Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 55 - Evidence, June 10, 1999
OTTAWA, Thursday, June 10, 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 11:00 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, our witness this morning is the Honourable Marcel Massé, President of the Treasury Board. He is accompanied by Ms Hamilton and Mr. Jolicoeur. Thank you for coming here this morning. I think this is the first time you have appeared before this committee. We are delighted to have you here. We appreciate your taking the time to be with us.
As you have probably heard from your officials, we should like to raise a number of issues with you. Please proceed with your opening statement and then we will turn to questions.
The Honourable Marcel Massé, President of the Treasury Board: Mr. Chairman and members of the committee, thank you for inviting me to discuss this bill. While I will focus my remarks on pension governance and investment, it is important to be mindful of the broader context the bill sets. The main purpose of this bill is to put the public service pension plans on a sound, sustainable and transparent financial footing for the future in a manner that is fair to both plan beneficiaries and taxpayers. It does this through three types of changes.
First, it introduces, along with Bill C-71, a number of benefit improvements for employees. For example, not only are pension benefits earned to date protected, but future pensions are increased. The term life insurance part of the PSSA, the Public Service Superannuation Act, is enhanced. In keeping with the courts, survivor benefits are extended to same-sex survivors and a dental plan for pensioners will be created.
Second, employee contribution rates will be set independently of the Canada Pension Plan or Quebec Pension Plan rates. Rates will be frozen for four years, to the year 2004, and thereafter will be set by Treasury Board subject to strict legislated limits.
[Translation]
Bill C-78 will also improve the management of these plans. It will create an independent, qualified investment board, which I will discuss more later, to invest future contributions in external financial markets. It will strengthen the existing advisory committees so employees and pensioners have a strong voice in plan management, and it will create a new plan for Canada Post.
Finally, consistent with the fact that the government has paid all past deficits, and remains responsible for those in the future, this bill provides the government with the tools required to properly manage the current and any future surpluses.
I understand that the committee has had an opportunity to discuss bill C-78 with my officials and that the chairman has specifically requested that I address two particular issues raised by Senators as part of their review. With the committee's permission, I will go directly now to those issues.
The first is the question whether through the proposals of Bill C-78 the government is treating itself more favourably than it allows private sector employers to treat themselves.
The second is the question whether the bill is skewed entirely in favour of the employer. Allow me to say straightaway that the answer to both questions is "No."
On the first question, the senators well know how complex and intricate pension law can be -- how difficult it is, for example, to find simple grounds of comparison between private-sector and public-sector pension plans. It is all the more difficult to compare legislated plans like those of the public service with non-legislated plans like the majority of those in the private sector.
Still, for purposes of comparing the government's treatment of itself as an employer with its treatment of private sector employers, I believe pension law can be boiled down to one valid, simple, common principle. It is the principle of promise-making and promise-keeping.
[English]
Where pension plans are concerned, the government keeps its promises to its employees and expects no less of private sector employers. In fact, the government has enacted legislation, notably the Pension Benefits Standards Act, to ensure that private sector employers keep their pension promises to their employees. If those promises clearly extend to the sharing of surpluses -- that is, if, for example, the pension plan has been set up as a legal trust or if the terms of the plan otherwise specify -- then, yes, the law insists that the employer keep that promise, too.
The public service pension plans are legislated plans and, as such, are not subject to the Pension Benefits Standards Act. Nevertheless, they are subject to their own laws, the legislation by which the plans were established and in which the terms of the plans are set out.
By that legislation, the government, as the employer, makes promises to the employees. Specifically, the employer promises to pay every employee a certain income on retirement, which is clearly defined in the terms of the legislation. The federal government, as the employer, has always heeded the law and kept that promise in every case. By the public service pension legislation, the employer also promises to assume all the financial risk and to keep the plans fully funded in times of deficit. The plans are in surplus now but have not always been so. Deficits have occurred many times in the past, and each time the government has heeded the law and kept its promise by making extra contributions to top up the accounts. Employees' contributions, on the other hand, have never been affected by the deficits.
In summary, the government always has kept and always will keep all the promises it makes to its employees in the pension legislation just as it expects private sector employers to do so. However, the promises that the government makes to its employees in the public service pension legislation simply do not include a promise to share surpluses. For one thing, public service plans are not set up as trusts. For another, as I have said, the plans do not yet contain any agreement on risk sharing which, as senators know, is the principle on which surplus sharing is almost invariably based in public sector pension plans. Nor is there any other way in which the terms of the public service pension plans specify that surpluses should be shared with the employees.
The answer to the first question is no. In Bill C-78, the government is not treating itself better than it allows private sector employers to treat themselves.
On the second question, whether or not Bill C-78 is skewed entirely in favour of the employer, I will begin from a premise that the bill's critics often fail to appreciate, let alone have the fairness to mention. The public service pension plans, with their generous early retirement provisions and full indexation to the cost of living, are even now among the very best in the land.
[Translation]
The benefit improvements provided under Bill C-78 and Bill C-71 will keep the public service plans among the front rank of pension plans in the Canadian public sector. And it is these benefit improvements that serve as proof against the accusation that pension reform is skewed in favour of the employer. Allow me to remind the senators of what the improvements will be.
First, there is the change in the basic benefit formula, from a six-year to a five-year average salary. This will result in increased retirement benefits in the vast majority of cases. Then there is the change in the benefit integration formula, which will result in a slightly lesser reduction in public service plan benefits when plan members begin to draw Canada Pension Plan benefits at age 65.
Next, for plan members under the Public Service Superannuation Act, there are four significant improvements to the Supplementary Death Benefit plan -- including a 25 per cent reduction in premiums. For members of the Canadian Forces and RCMP plans, there will be improvements in vesting and portability arrangements as soon as consultations have taken place. There will also be a pension plan established for Reserves, again pending consultations.
As another example of balance, I would mention the commitment to holding the line on employee contribution rates for at least four years, to making increases after that only if necessary, and to making gradual increases in any event. In that regard, I might add that the public service employee contribution rates compare favourably with rates in other employer-sponsored pension plans in the public sector and are lower in a number of cases. Talking of the balance we have achieved through the current round of pension reform makes me think of further balances that might be achieved in future.
With this in mind, I now would like to discuss the issue of joint employer-employee pension management, an issue raised in the Senate last week and by some witnesses at this committee. It is a central pension principle that the power to manage a pension plan, like the right to share in any surpluses in that plan, is directly dependent on responsibility for the risks under the plan -- that is any deficits. After all, to have authority to manage a plan without commensurate responsibility for deficits would mean having authority to make decisions that create deficits others have to pay for.
[English]
Public sector employees and pensioners have 50 per cent of the power to manage their pension plans in the future and the right to 50 per cent of future surpluses. During pension reform consultations last year, we offered to share equally with employees responsibility for future deficits and surpluses. While it appeared that we might reach a deal on this and other elements of a new pension deal, at the final meeting in December it became clear that employees would not agree to share responsibility for future deficits, thereby enabling joint management, unless the government gave employees a significant portion of the current surplus. That is something the employees have no rightful claim to, either by fairness or by law. We could have imposed risk sharing on employees to enable joint management. Assumption of risk is, however, a very serious obligation and should therefore only be assumed voluntarily. Thus, the government remains responsible for 100 per cent of all future deficits. Consequently, no joint management board could be included in Bill C-78, and the government retains 100 per cent of planning management powers.
This does not mean that the government is no longer interested in joint management. On the contrary, as I have said in the past, this government remains fully committed to sharing power based on voluntary and equitable sharing of risk. It is our hope that once the major stumbling block, the currents surplus, is dealt with under Bill C-78 in a manner reflecting the government's responsibility for all past deficits, employees will want to resume discussions toward a joint-management agreement based on risk sharing.
In the meantime, to show we remain serious about an equal partnership, Bill C-78 gives employees and pensioners a strong voice in investment board appointments through a nominating committee. In addition, through the strengthened advisory committees, employees and pensioners will have a strong voice in the administration, design and funding of their pension plans. Of course, final decision-making authority rests with the government, because the government takes all the risks.
[Translation]
I now would like to speak in more detail about our investment board proposal. First, I want to assure the committee that this board will be qualified to carry out its duties. Since it clearly is desirable, a sufficient core number of directors will indeed have proven financial ability. However, as recognized by this committee last year, pension boards should, collectively, have a broad range of experiences and expertise. Therefore, under Bill C-78 there is scope for persons with expertise in pension fund management and other relevant skills to also be appointed.
Now I know some say this opens the door for appointment of an unqualified board. I would simply point out that the fact the government is responsible for all future deficits gives it a very strong incentive to appoint persons with the required skills.
Given the size of the projected public service pension fund contributions relative to the size of Canadian financial markets, we also feel there is minimal risk that the board's market investment will significantly affect Canadian financial markets.
Assuming financial markets continue to grow at their historical rate of 10 per cent per year, in twenty years the board's domestic holdings of stocks and bonds are estimated to be in the 2-3 per cent range of the value of the various segments in domestic financial markets.
Finally, I would like to highlight that, as recommended by this committee last Fall, this board, as fiduciaries, will be required to make all investment decisions independent of stakeholders in the best interests of plan beneficiaries, meaning that more narrow constituent interests must be made subordinate.
Independence does not, however, mean the board is not accountable. Through its annual report to the ministers, which must be tabled before Parliament and made available to plan members, the board must regularly disclose the results of its operations, including financial performance, so stakeholders can judge its work.
In addition, the board must meet annually with the advisory committee to discuss its report, and its by-laws must be made available publicly. In short, what we have is a board with the necessary ability to make investment decisions independent from stakeholders, coupled with the duty to report the results of those decisions to those stakeholders. As has been the case in other jurisdictions, we expect that over the long term, the new investment policy introduced by Bill C-78 will reduce the total cost of public sector pensions that must be covered by employees and taxpayers.
It is my hope that in the future we can bring forward further legislation implementing the last "piece of the puzzle" -- a joint pension management board which is based on an equitable, voluntary risk sharing agreement with employees.
I will stop talking now and give honourable senators enough time to ask questions.
[English]
Senator Kelleher: Welcome to the committee, Mr. Minister. I think your officials have already been here and I am sure they have told you what a delightful experience it has been for them.
Senator Oliver: One of them is back again for a second go.
Senator Kelleher: I should like to deal specifically with the question of the surplus and its transfer back to the government. We heard from various witnesses yesterday that they are unhappy with the transfer. Their unhappiness focused on the lack of consultation with them concerning this surplus transfer.
As I understand it -- and you are much more familiar with this than I am -- the government passed Bill S-3, which dealt with the private sector. One of the main provisions of that legislation lays down rules and procedures for removal of surplus funds from employer-employee pension funds. I believe that you testified earlier before the House of Commons committee that the existing legislation does not address the matter of surpluses in any way. Is that correct?
Mr. Massé: Yes.
Senator Kelleher: I think this is what has caused a great deal of unhappiness. Under the present plan there is no discussion or direction whatsoever with respect to this surplus. These people are saying now that you are going ahead with little or no consultation.
