusion of the employee or the person who is to get the benefit? Is that not one of the inherent dangers here?
Mr. Ambaschtsheer: Yes, ideally this thing is completed so there is absolute clarity. Again, I put myself in the position of these people who will be nominated to be on this board. I would not know how to advise the board, unless that is clear. How should they think about risk exposure? Who is at risk?
Senator Oliver: The government has the power to pass a regulation subsequent to the passage of this bill to clarify for itself.
Mr. Ambaschtsheer: It should be clear in everyone's interest, yes.
Senator Oliver: If this bill receives Royal Assent, the government will have the inherent power, by regulation, to define it; is that not correct?
Mr. Ambaschtsheer: I do not know the bill that well, whether that is the case. The previous people would know that.
Senator Hervieux-Payette: Do we need the money in the market, these billions of dollars? Does the Canadian market-place need this in order to keep a healthy economy in general, or will it create, if the fund grows to a large extent, pressure on the market? What is the 20-year prospective? We should not look at this only over five years.
Mr. Ambaschtsheer: Something very important has happened to financial markets in the last 20 years, which is that, increasingly, they have become global. It is increasingly less relevant to talk about what turns out to be 2 per cent of a global financial market and how this money would affect that.
Your question gives me another opportunity to say -- and I think this group agrees -- that, when we invest globally and we want to give this new investment board a mandate to earn the highest returns possible commensurate with the risk, there is a real problem doing that inside one market representing only 2 per cent of the total. That increases the pressure yet again on this 20 per cent limitation.
Senator Hervieux-Payette: The rumour I often hear is that the Canadian market is undervalued. Does that have any relationship to this issue? Our shares would be worth more and the multiples would be bigger in Canada. Are we limited in the sense that we have to keep capital in our country? Is there not enough movement?
Mr. Ambaschtsheer: About half of the 2 per cent of the global market that Canada represents is resource-related. Since the early 1980s, this has not been a good market for a resource-related capital market. It is more a diversification argument. If one is stuck in this particular market, the 1970s were great. The 1980s and 1990s have been not so good. It has more to do with that.
The 20 per cent rule by itself is not constraining to other investors. Other investors can still create the equilibrium; only certain people cannot do what they would like to do. It is more the fact that in a global sense we have a stock market that is not diversified.
Senator Hervieux-Payette: I was always told that a big portion of the national debt is credited as being pension money that is not capitalized. I suppose it is the Canada Pension Plan, which means that there are billions of dollars.
In this case, let us say we just pay as we go and the taxpayers are paying for it all the way. We have an agreement that it is 4 per cent or an indexation. Do you not think this would have a negative effect on Canada's interpretation of its national debt? This would be capitalized and deemed to be a debt to Canada, added to the existing $200 billion. That is what I hear. When other countries talk about their debt, they do not include the pension.
Mr. Ambaschtsheer: With respect to these particular systems, it is to Canada's credit that there has been an explicit accounting for the debt. We have gone through double -- or triple-entry bookkeeping where we have created notional bonds. They are an asset to the plans, but they are a liability to the taxpayers. Hence, there is a net, net, net. They are really not there. At least we have the accounting, so we know the outstanding obligations.
In Europe, other than the Netherlands, my old home country, there has been no accounting whatsoever. Those economies are in far greater difficulty than are we because they have never accumulated pay-as-you-go retirement system debt, both in the national schemes and in the public service schemes.
Senator Hervieux-Payette: It is at least transparent in Canada.
Senator Austin: As always, Mr. Ambaschtsheer, your evidence and advice is very worthwhile.
I am tempted to ask you whether the decline in the real value of commodities is over and we will see a different curve. As investors, we would all be interested in your answer.
All things considered, is the Bill C-78 a reasonable piece of legislation?
Mr. Ambaschtsheer: I think it is incomplete. I am disappointed that it did not go the next step and create what I would consider to be logical, complete, retirement systems, where the old is integrated with the new, where natural constituencies are created, and where governance mechanisms look after both the asset and the benefit side of natural constituencies. In my view, that is the ideal model.
Sometimes one cannot get to the ideal. The question then becomes: Is this a reasonable second best? I would say yes, subject to these other pieces that are still dangling out there. They are a high priority, in the sense that they should be completed as quickly as possible. My advice to the nominee directors is that they should insist that these other pieces be completed before they can do their jobs.
Senator Austin: On the first part of your two-part answer, my information is that the Public Service Alliance of Canada and the Treasury Board do not have and cannot agree to a risk-sharing formula at this time. Therefore, this legislation is being put in place. Their future discussions may or may not look at risk-sharing, depending on the policies of each of the stakeholders.
Thank you very much for the answer.
The Chairman: Mr. Ambaschtsheer, thank you very much. You were as helpful as always.
The committee adjourned.