Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 14 - Evidence - Morning meeting
HALIFAX, Wednesday, March 18, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to continue its study of the governance provisions contained in the Canada Pension Plan Investment Board Act (previously Bill C-2).
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Pursuant to the order of reference of the Senate of Thursday, February 12, 1998, the committee has before it the governance provision contained in the Canada Pension Plan Investment Board, previously Bill C-2.
I would welcome our first witness today, Mr. Peter Van Loon, Director of Investments at the Department of Finance of the Government of Nova Scotia. He has been actively involved in the new CPP bill. I believe he also sits on the advisory committee that is making recommendations respecting the board of directors to Mr. Martin.
Mr. Van Loon will make a short presentation. He will give us a brief outline of his background. Then we will have questions.
Mr. Peter Van Loon, Director of Investments, Department of Finance, Government of Nova Scotia: Your chairman has asked me to briefly outline my investment career. It goes back to 1963, when long bonds were yielding 4.5 per cent, and it has been a roller coaster since then. I spent 14 years at Mutual Life of Canada, closing out my career there as an associate treasurer. I moved to Vancouver in 1977 and ran the Canada Trust pension operations in Vancouver for five years. I then went over to the other side of the street for eight years as an institutional equity sales manager for Nesbitt Burns Inc. I then decided to return to money management and moved to Alberta, where, for five years, I worked for the Alberta treasury as their manager of bond investments.
A little over three years ago I accepted the position of Director of Investments for the Nova Scotia pension funds. We currently manage $5.5 billion in the Nova Scotia pension funds. I will be happy to answer any questions about our investments styles as we go along.
I wish to express my appreciation on behalf of all Nova Scotians for the opportunity to address your committee on the new Canada Pension Plan legislation. It is indeed a significant piece of legislation which, I believe, is unique to that of any other G-7 country or, for that matter, any country in the world. The need for such legislation to deal with the future liabilities of the Canada Pension Plan has been obvious for some time.
I have studied the legislation at some length. Several notable features lead me to conclude the framework is in place to successfully implement the legislation. These features would include, first, an independent governance model which was adopted from, I believe, the Pension Investment Association of Canada's recent study, which I gather you have all received. I totally endorse this type of governance structure. If we are lucky, we will implement something similar in Nova Scotia in the near future.
The second notable point is that the board will be governed by 12 trustees with the necessary skills and independence. Third, the board will be subject to the same investment rules governing other Canadian pension plans. This is most important.
I would like to focus on the selection process to this board. I have had the privilege of being a member of the nominating committee since last fall, and I hope that will continue. This is a standing committee. It will not be dissolved after the first board is selected.
We were given instructions from the federal Department of Finance as to what qualifications the individuals serving on the board should hold. First, they stressed the need for a competent, professional and independent board, with a core group of qualified investment professionals. Second, since this will be the first CPP Investment Board, public confidence in CPP policy will be significantly influenced by the credibility of the board members. This suggests the need for at least a certain number of directors who possess a significant degree of prominence and public respect among Canadians. Third, and lastly, they stressed the need for regional representation on the board.
I can assure you these guidelines were followed very closely. In asking for nominations from the committee members, we enlisted the services of one of Canada's largest management consultant firms who provided a list of potential candidates. In addition, we were asked to bring forward a list of potential candidates from our province.
As an aside, the Province of Nova Scotia nominated two gentlemen who have extremely good investment backgrounds. They had actually applied to serve on the board.
The committee considered a total of over 160 candidates at its first meeting. We were able to pare that down to 35 in a period of half a day. Following this, we requested further biographies of the 35 people left on the list and, at the second meeting, we were able to pare the list down to 20. This list has been submitted to Mr. Paul Martin. I can assure you that the list contains many prominent Canadians and very qualified investment professionals.
The only reservation I have about the setting up of the board is that investment professionals employed as public servants in Canada are precluded from serving on the board. According to our figures, approximately 20 per cent of Canada's workforce are employed in the public service. I have a number of colleagues working in the public service who would be good candidates for the board. One of them is currently president of the Pension Investment Association of Canada. In talking to some of my colleagues at the Department of Finance, when I told them that we would have no voice on the board, they said "we are people too."
Another part of the legislation I did not like was related to the foreign property limit. There is no question in my mind that the 20-per-cent rule is out of date. The Province of Nova Scotia's pension funds currently have 19.8 per cent of their assets overseas. In the near future, we plan to increase this significantly through the use of equity index derivatives. A number of our colleagues in the pension fund management business have already done that, and I know some are as high as 35 per cent foreign property through the use of equity index derivatives.
I can assure you that, if carried out gradually, increasing the foreign content would not have a significant impact on Canadian financial markets. Indeed, the tremendous job done by the federal and provincial governments over the last four years has resulted in a dramatic reduction in the issuance of public debt. Canadian pension funds are currently scrambling to find other ways to invest their money prudently.
In the April meeting of the Pension Investment Association of Canada, one of the major topics to be discussed is opportunities, issues, and appropriateness for alternative investments. When I say "alternative investments" I mean Canadian private equity, index futures, junk bonds and so on. I will leave the list at that. I feel this is an important issue because I have already experienced opposition to the idea of investing in Canadian private equity through a very competent firm in Toronto. My investment advisory committee was afraid of taking this step. They did not have the required comfort level.
However, I am very proud to say that we have 5 per cent of our assets invested in Canadian small capital equity investments. These are companies that have gone public.
We would like to invest some of our money in companies that have gone beyond the venture capital stage but are still too small to issue public stock. We feel that there is a role for Canadian pension funds to support this type of investment, and we will continue to strive to invest in that type of security.
The final subject I wish to discuss today centres on the active versus passive debate. I know you have already heard testimony on this topic. I am a strong believer in active management. Indeed, there are many vendors with proven track records lasting over a number of years in Canada who have shown that they can beat the index on a consistent basis. To use our pension funds as an example, in the year ending December 1997, we had three managers managing small capital equities for us. These are Canadian investment counsellors. The worst performer added 17 per cent over his benchmark. His total return was about 24 per cent. The best added 44 per cent over his benchmark; and his returns for over 50 per cent for the year.
In the large capital arena we also have three Canadian managers. Again, the worst added 2.5 per cent over the TSE index, and the best provided a return of 15 per cent better than the TSE index. My case rests. There are good managers in Canada, and I hope that the CPP will employ some of them in the future.
In summary, I wish to reiterate that the CPP legislation is well designed for today's pension fund environment. The rules are in place to ensure that it will be operated at arm's length from government. The only sour note I will sound is that approximately 20 per cent of Canada's workforce, notably public servants, will have no say in the governance of the plan.
Senator Kenny: I will briefly touch on the 20-per-cent rule. This committee has already expressed a view about that. How should we move forward in that respect?
Mr. Van Loon: I think a gradual approach would be appropriate at this time. In other words, say 2 per cent a year for maybe five years. That would get us up to 30 per cent. I would prefer it if limits were eliminated, but I recognize the practical approach of moving in this direction gradually. It would have a minimal effect on capital markets in Canada if you moved by 2 per cent per year.
Senator Kenny: If it were 2 per cent a year, your first target would be to have that in place for five years, and then you would want to re-evaluate the situation and decided whether you would go further, is that what you are saying?
Mr. Van Loon: There is another reason I am against the 20-per-cent rule. As I said, we have plans to increase our foreign content through the use of equity index derivatives. All I will be able to get is index performance. I will not have a manager managing money who can probably beat that index. It detracts from the performance of the fund. Our foreign investment managers have proven there are many inefficiencies in foreign markets, as there are in the Canadian market.
Senator Meighen: You said that you did not think that moving to 30 per cent at least would have a significant effect on the capital markets. Do you think it would have the effect of reducing the exchange rate of the dollar?