I have heard your explanation as to why the government did not include itself under Bill S-3. I am having a little trouble with that rationale because you say that everything is being guaranteed and nothing will be changed. If effect, you are saying that the government can be trusted.
It has been brought to our attention that that is not necessarily correct. In 1982-83, with Bill C-133, you introduced what is commonly known as the six-and-five program. Are you familiar with that program?
Mr. Massé: Yes.
Senator Kelleher: It was a roll back of pension indexing. Under that legislation, which was unilaterally done by the government and passed by them, pension benefits were in fact reduced and they were never reinstated.
We are told that the same thing happened in Ontario, but the benefits were subsequently reinstated after a few years. No one suffered from it. In light of this, and in light of the fact that the government retains the sole right to legislate in this area, why should you not be brought in under Bill S-3 to protect the employees' concerns and rights?
Mr. Massé: There are quite a few questions there, but I will try to answer them all.
The first question was on the surplus. I will give more the political answer because you have already met my officials who will have given the technical answers. To me, the difference is that we have legislated plans with defined benefits. In other words, we have in front of us a law that defines what was promised to the civil servants. In that law, it was quite clear -- and I have been a civil servant and I was in that position -- that what the government guaranteed was a certain number of benefits at the end of it that defined your pensions. That is different from most private sector plans, which act as a trust where assets are accumulated and then used to produce a stream of income that is then distributed.
In the case of the government, there was a series of legislated benefits. The actuaries and the accountants, of course, forced the government to establish a system of liability and a number of balance sheets. In those balance sheets, deficits and surpluses are determined. However, it was never considered by the employees that they would have anything to fork out if there were a deficit. It was an accountant's exercise. They established proper balance sheets and so on. Whenever there was a deficit, it was clear that the government would pay for it.
When the pension plans were indexed, there was a sudden increase in liabilities of over $8 billion. The government put in the $8 billion because that was an accounting exercise to make the balance sheet sound. There is no doubt in my mind, and I had to assure myself of this because it is an essential point in the bill, that that surplus was put in by the government and was not necessary to make the plan financially sound. It does not belong in any way, shape or form to the employees, and they have absolutely no right to it.
I am supported in that position not only by all the lawyers but also by the Auditor General -- sometimes we find it useful to claim his authority -- by the accountants and by the actuaries. It is to my mind absolutely clear: Not one cent of that surplus was ever promised to the employees or belongs to them.
Of course, that determines the position I take with respect to the bill. That is why in Bill C-78 there is a definition of the benefits, including an increase in the benefits that are promised. There is not a word in that bill that the employees must share in the risks of the plan. They do not. As I mentioned again in my speech today, the government takes all the risks in that plan. What is promised to the employees is the legislated benefits.
Regarding consultations, it is always a matter of judgment how much people have been consulted. In the last three years -- and before, because these consultations on possible joint management started in 1991 -- there have been consultations and quite a lot of them with the employees.
The financing management of the plan is the responsibility of Treasury Board. Our view, by the way, was and is quite clear: We discuss benefits with employees who were ready to discuss potential future joint management. But on the question of the surplus, which is a question of the financing of the plan, it was clear that the government takes all the risks; therefore, it is an employer responsibility. We did consult. We did discuss for the future. However, the disposition of the surplus, in our view, is not a question of consultation with the employees. Once again, the legal status is clear.
Regarding the Pension Benefits Standards Act, formerly Bill S-3, I could make a distinction between private and public sector plans. Legislation is passed in order to ensure that there is a legal framework in the private pension plans that forces the private sector employers to deliver what they have promised. In the case of the public sector, it is quite different once again because we have laws that define these various plans; therefore we have legislated benefits. We know exactly what the law forces us to do.
I would go even further and argue that where the surplus is addressed in the Pension Benefits Standards Act, it says that if there are terms in the plans that define where the surplus goes or who it belongs that is fine. However, if you cannot determine that, then you can go to employers and employees and have them vote.
In our case, it is quite clear to whom the surplus belongs. Once again, our lawyers are absolutely clear on this.
I will even go further. One of the questions posted on the Internet by the retirees is: Why are they not going to court to challenge this? The retirees say they have a moral right to that surplus.
The response is that they have consulted independent legal experts who are quite clear that the retirees have no legal right to that surplus. Therefore, the lawyers' advice is that there is no claim. If there is no claim, which is, of course, what we argue, then we are satisfying the sections in the Pension Benefits Standards Act because we do not have to consult the employees on it. This surplus belongs to the taxpayers.
Senator Kelleher: I raised the issue of Bill C-133, the so-called six-and-five program, through which the rights of a group of employees were diminished. Those rights were never restored. Something that has happened once can happen a second time.
Had you included yourself in Bill S-3, that would have afforded employees the protection they lack against a similar occurrence.
Ms Sharon G. Hamilton, Assistant Secretary, Pensions Division, Treasury Board Secretariat: As you know, senator, the six-and-five program was a broad government program that applied to all federally regulated prices and wages within the federal public sector. It applied as well to social programs such as Canada Pension Plan and Old Age Security and possibly to transfer payments.
That was a broad government policy initiative to deal with a significant economic situation that the government felt it needed to deal with at that time -- namely, the high inflation rate. When the government was operating across such a broad spectrum, the public service pension programs were included in that initiative.
There was one significant difference with respect to the public service pension programs: in recognition of the fact that public servants had made contributions toward the indexing provisions of their pension plan, the indexing cap for public service pensions was set at 6.5 per cent and 5.5 per cent rather than the 6 per cent and 5 per cent that applied under other programs.
That program was applied across the whole federal spectrum. Presumably, if a future government were facing a similar economic situation that it felt needed such a broad approach, it might not necessarily believe that the PBSA should exempt certain government programs from it.
Senator Kelleher: I am advised that it did not apply to the Canada Pension Plan.
Ms Hamilton: That may well be. I expect that would have been because of the federal-provincial dimension of it.
Senator Kelleher: I can understand the motivation for doing it, but why, after the fact, did the federal government not do what the Province of Ontario did; that is, reinstate those benefits? We were told by witnesses for those affected that it cut severely into their pension entitlements. Nothing was ever done about it.
Mr. Massé: Ms Hamilton cannot comment on why specific governments did or did not do certain things. I do not fully remember all the circumstances of the six-and-five program.
Looking at it retrospectively, I would say that the government did not do that retroactively because it would have affected all the other rights that had been touched by the six-and-five rule. In other words, it is not only pensions that were affected long term; salaries were frozen for a while and there was, in theory, no catch up. Governments decided that everyone had borne a certain amount of pain as a result of the six-and-five legislation and so be it; there would be no catch up. That applied to pensioners the same as it applied to employees. I do not say that that was the reason the government did something. I am not sure that anyone who was not in that government would remember the reason now.
Senator Kelleher: Mr. Massé, would you please consider whether something could be done to assist those pensioners?
Mr. Massé: I will look at that.
Senator Meighen: On the question of entitlement to the surplus, I accept your word that the legal opinions you have received from the Department of Justice are crystal clear. If that is so, why is it necessary to include in the bill the entitlement of the government to the entire surplus?
Mr. Massé: It is necessary because it was not included in the previous legislation and, as a result, we created a surplus that did not make sense. We created a surplus that was criticized by the Auditor General every year and we have to pay interest on that surplus. Clearly, in a reform we have to deal not only with deficits but also with surpluses.
It is clear that we are entitled to the surplus but, unfortunately, because there were no rules about the surplus, we have built up a balance sheet that the Auditor General tells us does not reflect reality. In fact, he has been forcing us to adapt the surplus in the public accounts balance sheet in a way that is different from what we do in the pensions bill. Therefore, we had to include a clause that would permit us to deal with the surplus properly and to have a balance sheet that reflects how accountants would normally deal with the surplus.
Senator Meighen: That begs the question of why the surplus was allowed to build up to $20 billion or $30 billion and why adjustments were not made along the way, but that is a question for another time.
Senator Austin: Does Bill C-78 have the effect of extinguishing any litigation on entitlement to surplus?
Ms Hamilton: Are you referring to potential litigation?
Senator Austin: We were told by witnesses, including PSAC, that litigation has been commenced to claim an entitlement to a portion of the surplus. Can you explain whether that is the case?
Ms Hamilton: My understanding is that that litigation is focused on the accounting practices with respect to the pension plans and the surpluses in them. I do not believe it would be extinguished by this legislation, but I would have to check that with legal counsel.
Senator Austin: Mr. Minister, are you aware of the litigation that has been commenced?
Mr. Massé: I am and I have discussed with counsel what the basis could be. By the way, I am not surprised that there is litigation. Why would they not litigate? What do they have to lose except lawyers' fees?
Ms Hamilton: I am sorry, Mr. Chairman. I have to correct myself. I am being told that our litigator is suggesting that this does render the case moot.
Senator Austin: One of the purposes of the legislation is to extinguish the litigation with respect to the surplus and how it is accounted for; is that right?
Mr. Massé: My answer would have been this: Let the lawyers deal with it. If litigation is extinguished but the unions, for instance, believe that it is not, then they will go to court to say that it is not extinguished. The lawyers will then have to deal with it for the next 10 years.
That being said, I have to take the best legal advice that I receive, especially when it is as clear as this. Usually, it is not very clear. In this case, there are precedents up to the Supreme Court. We will win this case.
Senator Austin: Mr. Minister, I should like to pursue Senator Meighen's supplementary question, which is on the same topic. You may have advice that the Crown has an absolute entitlement to the surplus -- I am not challenging that. However, there is litigation in process with respect to the surplus, how it is accounted for and where the entitlement lies. The effect of the legislation, and I take it the intent of the legislation, is to extinguish those claims. Unfortunately, there is nothing for lawyers to do. If the legislation extinguishes the claim, it extinguishes the claim. I should like to know what the Treasury Board's information is on this subject.
Ms Hamilton: My understanding is that our litigator feels that the litigation is moot. However, that does not necessarily mean, as the minister has said, that the other side will agree. Obviously, it can be pursued in the courts.
Senator Austin: The question is: In legal terms, does this legislation eliminate the basis for the litigation? Is the answer "yes" or "no"?
Ms Hamilton: I gather "yes." That would be our view.
Senator Austin: The answer is "yes"?
Ms Hamilton: I gather so. We would have to clarify that with our Department of Justice advisors.
Senator Austin: May we consider this an open issue, then, until we receive further information?
Ms Hamilton: No. It is not an open issue. I am saying that based on the advice we have, our understanding is that the current case is rendered moot.
Senator Austin: By the legislation?
Ms Hamilton: That is correct.
The Chairman: Mr. Minister, I should like to make a comment because you were not at the other hearings of the committee. The essential question that has been posed by my colleagues on both sides concerns a difficulty with what we perceive to be the following chain of argument from the government.
The opening statement in the argument is that you have an absolute right to the surplus. If you have an absolute right, then why do you need legislation to confirm it? Is it not interesting that the legislation, which apparently is not needed because you already own it, is nevertheless being introduced at a time when it makes moot an existing court case? Therefore, one says that perhaps that is the underlying reason for it. One then asks: Is it fair that a participant in a court case, who happens to have the right to change the rules of the game, should change the rules of the game in the middle of the court case?
Mr. Minister, I am merely giving you a summary of what I think is troubling people on both sides of the table.
Senator Kroft: That was one of the issues about which I was going to ask.
I should like to come back to one of my principal questions upon which you touched tangentially. I should like to understand exactly the impact of this $30 billion number on the national accounts. We know there is the possibility of a legal action. Let us say that contrary to your conviction and your advice -- and, I would say frankly, my own experience on the matter -- the finding is that one half of the surplus did, indeed, belong to employees past and present. Can you explain what the direct impact would be on the national accounts? Would it be a direct hit to the deficit position of the current year or the following year?
Mr. Massé: I prefer the political answers to these questions because they are clearer. The basic answer is that the Auditor General has looked at it. He is an accountant. He has come to the conclusion that the accountants' balance sheets, according to the old pension bills, are improperly drawn and give a wrong view of the liabilities of the government. In fact, he has forced us to change our national accounts by deducting part of that $30 billion from the national accounts. That is why there is now a discrepancy between the way in which it is accounted for under the national accounts and the way it is accounted for under the previous pension accounts.
If there is a liability that we are not including in our accounts, then, as the judgment comes down, the liability will have to be recognized in terms of what a judgment would say, which is not predictable. Since this is a surplus in just an account, a judgment, presumably, would merely indicate that the surplus has to be kept in the account because that can be done for the next 40 years, until the liabilities in that pension account have all been used up. You can see, Mr. Chairman, why I prefer the political answer. It is because I can define the terms of the discussion.
If there were a Supreme Court judgment along the lines I have mentioned, then it would have no effect on government accounts because we would just continue with this accounting fiction in the accounts. The fact is that it is done in the national accounts now; the surplus is being eliminated year by year by an amount of between $2.5 billion and $3 billion per year and will be eliminated over a 12- to 15-year period. That is basically what will happen under the reforms that we are putting in place.
Senator Kroft: The answer is that either way the decision comes down it will not have an effect on the national balance sheet.
Mr. Massé: It will have an effect; however, that effect will be in conformity with what the Auditor General told us to do in terms of the national accounts.
Senator Kroft: Which you are already doing.
Mr. Massé: Bill C-78 will permit us to reconcile the account of the pension plans with that which is being forced on us already by the Auditor General.
Senator Kroft: I should like to turn to the issue of timing, which has come up one way or another as the final plea of almost every witness. Can we have more time? Why are we rushing this without due consideration? Why has there not been proper consultation?
In the interests of time, I should like the privilege of leading the witness a little, without declaring you a hostile witness.
Mr. Massé: I am a convinced witness, not a hostile one.
Senator Kroft: Everyone has been talking about very limited consultation. It sounds to me like you are saying that while that may be so in the specific terms of this bill, your position is that all of the principles at play here have been the subject of long and ongoing debate and negotiation.
Mr. Massé: Yes. These principles have been debated for years. In fact, when we began closer negotiations with the unions, particularly in 1998, the unions had been asking for joint management. I thought the government was making a major move forward by doing this. My own conviction is that joint management of the plan makes sense. I thought we were getting very close to a positive conclusion to the negotiations, meaning that we could have a joint scheme for the future joint management of the plan that would permit us to privatize the management of the plan and privatize the investment of the plan. I personally agree fully with those two issues, so we had in-depth negotiations on those. Nobody can argue that we did not have full negotiations on this.
Senator Kroft: Do you reject the position that important concepts involved in the legislation were added late in the game? Do you reject that kind of complaint?
Mr. Massé: Yes, because the principle of joint management was fully discussed. In fact, even though we did not have an agreement with the union, we included a number of those benefits. For instance, the averaging going from 6 per cent to 5 per cent, the supplementary death benefits and the dental plan for retirees were issues that had been discussed. We decided to incorporate them in the legislation even though we did not have an agreement. We had to include the question of same-sex benefits, because the courts have already made their judgement on that issue and we had already concluded collective negotiations with the union on that question.
There were a number of areas to the question of financing. The most important one is probably the influence of the CPP negotiations, the latest agreement on CPP. We needed to have for public servants in the public sector the same obligations that we have for all Canadians.
I think this would have hit us in the short term. This issue has been discussed ad nauseam. I agree with your general conclusion that there had been in-depth negotiations on most if not all of these points, that our positions were known, that the arguments had been repeated quite often in our negotiations and that we did not spring any surprises on anyone.
Senator Austin: During the course of the evidence yesterday afternoon and evening, a number of retirees groups came to us with complaints that they were entitled -- on a moral basis if nothing else -- to receive additional benefits because they had in the past contributed to the surplus. They also said, in answer to a question I asked, that PSAC had represented them in asking for enriched pension benefits to retirees. Could you tell us what the situation is with respect to those people? Was that part of the consideration or negotiation?
Mr. Massé: Benefits for retirees were discussed; the dental plan is one example, and I think supplementary death benefits also apply to them. We have included these benefits in Bill C-78. The argument of retirees groups is that even though they may well have agreed that legally they had no claim to the surplus, they have a moral claim to it.
Senator Austin: To a share of the surplus.
Mr. Massé: Or a share of the surplus. They stated it in that manner. In my view, it is very clear -- logically, legislatively, actuarially and based on the Auditor General -- that this surplus belongs to the taxpayers. On what basis do they have a moral right? I believe that the taxpayers have a moral right to have the accounts done properly in a manner that conforms to the Auditor General and to have their liabilities as taxpayers, because that is what it is, stated correctly. Therefore we have to make the change on the surplus that is in Bill C-78.
I think the moral claim belongs to the taxpayers. I listened to their arguments and I understand fully that retirees groups would make exactly that kind of argument because they exist to obtain additional advantages for their own members. However, the government is not only the employer of public servants but also the defender of the taxpayers. I have to assess if there is a moral right on either side, and there is no doubt that in this case the moral rights of the taxpayers clearly have more basis than the moral rights of any other group.
Senator Kolber:I do not understand what this pension fund is. Is $30 billion lying around some place? Is it an actual fund?
Mr. Massé: It is not an actual fund and there is no actual money in it. It is all on paper. There are pension accounts on paper that correspond eventually to an amount of money, but we have not invested.
Senator Kolber: You have not bought stocks.
Mr. Massé: We do not have stocks. The fact that you can have a pension account where the balance sheet is drafted according to different principles than those in the national accounts is in itself strange, but we are trying to remedy that through Bill C-78.
Senator Kolber: Does it follow then that the $30 billion is a liability on the government's books?
Mr. Massé: Yes.
Senator Kolber: As you take it back each year does that $2.5 billion you mentioned then become an asset so that our ratio of debt to GNP improves each year?
Mr. Massé: Let me differentiate, on the pension accounts it is a liability of $30 billion but on the national accounts it is not. In the national accounts it has been decreased because the Auditor General told us that this liability of $30 billion did not make sense in terms of proper accounting for the national accounts.
Senator Kolber: But as of yesterday it is still a liability; is that not true?
Mr. Massé: It is a liability of $20 billion.
Ms Hamilton: Yes, it is down to about $20 billion.
Mr. Massé: The Auditor General has indicated to us that he wants it eliminated over a period of 10 to 12 years.
Senator Kolber: In other words, the $20 billion will either become an asset or be wiped out; is that right?
Mr. Massé: It will be wiped out.
Senator Kolber: Since this does not have much effect on the government's financial well-being for tomorrow morning, why is there such a rush to get this bill through?
Mr. Massé: When a bill has been discussed for something like 10 years, when it has been in negotiation for 8 years, I do not find the rush is that great. We have had full negotiations with the unions on quite a number of aspects of this bill over years. The subject is well known.
At some point, a bill must get through to reconcile the national accounts with the public accounts. At some point, you must introduce the idea that these accounts will actually be invested. Once again, I believe in two big principles. The first is joint management and I think that will come. The second is that these accounts should actually be invested in the private market. That will lead to a much better rate of return on the investments.
Senator Kolber: You do not know that. It could also lead to losses.
Mr. Massé: That is correct, too. There is a risk involved. Usually, of course, the rate of return in the private market will be higher than what you get if you invest only in government debentures.
Senator Kolber: If it does not work out, you must pay the price.
Mr. Massé: That is why the question of risk is important. As one aspect of this bill, it deserves consideration. We believe very strongly, and I think you will agree, that the evidence is with us that the rate of return in the private market will be greater, but there is a risk.
Senator Kolber: Perhaps.
Senator Austin: We have some good derivatives for the board to look at.
Mr. Massé: I am not sure that the fund will be able to invest in derivatives. We need this bill to clean up the field of the public sector pensions. It is time to do it. I do not want to take the risk that there will be a Speech from the Throne in a new session and that this bill will be thrown out. Everything would have to start again and we would have to go through exactly the same problems we have already gone through, whether about same-sex benefits or about the surplus. On these issues, we need a clear method of dealing with the pension plans.
How to adapt the Canada Pension Plan is a problem that will remain. We must face it. We must deal with it. It is quite clear that we must treat public servants in the same way that we are treating every other Canadian. To me it is a fundamental principle of equity. Unless we pass this bill, we will not have done this. We will still need to do it in the next few years. The longer we wait, the greater the price.
Senator Kolber: The only caveat I would leave you with is that the biggest financial debacle of the last decade was caused by two guys who each held a Nobel Prize in economics.
Mr. Massé: I will take that as a compliment on my officials' qualifications.
Senator Tkachuk: I want to go back to the $30 billion. Why could you not fix the accounts without this bill?
Mr. Massé: There are other reasons for having this bill. I have mentioned CPP.
Senator Tkachuk: Let us just say that you did not have the bill. Could you not fix the accounts?
Mr. Massé: If we did not have the bill, pension accounts would continue to be at variance with national accounts.
Senator Tkachuk: Why?
Mr. Massé: Because the pension accounts are built according to the present law. The present law does not contain any provision to deal with the surplus. As a result, you not only get that theoretical surplus in the accounts, but you pay interest on it.
Senator Tkachuk: You told me that you had a right to that $30 billion. There was never any question. Every lawyer in the Department of Justice said that it was crystal clear. Why, then, do you need the bill to fix the accounts? Why were the accounts not fixed three or six years ago?
Mr. Massé: There is no provision in the present law to deal with the surplus. That is a deficiency in the present law.
Senator Tkachuk: In other words, you do not have the right to the $30 billion; is that the case? Do you have to get that right under this bill?
Mr. Massé: No.
Senator Tkachuk: I am asking you and you are to tell me. I will get in a little political argument about this.
Mr. Massé: It is not a question of the right to the surplus. It is a question of how to deal with the surplus according to the law. According to the law, not only is the surplus there, it will continue to increase.
Senator Tkachuk: I will keep trying. Despite the clarity of the officials and lawyers from the Department of Justice, this bill extinguishes the right of the unions, the pensioners and others to take the government to court.