Mr. Van Loon: I do not perceive that to be a major risk. In today's markets, with the flow of funds, it would be small, relative to what is out there now.
Senator Meighen: It would seem to me that must be one of the reasons the Minister of Finance appeared to be hesitating. He makes noises about how it is a question of not "if" but "when". Perhaps he is concerned about the dollar. I personally would agree with you.
Mr. Van Loon: I think the Canadian dollar is a real bargain right now.
Senator Kenny: We all seem to be moving in roughly the same direction. Nobody is telling us that we should not move up. Senator Meighen suggested that, perhaps, there might be a negative impact on the dollar. What disadvantages do you see?
There are obviously trade-offs in any change. If there were no problems with moving to 100 per cent obviously 100 per cent would be the proposal. What cautions would you have about moving quickly? What cautions would you have about moving beyond 30 per cent and what concerns, generally, do you have about moving away from the 20-per-cent rule?
Mr. Van Loon: As far as moving to 30 per cent right away is concerned, I would presume there would be significant flows of cash, and there is no question that that would have an impact on the dollar. It would depend on how fast the pension plans would react to the change in the legislation. My belief is that, and I have a great deal of experience in reporting to pension fund committees, it takes committees a long time to adopt new rules. Even as we sit here today, some of Canada's better investments counsellors are only advising 15 per cent because they do not have the expertise in international markets.
Senator Kenny: What is the message there?
Mr. Van Loon: The message is that moving rapidly would have a major impact on some of the larger funds like the Ontario teachers' fund and ourselves. We might decide to move immediately.
Senator Kenny: Should we set up the new entity and be feeling our way, or should we rush to the edge of the envelope right off the bat?
Mr. Van Loon: I would suggest that they go to 20 per cent right away.
Senator Kenny: Aside from the impact on the dollar and the insecurity of some pension board managers, which presumably is founded on some facts, is there anything else you can tell the committee that would enlighten us on the risks involved in moving beyond this threshold?
Mr. Van Loon: The reaction of Canadians who see much of their money being invested in other areas -- for instance, our pension fund has stocks in Russian, Sri Lanka, you name it -- might be to question why the investments are being made in those countries. The obvious answer to them is that diversification means less risk. They must buy that idea.
Senator Kenny: Have you heard that it might impact on employment?
Mr. Van Loon: No. As I said to you earlier, we wanted to invest in private equity for Canadian companies that are between the venture capital stage and the initial public offering where it is listed on the stock exchange. You will see much more of that going forward. This has been a natural process. No one told us we must do it, we just think there are good opportunities out there. Where there are good opportunities, pension funds should be there.
[Translation]
Senator Hervieux-Payette: I am certain that Senator Oliver will talk to you about the make-up of the board. I will allow him the honour of asking you that question.
I would have three short questions to ask you. In the case of private investment in small businesses, must the percentage of the fund invested in this way be managed by the staff of the fund, in other words in-house, or rather by outside management firms that are specialized in this area?
Should the percentage be set by government regulations? In other words should we, for example, authorize the Régie to invest 5 per cent in this sector and no more?
Concerning foreign markets and Canadian expertise, I would mention the experience of the Caisse de dépôt et de placement du Québec that sends teams of public servants out to study the market in Vietnam so as to be able to invest money there. I doubt that there are experts within our companies that are familiar with the Vietnamese market. What suggestions would you make if we were to increase the percentage of foreign investment? What would be the safest and most efficient way of making these investments without having to send board staff all over the world?
One suggestion that has been made to us by several witnesses was that there be three, four or five different funds, which would enable the board to be competitive once it starts managing sizeable amounts. I believe that at the very beginning it would not be necessary, but once the total gets up to $100 billion, would you look favourably upon the establishment of various teams, in order for there to be some kind of competition or separation within the management of the fund?
[English]
Mr. Van Loon: I wish to clarify the questions. The first question was: Do you think the CPP should hire outside managers to manage private placements? Is that correct?
[Translation]
Senator Hervieux-Payette: The investment in small- and medium-sized companies.
[English]
The small capital, the private placement.
Mr. Van Loon: I believe a fund the size of the Canada Pension Plan should have the resources to do this kind of thing themselves. The Ontario teachers' fund, for instance, is a good case in point, but even that fund uses outside managers. It is an expertise that is just developing in Canada.
Senator Hervieux-Payette: How would you manage the foreign investment? How do you make these placements all over the world? Do you send teams all over the world?
Mr. Van Loon: No. The Province of Nova Scotia does not have the resources to do that sort of thing. In the emerging markets we use two managers and, in both cases, they have contact with people living in Hong Kong, in South America, in India and so on, and they assess the investment opportunities in those equity markets. They do not invest in private placements in foreign markets for our pension fund.
[Translation]
Senator Hervieux-Payette: My last question relates to the splitting of the fund. Once the fund reaches $100 billion, do you believe that we should separate it into several chunks?
[English]
Mr. Van Loon: Having never been that big, it is a tough question to answer, but I would think that the Canada Pension Plan will probably have different investment strategies. You might have one team who manages what would be classified as growth stocks, you might have one team who focuses on value stocks, and you might have one team who is trying to match the index or be very close to the index.
There are a number of index managers in Canada. One of the banks is the largest manager of index funds. They will approach, say, the Province of Nova Scotia and tell us that, if we give them $100 million, they have the strategy to ensure returns at least as good as the TSE 300 index, and maybe a little bit more.
You could have three different teams or even more, with one managing U.S. equities as well. When the fund is that large there will be a need to have teams.
[Translation]
Senator Hervieux-Payette: I imagine that you do not have any concerns about such a large fund -- let us say of $100 billion, and if we are investing 5 per cent in private equity, that would be $5 billion -- or about a quasi-governmental organization having the discretionary power to invest in private equity without creating distortions on the Canadian market? We often have a problem in Quebec where the Caisse de dépôt invests in such private stocks. It will invest a certain amount in three companies from the same sector and, obviously, for the consumer and for the average citizen, there is not much credibility given to the fact that these investments might have a sizeable impact on the productivity of these companies.
To go over this again, let us say that there are three companies in the food sector and that $20 million are invested in each one and, for each one, there is a manager. This practice is perhaps wise as far as the investments are concerned. But the consumer and the investor, who are the future retirees, might think that that could have an impact on productivity since in any event everyone gets his or her share out of the Caisse. This is why I ask you the question: Do you believe that we should delegate this investment operation of close to $5 billion in small- and medium-sized companies? Could that not create distortions within the market throughout Canada?
[English]
Mr. Van Loon: That is an interesting question. The investment process adopted by the Canada Pension Plan should not result in, say, the Canada Pension Plan investing in three businesses therein, say the same business. They should invest in the best company. That is the bottom line.
Senator Hervieux-Payette: It does not work like that in Quebec.
Mr. Van Loon: Under the governance structure for the plan it must be made very clear that these are investment decisions, they are not what I would call a "government grant."
Senator Kenny: Some might call it "regional development."
Mr. Van Loon: Exactly. I would say that $5 billion is a large amount to put it into small business, but our economy is growing very well. In 2007 the economy of this country will be much bigger. The way the technology sector in Ottawa, for example, has been developing in the last few years indicates that this country has an exciting future. There will be many good opportunities for investment.
The Deputy Chairman: I wish to ask a follow-up question on the division of funds. What was your return on your fund over the last 10 years?
Mr. Van Loon: I believe it was close to 14 per cent. I do not have that number with me.
The Deputy Chairman: What was it last year?
Mr. Van Loon: The government employees' pension fund for the year ended December 1997 had returns of 16.4 per cent, and for the previous three years 19 per cent per annum.
The Deputy Chairman: Most provinces have their own crew to manage their own pension funds. I know in Saskatchewan they have an investment authority with a board that manages the government pension funds. I believe they actually have a separate board in their province.