Yesterday I was quite confused because I had a little discussion with Daryl Bean about this. I asked why the government would cause all this trouble and make everyone angry with them. You have made nobody happy with this bill. Usually the government does everything to try to make everyone happy. Why would the government have done this? You were so close on all other aspects -- on management, on appointments, on how the future would run. All of that was extinguished by the problem over the $30 billion, which could have been dealt with in another way, I believe, that would have made many people happy.
With this bill, you are hoping to extinguish the present claims on the $11 billion plus any future claims on this account. Is that not correct? Is that not why the $30 billion is in the bill?
Mr. Massé: I do not believe that that is correct. I understand your basic point that we are extinguishing a right. The lawyers have their point of view on it and I have mine.
On this one, if the unions believe that they have a legal right to the $30 billion, they will continue in court. That is the way it is done in our society.
Senator Tkachuk: No, it is not the way it is done. I beg to differ there.
Mr. Massé: Can I answer? I let you make your full point.
The Chairman: Please let the witness answer the question.
Mr. Massé: My full point is that the law as such does not extinguish the union's claim to a part of the surplus. If they do they have that right, the courts will tell us that.
In this case, we are passing the bill in order to make the accounts correct on the basis of the legal advice that we have been given. If the unions believe that they have any right to the surplus, let them go to court. This law will not change the legal rights that exist at present.
Senator Austin: That is a different answer.
Senator Tkachuk: That is definitely a different answer than what we got earlier from your officials and yourself.
Senator Oliver: Senator Austin asked the question and the response was that it will extinguish. The record is clear.
Mr. Massé: As I mentioned, Mr. Chairman, I asked for an answer from our advisers.
Senator Oliver: And you got it.
Mr. Massé: Our advisers gave us the answer that, in their view, the rights are being extinguished. That is fine.
Senator Oliver: That is correct.
Mr. Massé: The lawyers are giving their views about this thing.
Senator Tkachuk: You are the minister. What do you believe?
Mr. Massé: The unions may very well believe something different. I would not be at all surprised.
Senator Tkachuk: Do you believe their rights are being extinguished in this bill?
Mr. Massé: In my own personal opinion, and I am not here as a legal expert, this bill is introducing a way to recognize the surplus and abolish it. We are introducing the proper method of accounting for the surplus and that method of properly accounting for it will mean that, over a period of 10 to 12 years, it will disappear. "Disappear" means it that will be absorbed within the national accounts very much in the way that the Auditor General has indicated it should be done. The Auditor General has recommended that it should be abolished over time in the national accounts because that surplus, even in the terms of the Auditor General, does not make sense.
You must recognize why we have done it like this, and that is my point. If other parties have other views about it, our democratic system is such that they can go to court on that understanding of who the surplus belongs to and what it is and what it corresponds to, and they can say that the government is wrong.
Senator Oliver: They cannot do that if their right to go to court has been extinguished by you.
Senator Tkachuk: I will let the lawyers on my side deal with this later.
You said some interesting things about the $30 billion and about the guarantee that the federal government gives employees regarding paying their pensions, good faith, trust and so on.
What happens if this is removed from the accounts? This is not just a piece of paper. The government and the employees, not just taxpayers, have put in more money than the actuarial tables say they need at the moment. However, we do not know what the future will bring. If in the future there is a deficit, will there be increases in the amounts of money that you will be asking from the employees to cover the liabilities that you will have in paying out the pensions?
Mr. Massé: Ms Hamilton is telling me no. That is the correct answer. In the future, we may be asking our employees for more money, but the government will continue to be responsible for the risks and the potential deficits. In law, the government has and will continue to have a series of benefits and promises to employees. That series of benefits is the only thing it promises to employees. It will continue to pay those benefits.
Senator Tkachuk: I can see why the unions do not believe that. The CPP is a defined benefit plan, is it not?
Mr. Massé: No.
Ms Hamilton: It is very different from what we would normally consider a defined benefit plan in the pension universe. It does have a benefit formula.
Senator Tkachuk: Yes. Taxpayers were told years ago that if they paid this amount of money, they would have this. Then we were told 20 or 30 years later that that is not right and it will cost us a lot more money to deal with this issue.
Every public sector union that came before us is unhappy about this bill. The postal workers are unhappy. The Catholic Church has written us letter about this. The Evangelicals are unhappy.
Who is happy with this bill?
Senator Angus: The minister.
Senator Tkachuk: Why?
Mr. Massé: The fact that the unions would be unhappy with it is easy to understand. It is part of their role to indicate unhappiness. They want to have the greatest possible benefits for their members. That is why they are there.
As for the public in general, I think that the taxpayers, who will be the main beneficiaries of this bill in terms of your argument, are quite happy with it. The fact that you have seen relatively little public turmoil about it is a good sign of what is happening. This reform of pensions is necessary and will make the public servants pay for the CPP exactly the same way that all other Canadians are paying. This reform will, in fact, re-establish the accounts of the pensions in a way that is in conformity with the Auditor General and with what those accounts should have been. Of course some people would hope to benefit from that situation, but the people who should benefit from it are the taxpayers who paid for all the deficits in the past.
Senator Tkachuk: I really do not want to get into the conjugal benefits, which I think are a problem, but I have a question regarding the Defence Services Pension Continuation Act, which is to be amended by this bill. In clause 207, a "survivor" is defined in relation to an officer as a person who was married to the officer at the time of the officer's death or a person referred to in subsection 32(1). Subsection 32(1) of the Defence Services Pension Continuation Act reads:
For the purposes of this Act, where a woman establishes to the satisfaction of the Treasury Board that she had, for a period of not less than one year immediately before the death of an officer or former officer with whom she had been residing and to whom she was not married, been publicly represented by him to be his wife, the Treasury Board may deem her to be the widow of the officer or former officer and to have become married to him at the time when, in fact, the representation began.
I notice also that subclause 208(3) of the bill refers constantly to "him." It reads:
When an officer dies before a period at which a pension might be granted him, the Governor in Council may grant to his survivor, or, if he leaves no survivor, to his children under eighteen years of age at the date of his death a gratuity equal to the amount of the deductions made under section 9(1) from the officer's pay during his service.
It seems to me that even though conjugal benefits are in this bill, you make an exception in the military. Do you recognize two men sleeping together in the military?
Ms Hamilton: Basically, that is the predecessor to the current Canadian Forces Superannuation Act.
Senator Tkachuk: Yes.
Ms Hamilton: There are no female contributors under that pension plan. That plan ceased to cover members of the military in 1960 and there were no female contributors under it; there were only male contributors.
Senator Tkachuk: A survivor is referred to as a person who was married, who was obviously his wife.
Ms Hamilton: Yes.
Senator Tkachuk: Could an officer not have had a survivor who was not female?
Ms Hamilton: Do you mean at that time?
Senator Tkachuk: Well, I do not think homosexuality is a 20th century or late 20th century phenomenon.
Ms Hamilton: I am afraid I really do not understand your point.
Senator Tkachuk: I am not sure what "survivor" means here as it relates to what you tried to do earlier in the bill, which I do not agree with but do understand. I want to make sure that it is exactly the same for people under this pension plan as it is for everyone else. I am asking the question because something seems not right.
The Chairman: Could we perhaps ask the officials to come back to us with an answer to that?
Ms Hamilton: We will look at that.
Senator Callbeck: The Canadian Union of Postal Workers presented a brief yesterday. They said that when the legislation came in, they were astounded that Canada Post was to have a separate plan. They found themselves dealing with a bill that gives Canada Post the right to establish and administer a new pension plan without their input until October 1, 2001, at the earliest. Why would they not have any input in setting up this plan initially?
Ms Hamilton: In fact, the legislation does require that they be consulted and that their views be made known in setting up the plan.
Senator Callbeck: The initial plan will operate on October 1, 2000.
Ms Hamilton: That is right. Canada Post is required to establish the plan and must establish it to the satisfaction of Treasury Board ministers. One of those requirements is that Treasury Board shall approve a plan when it is satisfied that, when the plans are established, the corporation has informed all the employees and representatives of the changes that the plans would make and given them the opportunity to make their views and interests known with respect to the changes. When the corporation comes to the Treasury Board ministers for approval of their plan, there is a list of things that the Treasury Board ministers must be satisfied about.
Senator Callbeck: The union will have their input on that. This plan will come into effect on October 1, 2000. According to the legislation, it says it cannot be part of the collective bargaining process until a year down the road, October 1, 2001. Why is that?
Ms Hamilton: The notion here is that we are putting the pension plan for these employees in the hands of the employer and allowing the employer a period of time to get it up and running. We are doing that with a whole series of guarantees and requirements around the protections to be afforded the employees, and letting the corporation get this program in place and get the administration in place so that they will be in a position to begin negotiations with a solid pension plan in place. This will be one of the largest pension plans in the country, actually, so it will take some time for all of the necessary structures to be in place in order to manage the plan.
Senator Callbeck: Is that the usual practice? I thought that once a pension plan was proclaimed, it could be part of the negotiation process. The contract for these people comes up July 1, 2000, and, providing they get a three-year contract, that means that this pension plan will not be part of the collective bargaining until July 2003.
Ms Hamilton: I am not sure whether the pension plan would be negotiated as part of that particular series of negotiations or whether there might be scope for a separate round of negotiations on that subject.
The Chairman: I am sorry, Ms Hamilton, I normally do not intervene, but the bill is crystal clear.
Ms Hamilton: They certainly cannot negotiate.
The Chairman: You just said you are not sure that they will be part of the negotiations. It is crystal clear that they cannot be.
Ms Hamilton: I realize that they will not be part of the negotiations. They certainly cannot officially be part of the negotiations at that point. However, what I was saying is that I did not know if there would be a separate negotiation process that would be contemplated by the two parties in respect of pensions.
Senator Callbeck: According to the legislation, if these people get a three-year contract, then it will not be part of the bargaining process until July 1, 2003.
Mr. Alain Jolicoeur, Chief Human Resources Officer, Human Resources Branch, Treasury Board Secretariat: It can be done, presumably, in a different fashion. They could reopen a collective agreement or have a separate agreement for that. It will be for both parties to decide how they wish to do that. I fail to see why there would be a delay longer than what is established in the legislation because of the phase and the timing of the current collective bargaining occurring at the moment. I do not see that as a problem at all. It can be done in a different fashion.
Senator Callbeck: According to the legislation, is what I said correct?
Mr. Jolicoeur: Yes.
Senator Callbeck: Another concern they had was on the investment rules. This legislation requires the public service pension plan to adopt a passive domestic equity strategy over an initial fixed period of time. However, there is no restriction for the Canada Post pension fund. I am wondering why.
Ms Hamilton: I will need to verify whether that is in fact the case.
The Chairman: Ms Hamilton, given the quality of homework our members have done, you can take it that it is the case. The members of this committee do not ask technical questions in which the facts are not right.
Ms Hamilton: The point here, of course, is that they will be subject to the Pension Benefits Standards Act; therefore, their investment parameters will be set by that act.