Mr. Van Loon: That is correct.
The Deputy Chairman: They also do quite well.
If someone wrote you a cheque for several billion dollars to manage, would that be a huge problem for your organization?
Mr. Van Loon: I have been authorized today to offer our services to manage a few billion dollars for the Canada Pension Plan, if you so desire. We can handle it.
The Deputy Chairman: In other words, there is expertise all across the country. There are people who are very good at this and who actually very good returns.
Mr. Van Loon: When I first moved to Vancouver in 1977 there was one investment counsellor. Today I believe there are five, and the one investment counsellor who was there then is currently managing assets of over $25 billion. There is an investment counsellor in Halifax, who you will hear from today, who has more than tripled the assets under management in the last three years. They are very capable people. There is expertise everywhere you go in this country. It is not difficult to manage money from Halifax.
The Deputy Chairman: We have had some discussion of separate plans and we talked about the possibility of dividing the fund to allow some competition, as well as to serve the needs of areas throughout the country because, as a matter of fact, this fund will end up in Toronto or Ottawa.
Senator Oliver: My first question relates to proxies and I am sure that you have seen the regulations. The regulations, as written, do not require a policy on the use of proxies. As well we are not told whether these statements will be made public. We think they should be made public. What is your view on proxies and on whether these statements should be transparent? CalPERs, for instance, and other large funds do not mind voting their proxies.
How do you vote the proxies on your $5 billion fund, and how should the Canada Pension Investment Board handle this?
Mr. Van Loon: I am fully aware of CalPERs' policy. In Nova Scotia we delegate the job of voting the proxies to our external investment managers.
Senator Oliver: Do you tend to give them carte blanche -- leave it to their discretion?
Mr. Van Loon: Yes. However, we do monitor controversial subjects. There is no question that anything that is controversial will hit the press.
Senator Oliver: Is it your instruction that they do, in fact, vote the proxies?
Mr. Van Loon: Yes.
In the case of the Canada Pension Plan, I would strongly recommend that you have staff on board to monitor proxies, and that you vote your proxies yourself because it is a very important function in terms of corporate governance, and today corporate governance is a hot topic.
Senator Oliver: You have left that to your managers. Why would you have a policy opposite to what you are recommending for the federal board?
Mr. Van Loon: The bottom line is that we do not have the resources to hire somebody to do this sort of job. As I said, we very closely monitor any controversial subjects. The Pension Investment Association of Canada sends us a list almost daily of all the proxies that are being voted, and they will issue an alert if they feel it is controversial and that we should look into it. Although we delegate, we do monitor it through the Pension Investment Association of Canada.
Senator Oliver: You have dealt with the first part of my question which is that you believe they should be voted and actively. What about the second part of my question about this being made public so there is more transparency?
Mr. Van Loon: If you were ever to run into a controversial situation on voting proxies you would probably make it public. Whenever the Ontario teachers' fund is involved in some controversial matter with corporations it is made public. In this situation it could be made public, and that would not be a problem.
Senator Oliver: You have told us about your return. In the proposed regulations for the Canadian Investment Board there is mention of the requirement to invest in provincial securities. As a provincial fund, are you required to buy Nova Scotian securities? Is that one of preconditions of your fund?
Mr. Van Loon: No, it is not.
Senator Oliver: If it is not a precondition in Nova Scotia, why should it be a precondition that the federal fund must buy provincial securities at low rates of return?
Mr. Van Loon: The amount of product out there is decreasing, as you know, but the investment returns are higher than buying Government of Canada securities. There is a spread.
Senator Kenny: As well, they are safer.
Mr. Van Loon: I would not go that far. We are somewhat overweighted in provincial securities and it has paid off in terms of giving us much better returns. That is due to the fact that, as you know, in the last five years the provincial spreads have narrowed dramatically, and that has provided us with a good performance.
Senator Oliver: Yesterday in Ottawa, one of our witnesses was a professor from British Columbia and another one was from the C.D. Howe Institute. One said that, when Canadians are considering the security of this new fund, which will soon reach $100 billion, they will test its reliability by assessing the board and its performance.
If there is any kind of government interference, or an appearance of government interference in the appointment of the board, or in giving directions to the board on the types of investments they should make -- whether there should be regional investments, investments not just in provincial securities but provincial companies and so on -- do you think this will give the reliability and the security that most Canadians would like to see?
What do you recommend to us as a committee that we do to ensure that there is no perception of political and government interference in the direction of this fund?
Mr. Van Loon: The legislation, as I read it, was very clear that the fund was not to be used, and it was to be run at arm's length. If you adopt a proper governance structure and the fund is run with the same rules as other Canadian pension funds, you will not have that problem. If somebody were to approach me and tell me that I have to invest in a certain company in this province, and that suggestion made no sense to me, then I would rather quit than make that investment. The Institute of Chartered Financial Analysts has a code of conduct that precludes us from ever doing that. I would expect that the investment professionals you hire at the Canada Pension Plan would be governed by the same sort of code of conduct. In other words, they would not and could not accept political interference.
Senator Oliver: On two occasions that I recall in your evidence, when talking about the composition of the board and the competence that these people should have, you used the words "investment professionals." A number of witnesses, including senior labour officials, have suggested that the last thing we want is to have a board totally comprised of "investment professionals", as you call them.
In the ideal board for the Canadian Pension Fund Investment Board, what should be the background of the individuals who make up this board?
Mr. Van Loon: Certainly, the audit function of the board is a very important function, so you must have someone on the board, one or two people, with a very strong background in accounting and auditing. I would think you would want an individual who has run a large organization, probably, being appointed chairman of the board. He or she need not be an investment professional. Those are the two areas where I feel that there is room for at least six professionals with backgrounds other than investments.
Senator Oliver: Should an official from a major labour union be present on the board to ensure that the concept of investments that might produce jobs and reduce unemployment is being respected?
Mr. Van Loon: That is a loaded question. Again, I go back to the idea that this pension fund will be run like any other pension fund. The types of investments it makes will be strictly on the basis of their investment merit.
Senator Callbeck: You are a member of the nominating committee?
Mr. Van Loon: That is correct.
Senator Callbeck: I take it that you agree with the process that has been followed in selecting the directors, except that you would like to see public servants being able to participate?
Mr. Van Loon: You should have at least one public servant.
Senator Callbeck: You mentioned that you submitted 20 names.
Mr. Van Loon: No, two names for the Province of Nova Scotia.
Senator Callbeck: I thought you said 20.
Mr. Van Loon: We submitted a list of 20 to the minister, yes.
Senator Callbeck: What criteria did the nominating committee used in submitting those 20 names? You just mentioned accounting and auditing and the CEO of a large corporation. Did you consider regional representation? Did you consider women? Were labour representatives considered? What were the criteria?
Mr. Van Loon: We received many nominations from different provinces. We received nominations for many women. I can assure you that on the list of 20 there is a number of ladies who have distinguished service, having served on other pension boards. There are also some retired business executives who have strong backgrounds in management. As far as I know there is no labour representative.
I might point out that, when they announced the nominating committee and they called for people to apply, they told them how to apply to serve on the board. In fact in Nova Scotia we had two people apply and we put their names forward because they were distinguished people.
Senator Callbeck: Have you taken minorities into consideration?
Mr. Van Loon: I do not know all the people so I cannot answer that question.
Senator Callbeck: I thought the committee met and submitted the 20 names. Is that not how it works?
Mr. Van Loon: We met in Vancouver in November. That was when we had the list of 160 names. In December we were scheduled to meet in Winnipeg. Weather in the Maritimes precluded us from travelling, so we participated by phone.
Senator Callbeck: Is the nominating committee staying together?
Mr. Van Loon: Yes.
Senator Callbeck: Is that in order to appoint board members to vacancies when they arise?
Mr. Van Loon: The 12 people who are nominated to the board will have staggered terms, as you know, and the names of the eight who are not appointed will be kept on a list so that they will be available if a vacancy occurs. Therefore, they can be approached. If the list ever drops below eight, then the nominating committee will probably have a conference call and consider other names, so that we will always have eight people in the wings to serve on the board.
Senator Callbeck: Do you think the board's term should be three years or five years, or what is your recommendation on that?
Mr. Van Loon: My recommendation would be three years. I know it will be staggered at first, but the individuals who are nominated for one year can reapply for two more years to serve on the board. Having continuity on the board is very important.
Senator Callbeck: You talked briefly about the style of your pension plan. You mentioned you have three managers and, obviously, you know how to select them. What directions or directives do you give to your managers? The priority, obviously, would be a good rate of return. Are there some areas in which you do not want them investing, or is it wide open?
Mr. Van Loon: In the case of Canadian large capital managers, we tell them that their goal is to beat the TSE index by a significant amount over a period of four years, and we compare their performance to that of their peers.
As far as other directives are concerned, we will not allow them to do leveraging, we will not allow them to make short sales. We limit the percentage they can own in any one stock.
Senator Callbeck: What percentage?
Mr. Van Loon: The limit is 5 per cent.
Senator Callbeck: My last question relates to accountability. You know that the legislation and the regulations deal with about certain statements, public meetings and annual reports and so on. Are you comfortable with what is contained in the legislation and regulations on accountability?
Mr. Van Loon: It sounds the same as the Ontario teachers' fund, which is a model to which everyone should aspire. They produce a very well detailed annual report. You could recommend that they produce that type of report.
Senator Meighen: If I am not mistaken, you are the first witness I have heard say that three years is long enough. Most witnesses, if not all, have said that they think that is too short a term. Surely it takes time to get to know any business or occupation, and is not three years just about the time when you get up to speed?
Mr. Van Loon: I expect that most of the people who will be appointed to the board will already be up to speed in terms of pension funds, pension legislation and investment lingo. My investment committee is very much up to speed, but it took some time. However, now that we have them, we do not want to lose them.
Senator Meighen: How long did it take them to get up to speed?
Mr. Van Loon: About a year.
Senator Meighen: How long will you retain them?
Mr. Van Loon: We constantly review that.
Senator Meighen: Is there no legislative requirement?
Mr. Van Loon: No, there is nothing in legislation.
Senator Meighen: Do you report to the legislature?
Mr. Van Loon: I report to the executive director of investments, who reports to the deputy minister, who reports to the Minister of Finance.
Senator Meighen: Is there an annual report laid before the legislature?
Mr. Van Loon: Yes, there is. It is not as big as the Ontario teachers' report. It is very small.
Senator Meighen: Do you have any recommendations for us with respect to the reporting procedure for the Canada Pension Plan and the role of the auditor general? Are you satisfied with the provisions contained in the legislation as they now stand?
Mr. Van Loon: We are audited not only by the auditor general but also by the Department of Finance which has an outside auditor. You should have both. The auditor general should be there. As much as it is arm's length, it is still very much a responsibility of the Government of Canada and the Department of Finance.
Senator Meighen: Did the nominating committee have any difficulty finding experienced, competent people who do not have a conflict of interest?
Mr. Van Loon: Yes. We did have a little trouble, but it says right in the legislation that there could be potential conflicts of interest with some of the board members, and it states that they are to withdraw themselves from those processes and not vote on those processes.
At our first meeting, the chairman of the nominating committee broadened the rules about the potential conflict of interest so widely that there was no investment professional on the list. Thanks to my minister, Dr. Gillis, and the Ontario minister, who conveyed some concerns to Paul Martin, we now have what I think is a very acceptable list of candidates. The potential of conflicts of interest was a concern. There will undoubtedly be one or two situations that will affect certain members.
Senator Meighen: I would return to the question of your advisory committee and the nomination of replacements when a vacancy occurs. Did you say that your nominating committee will continue to exist?
Mr. Van Loon: Yes.
Senator Meighen: I do not believe that is required by the legislation, or am I mistaken?
The Deputy Chairman: It is not.
Senator Meighen: Do you recall a minister's representative saying that the intention was to retain this nominating committee?
Mr. Van Loon: Yes.
Senator Meighen: Would you, wearing your citizen's hat, prefer to see it as a requirement that a nominating committee exist, made up of provincial representatives?
Mr. Van Loon: Certainly, yes.
Senator Meighen: Do you, again, as a provincial citizen, feel that there should be any right of veto by provinces over nominations, or are you happy with the minister being able to choose from names on a list?
Mr. Van Loon: It is not in the legislation, but I know that Minister Martin will be consulting with the other ministers of finance before this board is actually brought forward.
Senator Meighen: You have the same faith that all of us have in Minister Martin and, indeed, we expressed it in the Senate. However, fortunately for Minister Martin, he will not be the Minister of Finance forever and he may not even be in public life, and who knows who will replace him. If we got another finance minister who did not have the wisdom to go along with the original sin that Minister Martin has committed, and did not consult as much as Minister Martin, we might be in a more difficult position, might we not?
Mr. Van Loon: That is correct.
Senator Meighen: Would you agree with me that it would be good to have it in writing?
Mr. Van Loon: Yes.
Senator Meighen: Returning to the Nova Scotia plan, is there a debate in the legislature on the report of your pension fund?
Mr. Van Loon: Not that I am aware of.
Senator Meighen: As you know, the minister has been kind enough to submit the regulations to us for comment. In the normal course, Parliament does not become involved in regulations until long after they have come into force. Some of us have been concerned because of the widespread desire to ensure that this is totally devoid of any political, small "p", interference, and we feel it might be advisable for the regulations to be submitted for scrutiny to some group such as the Standing Senate Committee on Banking, Trade and Commerce prior to coming into force. Do you see any merit in that?
Mr. Van Loon: I have the regulations. They are more strict than the regulations that apply to other Canadian pension funds so I am quite happy with them.
Senator Meighen: My question related to the subsequent regulations we will see from time to time.
Mr. Van Loon: They would be reviewed, yes.
Senator Meighen: There is no requirement, which would be an unusual practice I fully acknowledge, for them to be reviewed before coming into force.
Mr. Van Loon: Yes, it would be unusual.
Senator Meighen: Do you think it is advisable or necessary?
Mr. Van Loon: I do not think it is necessary because I have seen them.
Senator Meighen: I am referring to subsequent regulations. This time around we are being given the opportunity to suggest improvements. Subsequently, we will not have that opportunity.
Mr. Van Loon: I would suggest that they should be brought forward at least to the Banking Committee. I think any future regulations will probably make things tougher and stricter rather than easier for pension fund managers.
Senator Meighen: Finally, Mr. Van Loon, you in Nova Scotia, and no doubt you can take considerable credit for it, have had an excellent record of return. I believe the government is projecting a 3.8 per cent real rate of return. We know now that overnight you could find an investment which would give you 4.25 per cent. Is 3.8-per-cent a realistic rate of return? Is their projection unusually low in your view, or is that, given the fact that we are unlikely to enjoy the rates we have enjoyed for the past few years, a more realistic target?
Mr. Van Loon: Certainly going forward, I am praying for single digit returns in 1998 because we have had it so good for so long. I feel that 3.8 per cent is quite acceptable going forward from where we are today. We are looking at a 4.5-per-cent real rate. That is what is being used in our calculations.
Senator Meighen: By implication it could be even lower than 3.8 per cent; is that what you are saying?
Mr. Van Loon: Yes, it could. We have gone through periods, for example, from 1975 to 1985, where it was a real wasteland out there for investment managers.
Senator Meighen: To summarize what I understood you to say earlier, it is your view that, with competent management, you should be able to beat the indexes on a consistent basis?