Senator Callbeck: Why is it that this legislation has laid it out for the public service pension plan that they adopt a domestic equity strategy over an initial fixed period of time, but the legislation did not lay it out for Canada Post?
Ms Hamilton: It does not; that is a fact. The passive investment strategy for the public service pension plan, as you know, is a similar approach to that which was adopted for the Canada Pension Plan start-up period, to give the investment board a period of time to be established and to put its support network in place. The corporation may well be in a better position. I would presume that, in setting their investment strategy, the corporation will be looking at the kind of approaches that have been taken in these other programs, but I cannot say at this point what their actual strategy might be.
Senator Callbeck: I was curious as to why one plan was covered in the legislation and another plan is not.
Ms Hamilton: I suppose part of it is that the Canada Post plan will be their plan and they will need to set their investment strategies and policies in relation to their employee population and their objectives as sponsors of the pension plan, so they may have a different approach.
The Chairman: My supplementary question relates to the fact that under current public service pensions a number of exemptions are granted under the Income Tax Act: for example, the limit on pensions that are pensionable and that kind of thing. When you transfer the postal pension plan to being under the Pension Benefits Standards Act, those exemptions that are otherwise available to public service pensions disappear because they are not generally available under the PBSA; however, this act does not deal with those issues.
Is it the intention of the government to deal with those issues prior to October 1, 2000, when the postal plan would come into effect under the PBSA? Or, if the plan comes under federal legislation under the PBSA, are those extra benefits, in effect, going to disappear? For example, how will you deal with pension excesses? The limit used to be $60,000; now I believe it is over $85,000 or $86,000. Will one be able to have pensionable service between the ages of 69 and 71? How will you deal with those kinds of things that you can do under the federal plan but not under a PBSA plan?
Under this bill, it is clear that postal workers will lose some benefits that they otherwise would have. Is it the intention of the government to give them those benefits before October 1, 2000?
Ms Hamilton: In the section of the bill dealing with the establishment of a plan by Canada Post, it says that they have to establish a pension plan and that pension plan will have to be in conformity with the Pension Benefits Standards Act and the Income Tax Act. They are also required to establish supplementary plans in the nature of retirement compensation arrangements, which are the vehicles used to provide pension benefits that are off-side of the income tax rules.
The plan that they are to establish must also provide pension benefits that are equivalent to the benefits that are now being provided to the employees under the public service plan and the retirement compensation arrangement that is in place for the public service. The legislation demands that the same level of benefits be provided. Whether they can be provided in exactly the same vehicles as they are now for the public service is something else to consider.
Senator Meighen: I wish to go back over some well-tilled ground: the question of the entitlement to a share of the surplus. I was not sure we came to a conclusion on the matter.
I am not a pension expert and I hear what you have said about the legal position. By way of editorial comment, I must say that if I were an outsider with a direct personal interest in this, I would find it difficult to understand why I did not have some entitlement to some part of that surplus, at least on a moral ground. However, the law leaves us all bewildered from time to time. As a lawyer, I know that as well as anyone.
I think you said that if the union feels that it has an entitlement to it, then, since we live in a democracy, let them take legal recourse. However, we agreed earlier that the question of their right to seek an answer to that question could well be extinguished by the passage of this legislation.
If the Supreme Court were to say to you, "Mr. Minister, I can tell you that the passage of this legislation will extinguish the right to claim," I think I heard you say, directly or indirectly, that that did not seem fair. Or am I putting words in your mouth? I do not find it fair if the right to seek an answer is extinguished by the passage of legislation. I think it fair that what I am entitled to should be determined by the courts, but if I cannot even ask the question, does that not go to the question already posed of why the extreme haste?
You were somewhat sceptical that there had been extreme haste. I understand that you would feel that way, coming from a position where there has been negotiation over a protracted period of time. This bill was introduced in the other place on April 15, or thereabouts, and there was time allocation at each stage. To be charitable, there has not exactly been an overloaded legislative agenda for the past year and a half.
I take the position that this is going rather quickly. I ask you, sir, whether or not it is worrisome that it may very well be that the question of the entitlement of the surplus will be extinguished by the passage of this legislation and whether we should not try to find out an answer at least to that question before adopting this bill.
Ms Joan Arnold, Director, Pensions Legislation Development, Treasury Board Secretariat: In answer to Senator Austin's question regarding the present lawsuit, Ms Hamilton was trying to say that our litigator wrote to the plaintiff's litigator and said that it was his opinion that the lawsuit was moot. That lawsuit does not deal with the question of the surplus but, rather, challenges the government's accounting practices.
It would be fair for say that the contents of Bill C-78 would not extinguish a right to the surplus in terms of what we said about that lawsuit. It provides means to deal with the surplus. If the parties who oppose it believe they have a legal case, then I think they can easily bring their case to court. That is their right.
Senator Meighen: Notwithstanding the passage of this legislation, you believe that they would be entitled to bring their claim for a share of the surplus before the court; is that what you are saying?
Ms Arnold: Yes. I am sure they could launch a lawsuit to challenge, if they wished. I think they could.
Senator Meighen: And it would not be ruled moot?
Ms Arnold: No.
Senator Meighen: That, I think we would agree, is different from the impression we were under earlier.
Ms Arnold: I am sorry if a misunderstanding was created. At least that is my understanding.
Senator Meighen: That gives me some comfort.
Mr. Massé: I am glad to see that the common sense position is justified by the law.
Senator Meighen: What is the rationale for exempting this legislation from access to information and privacy legislation?
Ms Hamilton: The only part of the legislation that could be so exempt would be that part establishing the new public sector pension investment board. Regarding the other pension plans, which are the responsibility of the government and administered by the government, the normal access rules would apply.
Senator Meighen: To what would they not apply?
Ms Hamilton: To the public sector pension investment board.
Senator Meighen: Therefore, if one were a pensioner, one could not find out through that method the reasons for investment decisions or investment practices; is that correct?
Ms Hamilton: Do you mean individual investment decisions?
Senator Meighen: Yes. You say it will not apply to the investment board. If I were a pensioner, then, I could not file an application under the Access to Information Act requesting information with respect to the minutes, for example, of the board. Is that correct?
Ms Hamilton: Most of the information that would be available -- in fact, probably virtually all of it -- is included in the various forms of reporting and the various forms of public disclosure that the board is required to do under the terms of this legislation. There are probably components of the board's activities that have to do with commercial sensitivity, and so on, that would not be available under access legislation anyway.
Senator Meighen: Why, then, do we need it? You have told me to what it would and would not apply, in your opinion, but you have not told me why the clause was inserted to exempt specifically this piece of legislation from the Access to Information Act and the Privacy Act.
Ms Hamilton: Once again, it is to emphasize the arm's length nature of this operation from the government.
Ms Arnold: The CPP board is not subject to access to information legislation either.
Senator Meighen: Two wrongs do not necessarily make a right.
Ms Arnold: I would agree with what Ms Hamilton said in that the vast majority of capital gains would be available publicly anyway since the board is subject to strict reporting arrangements and must be transparent in all of its actions. I do not know that information about a particular investment would be available under access anyway, as it could be characterized as information that would be commercially sensitive or information that would give an individual advantage, which is one of the provisions in the Access to Information Act.
Senator Meighen: Subsequent to his testimony yesterday, Mr. Bean provided the committee with a copy of a letter dealing with a couple of matters in which he suggests a question for the minister. I am happy to pose the question because it may clear up some misunderstanding. Mr. Bean's letter reads in part as follows:
First, a number of Senators raised questions with regard to my assertion that the government has tied joint management of the pension plan to union agreement to relinquish any right to the accumulated pension plan surplus. During the hearing, I paraphrased comments by Alain Jolicoeur to the consultative committee to this effect, and suggested that Mr. Jolicoeur was undoubtedly speaking on behalf of the Minister's official position. Since I have no paper that would confirm this assertion, I believe that it would be appropriate for the committee to address the question direction to Minister Massé.
Senator Meighen: Is Mr. Bean's assertion correct?
Mr. Massé: That is not the way I see it. We have discussed the possibility of joint management. The union insisted that they wanted a share of the surplus. We indicated to them our clear view that that was not part of the discussion. We were talking about events in the future. In the future, if we have a joint management and the sharing of risk, we are obviously ready to discuss the surplus. However, regarding the past surplus, the government took all of the risks and was delivering on legislated benefits, and therefore that portion of the surplus was outside of the question. The union then stopped the negotiations.
The future discussion of a joint management scheme is not excluded. On the contrary, my own view is that that is the way it should eventually take place. In order to have a joint management and a sharing of the surplus, there must be an acceptance by the other side that they are ready to share the risks, also. The door remains open for that.
I am sure you will see the link between how joint management and sharing the surplus is established. My view is that joint management in the future and the sharing of the surplus will depend on an acceptance by the union that they are also ready to share the risks. If they do that, there can be a sharing of the surplus for the future. In the past, that did not exist. There was no sharing of risk or ownership of any type. There no was legal title to the surplus and the surplus, therefore, belongs to the taxpayers.
Senator Austin: Mr. Minister, I will make an observation because today I understand the proposed legislation better than I did yesterday. Yesterday I said to Mr. Peacock that I found it strange that Bill C-78 would set up a pension management board to allow the Government of Canada to make equity investments because, essentially, that is what it says today. You set up the board and they are free to make more active investments than currently have been the case, yet you retain the responsibility for servicing the pension laws of Canada, which you have also referred to today.
Is it correct for us to understand, then, that you see an institutional structure that is an invitation to the public service to negotiate a risk management arrangement in the future as justification for setting up the board?
Mr. Massé: I hope they will.
Senator Austin: Is that the justification for setting up the investment board in Bill C-78? Is it a preparation for the future?
Mr. Massé: I have two beliefs and they may be implemented together or separately. First, the ability for a private investment board to invest the proceeds of the contributions into a series of assets that are more diversified is a good thing. Therefore, we should move in that direction, whether or not the government keeps the whole risk or liability.
Second, I believe that, in a plan like this, we should have joint management of the assets and sharing of the risks. I hope that the second will happen eventually, together with the first. That is the best combination, I believe. However, there is a public interest involved in having the proceeds of the pension plan invested on a wider basis.
Senator Austin: I understand the scheme that you are outlining. We found in the evidence of Daryl Bean yesterday a willingness to participate in a risk management plan and to negotiate that plan, but an unwillingness to do so without settling the question of the surplus entitlement. I hope that you will arrive at some agreement in the future.
Mr. Massé: For the purpose of clarity, I wish to indicate that a sharing of future surplus and joint management and share of the risk is something that I am entirely ready to discuss. In the past plan, there was no sharing of the risk; the taxpayers paid for all the deficits. That surplus belongs to the taxpayers.
Senator Austin: Bill C-78 provides that until such a risk management agreement is entered into, the Crown has the option to retain any future surplus as well.
Mr. Massé: For the same rationale, which is that it bears all the risks.
Senator Austin: The other thing I wish to ask you about is the contribution rate. We heard evidence from Mr. Krause, who expressed concern that the contribution rate could be managed in such a way as to create a permanent surplus from employees' contributions. Could you clarify for us how the contribution rates are managed?