Mr. Van Loon: That is correct. One of the most important factors is the staffing of this pension board. I can assure you that you will have real difficulty hiring investment professionals in this day and age because the buoyant markets we have had in the last five years have affected the salaries of investment professionals in Canada. The figures will shock you. The Ontario teachers' fund report shows the compensation levels for senior management. You must accept the fact the you must pay that kind of money to get the quality of people that you need.
Senator Meighen: Did the Government of Nova Scotia undertake an impact study with respect to the Canada Pension Plan legislation?
Mr. Van Loon: No, we did not.
Senator Meighen: Was that because of a lack of resources?
Mr. Van Loon: Yes.
Senator Moore: I wanted to pick up on what Senator Meighen asked you about the projected real rate of return being 3.8 per cent. I am confused. I thought you said earlier that this past year you enjoyed a 16 per cent return?
Mr. Van Loon: Right. I was referring to the actuarial assumption that our pension plan will earn 4.5-per-cent real return in order to meet its liabilities. What the Government of Canada is saying is we must make a 3.8 per cent real return.
Senator Meighen: The Government of Canada?
Mr. Van Loon: Yes.
Senator Moore: What we are talking about here then, so I can make sure I am clear on this, is the return that you make, less the obligations to people on pension that will be drawn out of the fund each year. You want to net a real rate of return of 4.5 per cent, minus inflation, and after liabilities have been paid out?
Mr. Van Loon: That is right.
Senator Moore: You mentioned you have three external fund managers?
Mr. Van Loon: We have 17 external fund managers managing money for our funds. They are located in Canada, they are located in Portland, Oregon; Charlotte, North Carolina; San Francisco; and London, England. We have managers all over the world.
Senator Moore: Are any located in Nova Scotia?
Mr. Van Loon: Yes.
Senator Moore: How many of the 17?
Mr. Van Loon: One. There is only one investment counsellor in Nova Scotia. By the way, they did not get money to manage for the Province of Nova Scotia because they were Nova Scotians, they got it because they had the performance record and they demonstrated the capability to perform. The reason they have grown so rapidly in the last few years is that they, finally, have been able to get consultants in Ontario to include them in searches where Ontario pension funds are seeking money managers.
Senator Moore: This relates to the question that the chairman asked with respect to spreading the resources around the country. Is it anticipated by your board that there will be managers located in various areas of the country? I too do not wish to see everything end up in Toronto or Ottawa.
Mr. Van Loon: It would be very difficult to compete in Toronto with the compensation levels in Toronto.
Senator Moore: I was interested in your answers to Senator Callbeck with respect to the nominees put forward. Was there a concerted effort or policy to attempt to bring forward names of people who are female, as well as male, and visible minorities?
Mr. Van Loon: I know there was a concerted effort to bring forward as many names of women as we possibly could. I do not know what happened in respect of minorities. I do not know all the nominees.
Senator Moore: That would be after the nominees were brought forward. My question is whether or not there was discussion by the nominating board to try to find some Canadians who are visible minorities with that kind of expertise.
Mr. Van Loon: There was no discussion on that subject.
Senator Moore: I was interested to note that your nominating committee goes on forever. What is the term of individual members of the nominating committee such as yourself?
Mr. Van Loon: We were not given any term. Again, it is not in writing. I might wish to pass the torch to somebody else, but it is not a daunting task in the sense that we will probably meet only once a year, and that perhaps by phone.
Senator Moore: Are you there as the Nova Scotia representative at the pleasure of the federal Minister of Finance?
Mr. Van Loon: No. I was appointed by Dr. Gillis, my current Minister of Finance.
Senator Kenny: I would like to underline the question raised by Senator Meighen about the legislative preview of regulations. That is something that we as a committee should reflect on, and certainly it is something that appeals to me a great deal.
I would come back to the issue -- and it tends to get a little political -- of where the investment management should be located. It would be fair to assume that at least one person would argue that it should be in Toronto. Your position, if I understand it correctly, is that competence is the only test. Is that correct?
Mr. Van Loon: That is the only test, yes.
Senator Kenny: Geography should have no relevance?
Mr. Van Loon: That is correct. As I said, Halifax is a wonderful place to live and it is becoming easier to attract people from west of here.
Senator Kenny: Have you experienced political flack in that regard? When you are mention Portland, Oregon, does that aggravate people or is it accepted? Does your argument that this is a competence-based operation fly?
Mr. Van Loon: That is it.
Senator Kenny: That is all and you have had no reaction one way or the other?
Mr. Van Loon: None whatsoever.
Senator Kenny: Therefore, it is not a political issue if you defend it on the basis of competence. We will pick the managers wherever they happen to be, and we will pick the best; is that right?
Mr. Van Loon: That is right.
Senator Kenny: My last question has to do with voting proxies and, if I heard you correctly, you were recommending the exercise and use of those proxies only to the extent of ensuring appropriate corporate governance procedures were in place. Are there situations where you would see greater involvement than that?
Mr. Van Loon: In the case of the takeover of Scott Paper Canada, one of our managers came to me and told me that he felt that the bid for Scott Paper was far too low. He said that we should vote against it and that all we would need is one mutual fund in the U.S. to go along with us and we would be able to block the takeover. As a matter of fact, the mutual fund would not back us and so the takeover of Scott Paper happened, despite the fact that we voted against it.
The Ontario teachers' is another situation you should cover very closely, and you should ask that question of them if you have the opportunity.
Senator Kenny: We have touched on some of these issues in our examination of corporate governance. What I would like you to enlighten the committee on is how involved these great pools of money should be in terms of the management of the companies in which they invest, beyond ensuring that best practices are followed in terms of how they are structured, that they have appropriate sized boards, and that they have a division between chairs and chief executive officers, assuming you think that is a good corporate practice. How involved do you believe we should be in the management of corporations? Is it healthy to have the shareholder and those that are acting on behalf of the shareholder -- in this case we know who we are talking about -- actively involved in real business decisions, or should they just make sure that the structures are right and let the chips fall where they may?
Mr. Van Loon: It should be expected of the managers of the Canada Pension Plan that they would follow their companies very carefully and they would want best business practices. They should be involved. It is their job to be involved.
Senator Kenny: When you say "best business practices" that assumes they have the proper structures in place. In the case of the takeover you were talking about, your analyst told you that there was bad judgment and that someone had not figured out that the company was worth more. It was not a question of bad practice, it was a question of bad judgment, if I can differentiate between the two. Should they be involved in the judgment questions of management?
Mr. Van Loon: In isolated cases I must say yes. From time to time you discover some very obvious mismanagement of companies and, if you are a large shareholder of that company, you have a duty to express your concerns and a duty to see that the company at least addresses those problems. There is no way around it.
Senator Kenny: What sort of problems are created when you have large pools of capital messing with companies like this?
Mr. Van Loon: I do not know if many problems have been created in this regard so far but, I am not involved with the Ontario teachers' fund, and I am not involved with the Caisse de dépôt.
Senator Kenny: But you do see what goes on.
Mr. Van Loon: Yes. In some cases I feel they are justified in interfering.
The Deputy Chairman: You mentioned that people could apply to be members of the pension board.Was it advertised in the daily newspapers across the country?
Mr. Van Loon: I do not know if it was advertised in the dailies, but I know it was part of the press release issued by the Department of Finance. I phoned someone in Toronto who is retired who I thought should apply. I told him where to apply, but he did not. I had the address available to me.
The Deputy Chairman: Was it not a full-scale effort?
Mr. Van Loon: I would say, no. It was a press release as far as I know, but I could be wrong.
The Deputy Chairman: Senator Callbeck raised a question which I know concern many of the members of the committee. It is the question of balance on the board. How many women were part of the list that you submitted to the Minister of Finance?