Mr. Massé: In the future plan we will establish a separation between the way the CPP contribution rates are calculated and the contribution rates under the PSSA. For the CPP, the rates should be the same for the public servants as they are for every other Canadian. For the PSSA, we think a general principle should be put in place that the shares of the cost of the plan should be as they are in most of the other public sector plans: 60 per cent employer and 40 per cent employees.
You will note that this was true for most of the life of our pension plans. That is a basic principle in public sector pension plans. We are now going to the employer paying 70 per cent of the cost. If we do nothing, we will soon be paying 80 per cent of the cost. However, what we have established over time is the 60-40 split and it is our intention to leave it at that, not to create a surplus.
Senator Austin: Is you motion based on a notion of fairness to taxpayers as a whole with respect to contributions?
Mr. Massé: In terms of the accepted practices in public sector service plans, yes.
Senator Oliver: I am the tenth senator to get a chance to ask you a question. I have three of them. However, as the questions that have preceded mine have been wide-ranging, I regret that some of my questions have been partly put already, yet I shall still put my full question.
You have said today that not one cent of the surplus was ever promised to the employees. You went on to say that the disposition of the surplus is not a question of consultation with employees. In other words, you have said that you own it all, you have an absolute right to it and you do not have to consult with them.
Last night before our committee, Ms Deborah Bourque, Third National Vice-President of the Canadian Union of Postal Workers, referred to a letter that you had sent to Mr. Daryl Tingley. I asked for a copy of the letter to ensure that the quote they were using was accurate. It is a letter with your signature dated March 31, 1999.
In the letter, you seem to imply that you are open to negotiation of some of the surplus with this union. You state that with respect to the particular steps that the government is proposing to take, you have noted the union's interest in seeing issues such as surplus disposition, pension fund investment and contribution rates established through a negotiating or consultation process. You go on to state that you are disappointed that the consultation process did not result in the establishment of a joint management process that would have allowed for shared responsibility of those issues -- the surplus disposition. You also state that you are quite open to the possibility of reaching an agreement on joint management in the future. That is also what you just said to Senator Austin.
The language that interests me is "the surplus disposition." Would you explain that language? What were you prepared to negotiate with respect to the disposition of the surplus?
Mr. Massé: I have indicated that the accumulated surplus on the pension plan was accumulated when the government was entirely, fully, totally responsible for the risks and paid billions of dollars for the deficits that accumulated during that period. In an environment where the employer takes all the risks, the surplus, like the deficits, is the responsibility of or owned by the government and the taxpayers.
I am quite ready to discuss the disposition of future surpluses in an environment where there would be a joint management scheme with sharing of the risks.
Senator Oliver: Are you saying that this letter that you wrote to Daryl Tingley, National President of the Canadian Union of Postal Workers, on March 31, 1999, deals only with future surpluses?
Mr. Massé: Yes. That is how I would interpret my own letter. I said that I am quite open to the possibility of reaching an agreement on joint management in the future. It is in that light that surpluses would be discussed.
Senator Oliver: Last night, four witnesses dealt with the conjugal aspects of this proposed legislation. They referred to a number of cases that had been recorded in the courts.
You said earlier in your testimony today that you have tried to enshrine in your bill the law of the land. What is the law of the land and what are the cases that you were referring to? Is it Egan v. Canada, M. v. H. or Rosenberg? Where does M. v. H. stand in relation to the current law of the Supreme Court of Canada?
Ms Arnold: As I understand it, it is the opinion of the Department of Justice that M. v. H. would represent the Supreme Court's most recent word on that.
Senator Oliver: Is it something new since the legislation was written?
Ms Arnold: Yes, the M. v. H. decision was rendered on May 20, 1999.
Senator Oliver: How does it change what is in the current legislation?
Ms Arnold: Do you mean how does it change the legislation proposed in Bill C-78?
Senator Oliver: Yes.
Ms Arnold: I do not think it changes anything. It bolsters the position that the government has chosen to take in Bill C-78.
Senator Oliver: How would you distinguish Rosenberg from M. v. H.?
Ms Arnold: I would say that Rosenberg and M. v. H. are certainly within the same line of cases. Last night, the witnesses were referring to Egan v. Canada, which was a Supreme Court decision from 1995. The better view would be that M. v. H. would have overtaken Egan v. Canada.
Senator Oliver: I am sure, minister, that you know that we have all received dozens and dozens of letters from Canadians who feel aggrieved by your bill. The main reason they feel aggrieved is that they do not understand the surplus issue. Is there, or is there not, $30 billion in the surplus? Did that $30 billion not come from money that was deducted at source from a number of Canadians?
One of the letters I received in my office this morning came from Mr. William Devine, a former Ministry of Transport executive pilot and a superannuant, who says that the accrual of the surplus is simply due to an actuarial miscalculation by the Treasury Board on the amount that was to be deducted from public service employees' paycheques. In other words, public servants paid too much and now, instead of crediting this miscalculation back where it belongs, to the public servants and superannuants, the government intends to confiscate it and bolster their claims of fiscal management in regard to Canada's public debt.
Perhaps, minister, you could comment on that so that Canadians who feel aggrieved will have a direct answer from you about their major concern.
Mr. Massé: Of course, I believe that that is incorrect. As I just mentioned, the percentage that was paid by the employees into the pension plan has been, for most of the life of the plan, about 40 per cent of the contributions, which is considered quite fair and normal in public sector plans. In the years when the surplus was accumulated, the government's portion went to 70 per cent and it is now moving slowly towards 80 per cent. In these terms, it is the government that has paid the lion's share of the contribution. The surplus has accumulated in recent years because of the lowering of inflation and so on.
One must consider the rules under which the pension accounts were counted and what happened to deficits and surpluses. For most of the life of the plan, the deficits were much more common. When there was a deficit, the government naturally paid, without asking questions, 100 per cent of that deficit.
These accounting surpluses, once again, do not correspond to the way in which the accountants and the Auditor General would account for it. The Auditor General is forcing the government, in its national accounts, to represent more truthfully the way in which the liabilities of the plan should be represented.
In response to that letter, I would say that the contract with the employees was that they would pay 7.5 per cent of their salary and in return they would receive legislated benefits. That was what the employer had in its contract.
Senator Oliver: The government had a defined benefit.
Mr. Massé: Yes, a defined, legislated benefit. The government was not telling people that if there were not enough money, the defined benefits would be reduced. The government promised a series of defined benefits. The government is legally obliged to distribute them and will continue to be legally obliged to distribute them, whatever the state of defined surplus in the account.
Senator Oliver: Have you told any individual or group in the last few years -- that is, union group, pension group, military group or RCMP group -- that you would be prepared to sit down and negotiate with them, crediting to them any portion of this accumulated $30 billion surplus?
Mr. Massé: Not that I know of, no.
Senator Angus: Welcome, minister and colleagues, to this workshop on the extent to which politics strange bedfellows doth make. I think we have seen that in spades this morning.
With all due respect, we have also seen the extent to which your government has made an art form of sucking and blowing at the same time. I am rather amused. It is not so long ago that we witnessed outraged protestations by you and your colleagues about Conrad Black and other employers asserting the employer's right to surplus. Now you are indulging in the same activity.
I must confess that I think you are right. In the circumstances of a defined benefits plan, when the employer takes all the risk, I think he is legally entitled to the surplus.
However, I should like you to elaborate on the scheme of the integration between the CPP and these public service employee pensions. Perhaps you could run through it again. As I understand it, the employee must make contributions to both and, over the years, the employees may have been getting a better deal than other Canadians with their contributions to the CPP. Is that correct? If so, could you walk us through that? I think it is a significant point.
Mr. Massé: Yes, that is correct and it is a significant point. However, it is very complex so I will ask one of the experts to give you a detailed answer.
Ms Hamilton:The current legislation says that the contribution rate under these pension plans for employees is 7.5 per cent of their salary less the amount they are required to contribute to the Canada Pension Plan. Therefore, to the extent that the Canada Pension Plan contribution rates have been going up for several years now and will continue to do so for the next four years, the amount of contribution that employees are actually making to their pension plan has been going down by that amount. Their contributions have actually been decreasing.
Senator Angus: That is in accord with my understanding.
My last question relates to things that have already been said. My understanding of your position, minister, is that the advisory groups that met over eight years, I believe you said, were, in effect, the consultation on this proposed legislation, even though the terms and conditions of this proposed legislation as set forth in Bill C-78 were not, per se, the subject of those groups.
Mr. Massé: Yes.
Senator Angus: Is it your position that all of the issues that arise from Bill C-78 were covered in those discussions?
Mr. Massé: A great majority of them were. The Canada Post and same-sex provisions were not part of that, but the great majority of the rest were.
Ms Hamilton: It basically represents the areas of discussion.
Senator Angus: I do not understand why the RCMP were never included in any of those committees. They said that there is a law preventing them from being included. Would it not be good business to include such an important employee group in consultations?
Ms Hamilton: The consultation process that we have talked about is primarily the consultation with the public service unions over the last several years. For the most part, that took place in the pension advisory committee on the public service plan.
There are parallel advisory committees for the military and the RCMP. The financial issues surrounding the pension plans were discussed in those advisory committees. The fact that the public service was looking at joint management and moving in that direction was certainly discussed in those advisory committees and they did make reports to their respective ministers on occasion over the years. Treasury Board's consultation process was with our unions.
Senator Angus: I am focusing on the RCMP. A representative of the RCMP told us categorically that there was never any consultation, that they had no input whatsoever. He said that they asked to appear before the House of Commons committee and were told they could not. He said that his appearance before us was their first opportunity to put forward their views.
Are you saying that this man is a dissembler?
Ms Hamilton: It would be a question of perspective of what constitutes consultation. In the RCMP, there are two bodies where consultation might occur. One is the pay council, which is where the regional representatives have their strongest representation. They are also represented on the advisory committee established to advise the minister on pension matters.
Senator Angus: Is it the government's view that they had a fair chance to give input? If you think that there may have been oversight in the case of the RCMP, it would not be too hard to say that.
Ms Hamilton: On the financial side of the pension arrangements, for example the action with respect to surplus, there was no consultation on existing surplus in any form because it was not on the table for discussion. Obviously, I was not a member of the RCMP advisory committee so I cannot speak to their specifics. There may have been aspects of the legislation that they had not anticipated.
Senator Angus: Is it your position, Mr. Minister, and that of your colleagues, that at no time, in any forum, was it acknowledged by the government that there was a possibility of splitting up the surplus?
Mr. Massé: Not that I know of.
Senator Angus: At no time, in an endeavour to make a compromise?
Mr. Massé: Mr. Jolicoeur is the lead of the negotiating unit. He would know best.
Mr. Jolicoeur: Our position with regard to the past surplus has always been that it was not negotiable. The only thing that was negotiable was future surplus and additional benefits, as we see in this bill. There was no negotiation with regard to splitting the past surplus.
Senator Kenny: Looking at the broader picture, I am concerned about the rapid change of pace that has affected the terms and conditions of employment of public servants over the past decade. I think of pay freezes, job security, the creation of new agencies and now this bill. You have had a distinguished career as a public servant and you represent a riding that has a great many public servants in it. What impact do you think this has on the morale of the public service?
Mr. Massé: I would ask the question a bit differently. I would ask what kind of changes had to be made to make government more responsive to the needs of the public. Even as public servants, this is a question that we must ask. We are not in the public service entirely for our own benefit. If you ask the question in that way, you come to the conclusion that a considerable number of profound changes had to be made in government that, as a result, impact on the people who help to implement government policy and give advice on it -- people who are public servants. In fact, I entered politics because I believed that there were reforms to be made and that, for the good of my children and my grandchildren, they should be made quickly.
These changes did include changes in the terms of conditions of employment. They included some painful changes in terms of job security -- the reduction of the number of jobs by very close to 20 per cent in the public service. Sometimes we do not realize how deep these cuts have been. Yes, I have been concerned about it, because close to 20,000 of my voters are civil servants or related to civil servants. I am very sensitive to that issue.
At the same time, a number of those civil servants in my riding tell me, when I meet them in the shopping malls, "We knew we were sitting on a keg of dynamite and it had to explode some day. In fact, it did explode, but you helped make it tolerable." The terms on which we let a number of people go were, for the most part, negotiated with the unions. I think the majority of public servants, even amongst those who were affected, would say that we have done it in a humane and correct way. As a result, we did not have the labour problems in the federal public service that existed, for example, in the Ontario public service.
Yes, there were changes in the conditions of service. Some painful reforms had to be put into place. The pension reform, in fact, contains additional benefits, so I do not think it is as painful. There have been recriminations about the surplus, of course, and I understand that, but no benefits have been denied or reduced for public servants. In fact, it is quite the contrary.
Regarding the pension benefits, the feeling in my riding, apart from the fact that we would like to share in the surplus, is that we are quite happy to see that the averaging has been reduced from six to five years. The retirees know about the dental plan because that was one of their long-standing requests. You see why I put it in a slightly different light.
Senator Kenny: I was encouraged by your comments, if I understood them correctly, that you are interested in finding a better model of governance than currently exists in this bill.
Mr. Massé: Certainly. Once again, I should like to see, over the years that come, a regime where the pension fund is managed jointly by the retirees, the unions and the employer. I should also like to see a sharing of risks, a sharing of the benefits of the surplus of a better investment pattern, and a sharing of this amongst employers and employees and retirees, if we can do so.
Senator Kenny: Mr. Chairman, there seem to be many questions that need further consideration. Is it possible for the committee to find time to discuss them further?
The Chairman: Do you mean the beginning of next week?
Senator Kenny: Whenever you can organize it.
The Chairman: I am happy to take that into consideration and talk to Senator Tkachuk about it. We have our regular time scheduled for next week, and we do not currently have anything on the timetable.
Mr. Minister, thank you for taking the time to be here. I realize we kept you beyond your schedule, but it was important that we review the issues in some detail.
Senator Tkachuk: There was a question regarding "survivor" in the Defence Services Pension Continuation Act. Is there an answer? Could that be clarified for me?
Ms Hamilton: Basically, the Defence Services Pension Continuation Act is a closed pension plan.
The Chairman: I will ask you to discuss that at the side, because we have the other minister waiting. Mr. Massé, I am sure you will regard your first appearance before this committee as memorable.
The committee suspended its proceedings.
Upon resuming, the Standing Senate Committee on Banking, Trade and Commerce, met to give consideration to Bill C-67, to amend the Bank Act, the Winding-up and Restructuring Act and other Acts relating to financial institutions and to make consequential amendments to other Acts.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Mr. Minister, welcome to our meeting to consider Bill C-67.
Senator Kelleher: Mr. Chairman, I would ask that the record show that I have a conflict of interest in that I sit on the board of a Schedule II foreign bank. Therefore, having declared my interest, I intend to leave and will not be present for these deliberations.
Senator Meighen: I too, Mr. Chairman, will be withdrawing for the same reason and wish the record to so indicate.
The Chairman: Senators, before the minister starts his opening statement, I have distributed to you a letter which arrived in my office this morning from Mr. Stammati, who is the head of the foreign banks association. In the first paragraph, he indicates that he was invited to appear but the foreign banks themselves decided that, given their support of the bill and their anxiousness to get it passed quickly, he did not consider it necessary for him to appear. Therefore, our only witness is the minister.
As some of you know, when this bill was first tabled in the House of Commons, there was a considerable amount of objection to it from some of the foreign banks on a tax question. In the House of Commons, amendments were then introduced, which dealt successfully with that tax question. By "successfully," I mean that they dealt with them to the satisfaction of the foreign banks. I thought members should be aware that that happened.
Senator Austin: I would ask you to append the letter to the proceedings today, because it is an important statement.
The Chairman: Certainly.
(For text of letter, see appendix )
The Chairman: Mr. Minister, thank you for attending here this afternoon. Please proceed with your opening statement.
Mr. Jim Peterson, Secretary of State (International Financial Institutions): Thank you, Mr. Chairman.
This legislation would allow foreign banks to offer specified commercially focused services in Canada through branches rather than having to operate through separate Canadian banking subsidiaries.
[Translation]
The main reason for instituting the system of foreign bank branches is to promote the competitiveness of the Canadian banking sector by supporting the healthy presence of foreign banking institutions.
The number of foreign banks in Canada has dropped from 59 to 42. One reason for the decline is the inflexibility of the system in place in Canada allowing foreign banks access to the country.
We are the only G-7 country that does not allow foreign banks to operate through branch offices. Many foreign banks would find it more advantageous to open a branch rather than to operate a wholly regulated subsidiary, as Canadian laws now require them to do.
A branch can draw on the parent bank's monetary reserves to finance its lending operations in Canada, whereas foreign bank subsidiaries must maintain their own separate reserves to finance their Canadian activities.
[English]
Branches would also be spared the expense of setting up separate boards of directors and committees in Canada, which is required of subsidiaries.
By creating a more attractive market environment, foreign banks will be much more likely to enter the Canadian market or to expand their offerings here. This will help ensure a broad range of financing sources for businesses of all sizes, as well as a larger selection for some types of consumer lending.
The legislation would amend the Bank Act to allow foreign banks to apply to the Minister of Finance for approval to establish branches in Canada. Branches would have essentially the same powers as domestic banks, with the exception of deposit taking. They would generally not be permitted to take retail deposits, by which we mean deposits of under $150,000. The reason for this restriction is that we cannot offer to the banks a less burdensome regulatory regime for branches while at the same time maintaining standards of prudence and regulation and protecting depositors' funds.
It is important to remember that foreign banks already have the option to take retail deposits in Canada by setting up fully regulated subsidiaries, an option that will still remain open to them.
To give greater flexibility in establishing branch operations, we propose two branching operations, either a full-service or a lending branch. The full-service branch could take deposits greater than $150,000, whereas the lending branch will not be able to take any deposits whatsoever.
The benefit of two separate types of branch regimes is a regulatory regime that caters to their specific needs and requirements.
As you are aware, we have already had extensive consultations and discussions through your committee, Mr. Chairman, through the House of Commons committee, and through the MacKay task force, all of whom -- and I thank you for this -- have supported enthusiastically this type of foreign branching regime.
We appeared before the House of Commons Finance Committee on May 11, having tabled the bill in the House originally on February 11.
When we appeared before the House of Commons committee, we introduced some amendments based on subsequent representations we had received after having tabled the bill in the House. These dealt with changes to the $150,000 minimum deposit requirement. We introduced some more flexibility there to recognize business requirements. Another was to permit the subsequent sale to financial institutions of certain debts, which had not previously been allowed for, and, furthermore, to allow an extension of the time to file the auditor's report from two months to five months.
As you quite rightly pointed out, Mr. Chairman, we also introduced tax changes, the major one of which was to give a foreign bank subsidiary in Canada the capacity to roll its assets over into that branch. We have made this option available for a limited time only. We have done it in such a way that we hope we will ensure the continuity of operations and the subsequent growth of them without imposing any tax liability as a result of that change of methodology for doing business here, but we have not foregone those taxes. They will be realized at a subsequent time, such as if the branch is wound up.
Having said that, we believe that this will remove an unnecessary barrier that we have had in our law to the expansion and entry of foreign banks in Canada, and it will be beneficial for all Canadians.
Senator Angus: As a member of this committee, I find it difficult to deal with the time pressures that are referred to in this letter that we received from Mr. Stammati. This is very important financial services sector legislation. I want it made known to you, and to whoever looks at the record, that I find it very troubling that the Banking Committee is getting one hour to study this legislation. I am not suggesting that you were the one who talked to Mr. Stammati. His letter speaks for itself.
I have a problem with that, considering the system that we have, in particular in the upper house, of studying legislation soberly and thoughtfully. Having said that, I noticed the substantial amendments that you introduced, and which you have just described.
What was your thinking in introducing the bill in its previous form, which was almost a prohibition for any of these folks to come here? That is the first question that comes to my mind.
Mr. Peterson: I assume that you are referring to the fact that, when we introduced the bill, we did not speak of the tax rollover.
Senator Angus: That was a major problem. Let us deal with that. However, all of your amendments were, quite frankly, good ones, and I was glad to see them. The banks have told us that, without them, they never would have come here at all.
I have always thought that there was a good measure of consultation among your officials, the Department of Finance and the representatives of these foreign banks. Therefore, I could not understand the first form of the bill.
Mr. Peterson: Quite frankly, we had had extensive consultations with the foreign and Canadian banking communities right up until February 11 when we tabled the initial version of the bill.
Some of the suggestions for amendment which came forward subsequently had not been raised up until that time, in particular the possible inflexibility of the 1 per cent exception that we had to the $150,000 limit on what we considered to be retail deposits. They were able to point this out to us and demonstrate why it would not prejudice depositors here if we were to open this up and carve out some other areas. This was their suggestion, and was something that had not been raised previously.
On the tax side, yes, they had asked for rollovers for a long period of time. On the other hand, we had asked them, over a year ago, to provide us with the information as to what the potential tax liability would be if we were not to provide rollovers. In our income tax system, we do not provide a tax rollover from a Canadian taxpayer to a foreign or non-resident person in any other provision whatsoever. They were asking for an exception to the law, for which we did not want to create a precedent.
We did not receive the information as to what the extent of the potential tax liability would be until the end of April of this year. The moment we received it, we examined it and said, "Yes, there is a real problem if we want to encourage them to have the option of rolling into branches." The moment we saw that, we said we would grant that and we tabled the commitment to file amendments because the tax aspects will involve a different piece of legislation.
I know from certain conversations that I was able to have privately with honourable members here that there was certainly encouragement to proceed at that level, and I appreciate that very much.
However, Senator Angus, out of a sense of responsibility, we could not make an exception to the income tax rules when we had other people wanting the same types of privileges outside of the banking area without having a demonstrated need. If the need had not been great and we could have accommodated it by a transitional period during which they could have operated as both, which we talked to them about, then we would have done it. However, that did not prove to be worthwhile or practical in the circumstances, so we said that we would make a one-off change to our tax law.