Mr. Van Loon: I do not have an answer to that. If I were to guess, I would say seven or eight.
The Deputy Chairman: Seven or eight out of the 20, right?
Mr. Van Loon: Yes. Again, I could be proven wrong. I must go back to my office and check.
The Deputy Chairman: If the Minister of Finance told you that he wanted a union representative, say someone from the Canadian Federation of Labour, what would be your reaction?
Mr. Van Loon: I would appreciate him bringing those names forward to us before making an announcement. It would be behove him to at least consult with the nominating committee and ask us to consider certain names. I would appreciate that opportunity. I would expect he would do that, and that would not bother me.
The Deputy Chairman: I would welcome Mr. Don Cayo, who is president of the Atlantic Institute for Market Studies.
Mr. Don Cayo, President, Atlantic Institute for Market Studies: Mr. Chairman, the Canada Pension Plan has been a good deal for some Canadians, for those who have retired or are about to retire, with pensions well in excess of what they might have expected based on their contributions and the past performance of the plan. However, it has not been a good investment for Canadians as a whole. The pay-as-you-go aspect of the plan has proven, with hindsight, to place an immense burden on workers who have more recently entered or who are about to enter the workforce.
I applaud some aspects of the changes now being considered as far as they go, but I do not think that they go far enough. In the words of a submission which I have also circulated, a submission that my colleague, Fred McMahon, and I made to the House of Commons Finance Committee on pension plan changes, we believe they merely "make a worse situation bad." The trick now, however, is to use this opportunity for change to maximum advantage and to minimize how bad the system remains.
Any examination of the future of the Canada Pension Plan involves two key elements: First, the plan must generate enough money to pay the pensions it is already committed to pay and, secondly, it must build a fund that will cover the cost of future pensions for people currently in the workforce. That first element is, because of past practice, a huge expense, and it will be a drain on the economy. While it must be faced, I feel that it matters not at all to the size of the bill whether that money comes from excessive premiums, which are in effect a glorified payroll tax, or from some more equitable form of taxation, the same amount of money remains to be paid.
We at AIMS believe the best solution would be to cover the cost of existing commitments from general revenue and to allow Canadians to choose RRSP type plans where their genuine savings would go. Given that this solution does not appear to be in the cards at this time, I will forego discussion of the myriad of advantages of going to competitive private plans and I will confine my remarks to the material at hand. I also will forego any attempt to advise you on the details of how the pension fund should be administered and the specifics of how the board will be structured. You will talk to people who will give you far better advice than I am able to give on that. What I wish to do is to focus simply on some broad principles that we at AIMS believe must govern how the fund is managed.
The first principle is the management of this fund can have only one goal, to make prudent, productive investments that earn money to pay the pensions of contributors. The second is that political interference, direct or indirect, partisan or regional, must be avoided at all costs; and the third is the decisions of how to invest Canada Pension Plan funds should be unfettered by artificial constraints by the obligation to invest portions of the fund in each of the various regions of Canada, for example, or by limits on foreign investment.
These principles do overlap somewhat. Mandating more than one goal: If we were to mandate both job creation and sound investment, for example, that is a form of de facto political inference and that would violate both the first and the second principles I have outlined. Similarly, mandating regional investments or limiting foreign ones would also be a form of political interference and it would, no doubt, imply more than one goal for the fund, hence, that would probably be an overlap of all three of these principles. It is still useful, I believe, to look separately at each of the three principles, so please bear with me if I do that in more detail.
Canada's recent economic history is replete with examples of how and why it does not work when programs try to combine more than one goal, however laudable each may be. In Atlantic Canada we have seen the example of regionally enriched EI/UI. This program has, for decades, tried to be both a genuine insurance program for temporarily displaced workers and a social welfare program for those habitually involved in seasonal work. The upshot has been a serious skewing of labour market dynamics, a loss of labour flexibility in this region, and a loss of mobility. Rural populations here have remained high with much diminished impetus to create full-time jobs for the people who live here. People have developed a sense of entitlement that has weakened the will to work. Employers report from time to time that they have trouble finding labour, even unskilled labour, and the most recent example I have read about was in Cape Breton, of all places.
Indeed, our institute has studied, in-depth, the broader question of transfer dependency as it affects governments, business, labour, virtually all segments of the Atlantic economy. We found that the trillions of dollars of net cash in-flow the region has received from Ottawa in the past 30 years has done, in fact, more harm than good. It has skewed business decisions to pander to government rather than to satisfy customers; it has slowed the development of entrepreneurial business start-ups and, as I already mentioned, it has skewed the labour market.
Even more dramatic is the role of mixed objective policies in the fishery. The EI/UI system was one factor that led to huge overcapacity, the ability in the case of some species, I believe, to quite literally kill the last fish in the water. Other policies, subsidies for boats and plant building, and a general tendency to treat the fishery as the economy of last resort, also contributed hugely. While one goal of fishery policy has been to build a viable industry, it has been doomed to failure by conflicts with another incompatible goal -- that of creating jobs at almost any cost. The existing Canada Pension Plan I believe is another example of how mixed objectives do not work. Its traditional role as a slush fund for government borrowing has crippled its earning potential.
As I have pointed out, the very act of mandating mixed objectives for the Canada Pension Fund would be an act of political interference in the way the fund is managed, but the danger of political interference goes well beyond that and it is not just the prospect of partisan politics that is worrisome. Regional politics have every bit as much potential to skew decision making.
The first possible pitfall to consider is how appointments are made to the plan's investment board. Board appointees should not be those whose prime qualifications are political credentials, ties to the party in power, nor should they be representative of interest groups. The prime consideration should be that they have investment expertise and that the terms of their appointment are insulated in every possible way from political influence, as is the case with an auditor general.
It is also important that all appointees see themselves as responsible for representing all contributors to the plan rather than narrow regional or sectoral interests. We have seen how regional rivalries distort decision making in the actions of various federal regional development agencies during the past few decades. I am not speaking merely of jockeying for influence among the large regions of Canada -- the watering down of the regional impact of the former DREE programs, for example, by extending them to almost every part of the land -- I am also speaking of the persistent problems of factions within these broad regions, interprovincial sniping in Atlantic Canada being a classic case in point.
Of all the many faults in the current ACOA program, for example, petty provincialism is one of the worst. As soon as one province gets a successful industry, a blueberry plant for example, each of the other provinces must be funded to get the same. When one riding gets a new fish plant, so must the one next door. The successful hotel operator finds himself suddenly flanked by government-subsidized competitors, and so it goes. The frequent outcome is that the market becomes so saturated that none can do well or, in some cases, even survive.
I know that pressure is already building for a portion of Canada Pension Plan funds to be earmarked for this region or that. I am aware that some Albertans want a guarantee that a sizeable portion of money will be invested there because they believe they are doing well and they do not trust Toronto-based bankers to see the same investment opportunities that they see. I would bet my boots that you will find some Atlantic Canadians who want similar guarantees for our end of the country for the opposite reason. They do not think we are doing so well and they fear no one will invest here if they do not have to.
We at AIMS disagree with both of those arguments. We believe that a soundly chosen investment board will recognize good opportunities wherever they may be, and we believe that Canada Pension Plan funds must be invested only where the market provides prudent opportunities.
This leads directly to my third point: that management of the fund be unfettered from artificial constraints. The exact same concern that I have expressed about mandating regional investment extends to all other areas: requiring investments to be made in Canada rather than abroad; requiring some specific mix of investment types; requiring investment in certain sectors; et cetera. Any or all of these things get in the way of what must be the fund's principle and preferably its sole mandate: To invest wisely in order to make money for contributors.
I know that you have already heard a different viewpoint. I know that some others argue for a mixed mandate that stresses job creation as well as prudent investment, and for an investment board with members chosen to represent various sectors of society. You face a tough choice, you cannot please all of us.