Senator Angus: You are aware that this committee has encouraged the government to open the doors to foreign competition to our banks to a greater degree than this bill will allow. I want to explore with you the degree of commitment your government has to this policy, because I feel that you are reluctant about this bill.
Mr. Peterson: If you sat back and said, "These banks are a diminishing part of our Canadian banking sector and all they will do is cream the market and steal from our domestic banks, and they will probably not have any real interest in retail banking at all in Canada," you could come to that conclusion. These would be the criticisms that would be made. One might ask, "Why would you want to hurt the great Canadian banking institutions, which are terrific and the greatest industry we have in this country?" Why would you want to increase the competition for them so that some of their best accounts could be stolen from them by these foreign banks, which are here with a limited purpose? No, a greater public policy issue is at stake here, namely competition. The minute you get rid of competition you are doing a disservice to our own institutions, because they will not have the impetus to keep up with the latest changes. Foreign banks will bring -- apart from a desire to compete and a different manner to serve the people -- the expertise of their foreign officers and employees from countries where these banks are privy to the latest developments in other markets. Foreign banks can bring to Canada the latest information about markets, technologies and new ways of doing business. That will encourage the growth of a very vibrant bank economy, which will be right at the heart of global financial sector developments.
Schedule I banks have come to us with open arms saying, "Please, bring these people in. It is the way of the world and we encourage you." They were not trying to protect themselves or carve out little niches for themselves. They encouraged us to do it. For that reason, I feel positive and enthusiastic about this. We are not reluctant; we are very enthusiastic.
Senator Angus: I am glad to hear that. However, it still appears that this bill has the minimum compliance with our international obligations under the WTO, and that we have done this to comply with these international obligations as part of the duties we have with our trading partners, but that we will not go one millimetre further.
I believe that the words you spoke are the right policy and we could have opened our arms wider in the name of competition and to strengthen our banking sector. However, I wonder if this bill actually goes far enough in order to bring all this expertise and these people in?
Mr. Peterson: I welcome your suggestions as to how we could go further. We have endeavoured to create both lending and full-service branches to reduce the regulatory and administrative burden for those who want to come in here for a limited purpose and do not cause us problems. We have tried to tailor the regime to meet their needs.
You could legitimately say that there is unfinished business on the table, relating to our ultimate response to the MacKay task force. If we had given in on some of the issues that the foreign banks requested us, they would have had a great advantage over our domestic institutions and we would have thus created an unlevel playing field. Some changes will be forthcoming and will apply to all financial institutions, but we will not allow the foreign banks to jump the queue ahead of our domestic banks. That would not be good policy and it would not be good for them.
Senator Angus: I will be looking with interest at these additional matters. When you agreed to introduce the amendments in the other place, did you receive assurances, either official or unofficial, that the foreign banks would come in and open branches? I am speaking in particular of banks that had disappeared. You mentioned the diminishing number of players in Canada in recent years.
Mr. Peterson: We have had a number of expressions of interest. Mr. Seeto has some survey numbers.
Mr. Charles Seeto, Director, Financial Sector Division, Department of Finance: OSFI had done a survey of foreign bank subsidiaries, and 17 indicated an interest in operating branches in Canada. In the survey of the represented offices, five indicated an interest in operating branches in Canada.
Mr. Peterson: This survey was done before we introduced the amendments, at the time when we appeared before the House of Commons Finance Committee.
Senator Angus: Were any dealings made or were there any assurances in consideration of the amendments?
Mr. Peterson: I am not sure of the implication of that question.
Senator Angus: You gave a very legitimate reason for the tax policy involved here. Before you decided to do an exception for non-Canadian citizens on a tax rollover situation, would it not have been good business to say, "We will go to the trouble. We will take the heat, but let us have some assurances that you will play and come to the table"?
Mr. Peterson: They were quite forthright. They recognized that we had placed a straitjacket around them when they first came here in 1980. That was when we first passed this law. We insisted that they come in as subsidiaries, and we were one of the few countries in the world that did this. Talk about reluctance. In 1980 there was much debate as to whether or not we should allow foreign banks into Canada. It was a different era, but we have passed through that.
Deals were not made, but we worked closely with them. We asked them how we could do this in a way that makes Canada attractive to you but at the same time respects our legislative priorities here in Canada.
Senator Angus: I do not think that this goes far enough in sending that message to them. I will be sitting in this committee to review the next series of MacKay regulations and clauses, as well as other types.
Mr. Peterson: If this does not go far enough, we welcome your suggestions for improvement.
Senator Angus: My first suggestion would be on the retail restriction. As you said, they probably will not do it anyway. They will just hive off the cream of the wholesale business. However, we are letting them do that. Why give them any restrictions?
Mr. Peterson: In this restriction, we were respecting what this honourable committee suggested to us. If foreign banks wanted to come in here on the retail level, then they should be required to do so through a separate subsidiary. We looked to the experience and wisdom of this committee in adopting that position.
Senator Hervieux-Payette: We received correspondence from banks that are operating as foreign banks. I want to clarify this situation, particularly as it relates to Quebec, for I understand that Schedule III banks are not considered as a Schedule I or a Schedule II bank, according to many pieces of provincial legislation.
However, what happens if the provinces' legislation does not treat them as Schedule I and II banks, even though they are under Schedule III?
I have been informed that legally this means that 70 pieces of legislation will have to be changed in Ontario within a short period of time so that they are treated as a bank. In Quebec, 200 pieces of legislation will have to be changed.
What can we do? Will a general revision insert such banks in a Schedule if the provinces have not moved on it? Do we have any assurance at this time that the provinces will agree to make some amendment to their legislation by way of an omnibus bill that will make it clear that Schedule III banks will be treated as Schedule I and II banks in their own legislation?
I see that as being complicated for Quebec. Is it a constitutional matter? I do not know. I am asking this question because I had thought that in the Constitution banks were within the federal jurisdiction. Your officials are informing me that that is not necessarily so. I find this confusing.
The Chairman: Does anyone know the answer?
Mr. Peterson: Yes. I am happy to respond to that. That is indeed a dilemma for us. There is no perfect solution to it. We said that we have a possibility of keeping them in a Schedule II so that we do not disrupt provincial legislation. In discussions with the provinces, it was queried whether there was not a difference between a foreign bank that operates in Canada through a subsidiary and one that operates through a branch.
It is a different regulatory regime. We are dealing with a primary regulator that is outside Canada. A branch is a different operation in Canada than a subsidiary. The provinces pointed out that in either case they would want to review all of their legislation that mentions a "bank," whether it is a Schedule I or a Schedule II. They would then determine whether they want their laws to continue to apply in the same way to a foreign branch as they would to a subsidiary.
We have had ongoing discussions with the provinces about that. Their preference, particularly that of Quebec and Ontario, was to proceed the way we did. We recognize the problem, but there have been full consultations.
We could have acted unilaterally and forced them to take defensive action, if they had not agreed to go along with our regime. However, this course of action was worked out in conjunction with them.
Senator Hervieux-Payette: Do you have the assurance that after their examination, providing there is no evidence that it will go against each province's regime, that they will modify their laws? Will it be a number of years before we find another solution?
Mr. Peterson: They have told us that this was the course of action that they wanted to adopt, and that they will respect it. If we have a problem six months down the road, we will be prepared to revisit it. However, we have every sense that they want these branches to operate effectively.
Senator Kolber: First, I wish to welcome you here, minister and friends. It is a good idea to attract foreign banks here.
In your opinion, would it be reasonable to say that our level of expectation for what their presence here would mean is quite minimal?
Mr. Peterson: No, my opinion is optimistic.
Senator Kolber: I understand that. However, in light of the climate that we have here with huge, dominant banks, is it not almost inevitable that their impact will be minimal, except for creaming off some good clients?
Mr. Peterson: We have not had indications from a number of them that they expect to use the new regime, or would want to use the new regime, to expand into retail.
If you are talking about retail, I think you are right in saying that our current financial sector institutions have a strong hold on the Canadian market. One must ask why. In my opinion, it is due in large measure to the fact that they have provided world-class service to Canadians. They have left very few niches where someone can come in, get a toehold and tackle them.
We have seen a scenario where banks like ING came in and tried to do electronic banking. Our banks responded magnificently. They are filling those holes in the marketplace themselves. This is one of the great advantages of the competition that they brought in.
Senator Callbeck: Mr. Minister, you said that branches can be set up as full-service or as lending institutions, but a foreign bank cannot set up both. Why is that?
Mr. Peterson: This is one of the compromises that I was talking about in my response to Senator Angus.
Our Canadian banks, as of yet -- because we have not responded to the MacKay report -- cannot operate through a holding company or separate entities in the same way. It was our position that we should not have to give the foreign banks an administrative advantage by being able to do this.
Our response to the MacKay report and the holding company regime will address how far one would want to go in allowing flexibility of arrangements. I believe that we should try to be flexible in allowing different types of operations to meet different business needs commensurate with serving our customers and keeping our institutions solvent.
Senator Callbeck: Who is the regulator of these branches? Is it OSFI or the regulator of the foreign bank?
Mr. Peterson: The primary regulator will still be the foreign regulator. The Canadian banking operation of the branch will be, generally, such a small part of the overall operation that we will not be the primary regulator.
However, it will be critical -- and Mr. Thompson can talk to you about this -- that we oversee not only the Canadian operation but are in close contact with the foreign regulator to assure ourselves that Canadian depositors are protected. It imposes different responsibilities on our regulators and adds the need to relate very well with the foreign regulators.
Mr. John Thompson, Deputy Superintendent, Regulation Sector, Department of Finance: It is clear to us, and it should be clear to you, that when we supervise a branch of a foreign bank, we are in fact only supervising a part of an overall entity. We will be getting financial statement information from not only the Canadian branch of that entity but also from the parent bank itself, the foreign bank, on a consolidated basis.
We will be focusing our supervisory energy on the local branch and also on the foreign entity. We will be examining those books and records. We will be in discussion with the foreign regulators to make sure that we understand how they view that entity, and form our own view as to how soundly run that foreign entity is.
A great deal of our energy will be focused on looking at what is going on outside of Canada when dealing with supervising a branch here in Canada.
Senator Austin: Mr. Minister, you referred to a forthcoming policy position of the Department of Finance. Could you tell us when we could expect that paper so that we can plan our summers?
Mr. Peterson: It will probably be ready sometime in July. We are working on it actively, and the minister is giving it a great deal of thought and is making it a priority. We hope to see it soon so that Canadian stakeholders can have a look at it over the summer and we can consider the introduction of legislation in the fall.
Senator Austin: So, sometime in July is your prediction?
Mr. Peterson: It could be sooner.
The Chairman: Since there are no further inquiries, can I have a motion to adopt Bill C-67 and report back to the Senate without amendments?
Senator Hervieux-Payette: I so move.
Senator Di Nino: I second the motion.
The Chairman: Carried.
The committee adjourned.