That being the case, let me end with an upbeat little bit of information that I think is not well enough understood, and let me put it in context with a bit of history. Back in the 1960s, GDP per-capita growth in this region was growing at a rate nearly twice the national average, although we still had a lot of catching up to do. Ottawa decided to help us out initially with a little money to bring our education and medical systems up to snuff, and it seemed to work. So went the wisdom of the day: If a little seed money does a little good, a lot will do more. Transfers skyrocketed and the targets were broadened to include virtually every aspect of the Atlantic economy. What happened, in fact, is that our per-capita growth slowed to well below the national average and it stayed there for a long time, right up to the point where, just a few years ago, Ottawa began cutting back massively on federal transfers. What happened? Now our per-capita growth is once again better than the national average. We have some problems but we are doing okay.
I invite you to look very closely at this city while you are here. So far this decade, grants to businesses here have plummeted to levels not seen for decades. Meanwhile, Metro Halifax has lost 10,000 government jobs. This is a double whammy, massive cuts far more severe in per-capita terms than have been seen in any other part of Canada. Yet today the unemployment rate here in Greater Halifax is barely over 8 per cent, significantly less than the national average. Far from having been hurt by diminished transfers, Halifax is learning to thrive on its own. Our private sector is coming into its own with remarkable creativity and vigour.
The same thing happened in Moncton, another Maritime bright spot, a few years earlier when CN, which was at one time almost the only game in town, dramatically downsized.
I could go on, but the point I wish to make is that the market forces do work when you let them. The money that the Canada Pension Plan has to invest will be a force for good in all regions of Canada, but I do not feel we can force it to be, we must let it work to the betterment of us all and to making money to pay pensions to old folks.
Senator Kenny: I find our witness's views very refreshing. I think you would have done well to have stuck with them.
The case that you have made is a compelling one. Let us accept that what you are saying is so. I feel pretty comfortable with what I have heard you say and what I have read. However, it runs against the very fabric of Canadian decision making. The nature of Canadian decision making tends to be one of compromises, it tends to be one of this deal is not good enough on its own so let us find some add-ons to make it work politically. You can look out at Hibernia and see 50 different reasons for proceeding with that investment, or you can look at military purchasing and you know that the soldiers' needs is one of five components that go into making the purchase.
You are arguing, essentially, that we should have a board that does not take into account questions of sex or race or region. You are suggesting that it stay clear of that completely, and you are talking about focusing on one thing.
Do you agree that this runs counter to how we generally make decisions in Canada, and in fact that the "Canadian way", if you could call it that, is quite contrary to what you are proposing?
Mr. Cayo: I agree with the first part of your question. As to the second, perhaps you are overstating it a little. You have some tough choices to make. My job is the easy job -- I just come here and tell you what to do. Other people must do it. This is the glory of being a member of the think-tank. It is tough but this one is too important to screw up. We have gotten ourselves into massive problems with the Canada Pension Plan. It was approaching the point where Paul Martin had to do something. I am not entirely satisfied, as I made clear, with what he has done, but he has done something, and he has certainly gone some significant distance towards fixing it. If he had not done so, the legion of people who fear that they will never get anything out of the Canada Pension Plan would very probably have been right. It was on a very bad track. It was a result of the kind of decision-making process that you have been talking about.
Canadians are at a point right now where there is considerably more willingness than in the past to go with solutions that work as opposed to solutions that feel good. Not everybody is there, you will hear long and loud belly aching from the interest groups who would like to be represented in this, but I think those interest groups are speaking for fewer and fewer Canadians.
I also feel that, if you can tough it out for a while, the Nova Scotia experience might be a little lesson for you. What I heard Mr. Van Loon saying, in questions of the sort of political pressure on them to do this or that, in terms of broadly based controversy, is nobody cares because nobody notices.
It will be tough, there will be some clamour of voices, and I do question how many real Canadians they represent, but I think, once you are over that hump, if the plan performs well the problem will go away.
Senator Kenny: Could it be that Canadians have adopted this form of hybrid decision making, if I can use that term, or multiple goal choices, because they think that that is an important factor in the fabric of the country and because they have come to the conclusion that these sorts of trade-offs -- having less than optimal performance in a whole variety of areas, not just the pension plans -- is are acceptable trade-offs in return for keeping the country together and for accommodating the different regional concerns that exist?
Mr. Cayo: Yes. In many ways I still endorse that, but I think that it happens in certain areas. For example, in the constitutional area, the Canadian "muddle-through" way is actually a rather good practice because we are such a big and such a diverse country geographically, economically and culturally that there are no absolute, one-size-fits-all, solutions.
The problem is that, over the past 30 years, that sort of process has extended into many areas that some Canadians, I think quite a few, certainly me among them, are thinking that it ought not have gone.
I am not against that process in all things. There are many compromises that I must make as a Canadian and, for the last 31 years, as a pretty committed Atlantic Canadian and a guy with much fondness for the Prairies where I grew up. There are many compromises that I must make in order to make this country work, and I quite willingly, and in some cases quite joyously, make them. However, there are other areas that we have found that this approach simply does not work, and that is basically in areas driving the economy.
If you look at the study done by our think-tank did, it is a book called, "Looking The Gift Horse in the Mouth" on transfer dependency, the cost of these muddle-through compromises and politicized spending of half a trillion dollars which the federal government has sent down our way in the past 30 years, is enough money to virtually pay off the national debt. That is the net in-flow of federal funds, the money we received in excess of what we sent back to Ottawa through taxes. It was enough to pay off the debt.
What we found is that we are worse off for it. It stunted our economy; it hurt us. That was a typical Canadian compromise. I think much of it was good-hearted, but I think much of it was also wrong-headed, and we are coming to find that, when it comes to a purely financial tool like how will we pay for people like me on the cutting edge of the baby boom to retire, we wonder how our kids will be able to pay for it because there are not enough of them. We are not allowing enough immigrants into Canada.
Senator Kenny: When we cut back we also lost every seat in the region. There is a message to governments in that: In the real world, when the government follows the sort of advice you are offering, they do it at their peril.
Mr. Cayo: Governments win, governments lose; politicians win, politicians lose. Time will tell. I do not care if some people lost their seats. I am not very political. This relates to what I am saying about tough choices. Do you wish to have good governance or not? On this issue, good governance is an absolute requirement. This is too important to screw up, as I say, because it has the potential to bankrupt the country if we do it wrong.
Senator Kenny: If we take what you say as being the way we should go, what is the best way to do it? For example, we have been talking about transparency. Transparency seems to be a comfortable solution in the minds of many of us. On the other hand, if you do not have much transparency you can go ahead and do some of the things that you are suggesting and not have the flack that is associated with it. How do you insulate the folks who are running this operation from the criticism that: "I am from Alberta and we have put X per cent in and, in looking at these figures we see that are only getting half of that back. It is those people in Halifax who are running the fund"? How do you deal with those sorts of problems?
Mr. Cayo: The appointment process should be de-politicized it to the absolute maximum extent. I only caught the last part of Mr. Van Loon's testimony, but I believe he said that this nomination process involved two nominations from each province. That is wrong. I find it difficult to believe that, coincidentally, of the best 20 people in Canada, two come from each province. That is exactly the kind of thing I am talking about. That should not be. If seven of the best people come from Nova Scotia, then they should be chosen. Conversely, if no suitable nominees can be found in Nova Scotia, then there should be none chosen from that province. It must be that simple. They must be appointed with the kinds of insulating factors that protect, say, an auditor general or an ombudsman, so that they can simply do their job without worrying about day-to-day consequences or who was carping about them where today. I believe, because pension issues are so arcane, that, if the fund makes money, interest will be lost very quickly.
Senator Oliver: I appreciated your, what I would call, "challenging" comments. I particularly enjoyed your comments about the fishery and the effects money coming from Ottawa to Atlantic Canada has had on our economy.
The Standing Senate Committee on Banking, Trade and Commerce has before us today a statute, the CPP, which was passed and given Royal Assent in December, save some clauses. We also have asked to consider some regulations on corporate governance.
I would like your advice on what corporate governance principles we ought to recommend to the Minister of Finance should be inserted or varied.
As Senator Kenny mentioned, we are considering principles related to accountability and transparency. In your statement you said, on page 1, second last paragraph:
...political interference -- direct or indirect, partisan or regional -- must be avoided at all costs.
What recommendations should we take back to the Minister of Finance to ensure that the regulations and the act avoid political interference, direct or indirect, partisan or regional, at all costs?
Mr. Cayo: I am not the person who can answer that question.
Before I accepted your kind invitation to appear, I talked with Mr. Benoit to find out what aspects of this legislation were causing you concern. Initially, I thought you would be looking for detail and knowledge beyond my expertise. However, Mr. Benoit was kind enough to send me some material, from which I discerned some of the arguments that were being put forward, particularly in the CLC brief, specifically outlining two objectives. This was fundamentally opposed to my position. Broadly, I believe that this is a business transaction, and that it must be run on business principles. You must set your political histories aside. Politics is an important skill and an important activity for Canada, but it should play no role in the investing of money to pay pensions. That has been amply demonstrated by the rather dismal track record of the Canada Pension Plan and many other business management functions that governments, federal and provincial, have attempted to undertake in this country over the last many years. They do not do it very well. In broad terms I would urge you to listen to me, not them, and to adhere to business principles.
I did go through other material that Mr. Benoit was kind enough to send, and the details, to tell you the truth, kind of boggled my poor little mind. I do not have a good grasp on all of the details.
Senator Oliver: At the same time that we are studying this CPP legislation, our committee is also conducting another study on institutional investors. We are studying corporate governance principles for institutional investors. I do not know what conclusions will be reached by the committee because the study has not yet been completed. We have many more witnesses to hear.
We have heard that groups like CalPERS use their power and their influence vis-à-vis proxies and making suggestions to senior management of certain companies to try to increase their return on investment from those companies. Do you think the CPP Investment Board ought to vote its proxies? What direct role should the board play in some of the companies in which they invest?
Mr. Cayo: I believe that it should vote its proxies on responsible fiscal issues. The specific instance discussed with Mr. Van Loon I feel would be a simple call, if I were to deal with it. If investment fund managers believe that one of their assets is being sold for less than its appropriate value, that is an appropriate point at which to intervene.
There have been all kinds of movements of late to encourage investors to concern themselves with ethical investments. As a person with a very modest personal portfolio, that is of considerable concern to me personally. However, I have great difficulty when institutions start making these judgments on my behalf, and when we get into political correctness debates and so on. I have some interest in and some knowledge of things like embargoes. I was in Haiti very shortly after the embargo was lifted. The horror that that embargo posed on the Haitian people while it existed was awful. There are desperately difficult issues and I am quite prepared to wrestle with them myself. I do not think that is the kind of issue a pensions board should get into.
However, there must be value for money. We should ensure that the best business practices are applied consistently in the running of any company in which the board invests.
Senator Oliver: My last question concerns the term of appointments to the board. If the fund grows to, say, $50 billion or $100 billion, undoubtedly some investments will be long-term. That being so, some long-term decisions will have to be made. Do you think a three-year term for those in charge of masterminding the decisions is appropriate?
Mr. Cayo: I would tend to think it is too short. However, I am stretching beyond what I would consider to be my expertise. I have never managed a few billion dollars and probably never will. If it were my call on how long it should be, I would simply look to the advice of people who have managed a few billion dollars and go with their advice.
Senator Oliver: Do you have any comment respecting the salaries of board members?
Mr. Cayo: I believe the pay should be competitive with the industry and with the performance.
Senator Callbeck: I realize that we are here to talk about the Canada Pension Plan, but I wish to comment on your brief, specifically your observations regarding ACOA. Obviously, we have differing opinions. You state:
As soon as one province gets a successful industry -- a blueberry plant, for example -- each of the other provinces has to be funded to get the same. When one riding gets a new fish plant, so must the one next door.
That has not been the case in my experience. We have some of the best blueberries and some of the best land for growing blueberries in North America.
Mr. Cayo: That is fine, and I think that if a business could go in there and make a go of it without government funding I would wish them well. I also think that, where you have a very large, world-class blueberry plant that is literally a stone's throw away from another province, then they will want one too. It has happened time and time again. Do not tell me that there are no fish plants in adjacent ridings because the Acadian Peninsula, at one point, had 200 of them. This is insanity.
Senator Callbeck: I can only speak about Prince Edward Island and I certainly go on record as saying that P.E.I. has benefited from ACOA. We wish to become more self-sufficient, and ACOA has certainly helped us achieve that goal.
Mr. Cayo: Senator Callbeck, I invite you to read our book, because I would suggest to you that P.E.I. has been held back, not just by ACOA, but by many other subsidy programs. It has not done this region long-term good.
Senator Callbeck: I can only speak to ACOA with which I am familiar, and for the Province of Prince Edward Island. Statistics will demonstrate that we are becoming more self-sufficient; and I feel ACOA has played a role.
Mr. Cayo: You are becoming more self-sufficient because they are shipping down less money these days.
The Deputy Chairman: Maybe we should get back to the Canada Pension Plan. Mr. Cayo is presenting his arguments against a background of what he believes and, frankly, I agree with him about what government programs do to the economy, but that is not something we can argue here. That debate has been ongoing since 1867 and it picked up a little speed with Karl Marx.
Senator Callbeck: As I understood your presentation, you believe there are three things to consider: rate of return; board appointments, that there be investment expertise; and let the market forces work.
Mr. Cayo: Yes.
Senator Kelleher: On page 2 of your brief, in last paragraph you state:
The Canada Pension Plan itself is another example of how mixed objectives don't work. Its traditional role as a slush fund for government borrowing has crippled its earning potential.
Of course, we all know that for years the provinces have been borrowing money from the fund at below market rates, to say the least, and yet we read with some concern that, in clause 8 of the proposed regulations, there is included an ongoing commitment to invest in provincial debt obligations. That does not seem to me, at first blush, to meet with your objectives as to how this board should carry out its investment objectives. Would you care to comment on this further?
Mr. Cayo: I am very much opposed to that kind of continuing commitment. That does not mean that I am automatically opposed to the fund lending provinces some money. It may in fact be a good deal. My understanding of managing big funds is you put some money into lower return, very safe investment vehicles. If financing provincial debt happens to be the good deal and the right mix for the fund, I do not think there should be any prohibition from doing it, nor do I think there should be any commitment. It should be a business decision that this is a place to park some money or this is not.
Senator Kelleher: You are still prepared to include P.E.I. as a possibility?
Mr. Cayo: Absolutely.
Senator Moore: Where does the Atlantic Institute for Market Studies get its funding?
Mr. Cayo: We are a business-funded think-tank. We are about three and a half years old. For the first three years of our operation we had some general funding money, fairly generous, from the Donner Canadian Foundation. That was for a three-year term to get us started. We have spent it. All of our core operations are funded by businesses, many of them Atlantic-based, and virtually all of them with strong Atlantic ties. Some of our projects that go over and above our core funding are still funded by foundations. We receive no government money whatsoever.
Senator Moore: I was interested in your example about the blueberry plant. Do you get any money from anybody who is involved in the blueberry business?
Mr. Cayo: Yes. One of our directors is involved in the blueberry business.
The Deputy Chairman: The meeting is adjourned. We will resume at 3:00 o'clock.
The committee adjourned.