FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 19, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Order.

Welcome, everyone.

The order of reference for the committee is Bill C-2, an act to establish the Canada Pension Plan Investment Board and to amend the Canada Pension Plan and Old Age Security Act and to make consequential amendments to other acts.

We've had a series of round tables and also individual presentations by a number of Canadians in reference to this bill, and it's been, indeed, an excellent exercise. We've received valuable input, and I'm sure today will not be different.

We will begin today with representatives from Knight, Bain, Seath & Holbrook Capital Management Inc., Mr. Richard Holbrook and Kevin Willis.

Mr. Richard Holbrook (Knight, Bain, Seath & Holbrook Capital Management Inc.): Thank you very much.

Mr. Chairman and other honourable members of the committee, we very much appreciate the opportunity today to meet with you and to make a presentation regarding the changes to the Canada Pension Plan.

Because of our operations and our expertise, and given the relatively limited amount of time available, we would like to confine our presentation to aspects of the Canada Pension Plan Investment Board—its structure, its organization, the investment objectives of this board, and also the investment guidelines under which it will operate.

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By way of introduction, Knight, Bain, Seath & Holbrook Capital Management Inc. is a Toronto-based investment counselling firm. There are 47 employees in the firm and it manages in excess of $10 billion currently on behalf of over 150 Canadian pension sponsors. In addition to those sponsors, the firm also acts on behalf of a number of the larger endowment foundation accounts in Canada.

We have five points we would like to make. First of all, the important point, in our view, regarding the composition of the Canada Pension Plan Investment Board is it's critical that the selection criteria for that board be based primarily on merit and investment skills. While we recognize that it's clearly important that there be representation from all areas of Canada, our belief is that because of the rotating nature of the membership or composition of that board, there will in fact over time be very broad representation. But we do feel that merit and investment skills should be the primary criteria and not secondary.

Another related aspect of this is the matter of compensation. Our experience in looking at the compensation packages or compensation standards for various investment organizations certainly has been that it is also very important that the compensation for both the directors of the board and also all of the investment personnel be related very directly to the investment performance of the fund. We feel it could be a major disservice to all of the contributors and beneficiaries if the entire structure were based on compensation irrespective of the investment results achieved.

Very clearly, in our business, our success in meeting and exceeding client objectives is reflected in further growth of assets under our management. Where we fail to meet those objectives, we are fired. So there is a definite and very direct link between results achieved and compensation awarded.

We would like to focus on perhaps two of the most important aspects of the recommendations for the Canada Pension Plan Investment Board.

First, the immediate concern we would like to bring before you is the provision that up to 15% of the total assets of the Canada Pension Plan fund be available for investment in Canadian resource properties. I've pointed out in a number of instances that we feel this percentage allocation is far too high.

Based on the most recent data available, the average level of investment in real property on behalf of Canadian private trustee pension plans is currently approximately 2%. A recent survey in the latest edition of Benefits Canada indicates that of a poll taken of all investment managers of pension funds in Canada currently, the recommended asset mix is 2%.

Based on our experience in dealing with a whole variety of different types of pension funds in Canada, the majority—and it's fair to say the large majority—of such funds have zero investment in real property in Canada. Their investments are restricted entirely to securities that are publicly traded, that is, stocks and bonds in the Canadian market and in recognized foreign markets.

Mr. Kevin Willis (Officer and Shareholder, Knight, Bain, Seath & Holbrook Capital Management Inc.): Just to support that, even though there's an average of 2%, that 2% is really represented in very few very large pension funds, and then when aggregated across all the funds it comes out to 2%. So virtually 90% of pension funds don't hold any real estate at all.

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Mr. Richard Holbrook: Given the size of the funds currently, if there's $40 billion available for investment early next year, as is expected, most pension funds in Canada have announced that allocation to Canadian equities in the area of 40%. So if 40% of those funds are invested in Canadian equities and then up to 15% of the funds are invested in property, that allows up to $6 billion initially to be invested in property in Canada. Assuming some of the more far-ranging forecasts of total growth in the fund, looking ahead up to 15 years, assuming that those forecasts of $200 billion are achieved, then this guideline would allow a total investment of $30 billion in property on behalf of this fund. That would make this fund, by a very wide margin, the largest single investor in Canadian real estate by almost any standard. In fact, it would make it one of the largest investors in real estate in the world, if not the largest.

So that alone suggests to us that there's far too much room here to allow the management of this fund to move directly into property investments.

Not only have property investments generated in the last 10 to 20 years the lowest rates of return in relation to Canadian bonds, Canadian stocks, and foreign equities—of all those asset categories, real estate has generated the lowest returns—but it's also the most vulnerable to mismanagement. Clearly, in illiquid real estate markets where very large sums of money are moved in and out of different projects, there is considerable scope for mismanagement.

So we feel that successful investment is going to be based on allocating investment dollars to those areas that are going to generate the highest rates of return with the lowest risk. We feel that such returns are available in publicly traded equity and bond markets.

In addition, the obvious concern of participants is that, particularly as the composition of the board is to be based on regional representation, there may be ongoing pressure on the direction of investments to ensure that such investments are allocated or investments are made in real property in various regions of Canada that in fact may or may not prove to be consistent with the investment objectives of attaining the highest real returns for participants.

The next item that we would like to bring before you is the provision in the guidelines that 100% of all investments in the Canadian stock market would be invested passively; that is, automatically indexed to such indices as the Toronto Stock Exchange 300 index. We feel that this provision is totally inconsistent with the stated objectives of the fund of achieving, on behalf of the contributors and beneficiaries, the maximum rate of return. In our view, at least 75% of the total dollars that are available for investment in Canadian equities should be invested competitively by external investment managers who have demonstrated the best track record and an ability to in fact meet the stated objectives of achieving the best returns.

According to the most recent data available from the Toronto Stock Exchange, the market value of the Toronto Stock Exchange 300 float—that is, the amount of floating supply of stock available for investment to the public—is $553 billion as of September 30 of this year. Assuming again that 40% of the assets of the fund are invested in Canadian equities consistent with the level of investment of other Canadian pension funds, $16 billion would be invested in Canadian equities in 1998. This would represent 3% of the value of the float of equities in the Canadian market. Whether this investment is made passively—i.e., in a prescribed list of securities based on Toronto Stock Exchange 300 index weightings—or invested actively on a number of managers, the market impact is going to be the same. Essentially, what indexation requires is that those investments be made automatically pro rata based on the market weighting of all of the companies in the TSE 300 index.

By definition, what that means is the single largest investment in the portfolio will be in shares, for example, of BCE Inc., which currently accounts for over 5% of the value of the Toronto Stock Exchange index.

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If investments are automatically allocated to the largest companies in Canada, they are automatically going to flow to companies that already have well-established access to all capital markets. Many of those companies are relatively mature in their development, and they allocate their cashflow disproportionately to payment of dividends rather than to new capital spending and new investment.

It should certainly be an immediate concern that the equity investments that are made on behalf of the fund are invested in those companies that have the highest growth potential and that have been able to generate the best possible returns for their shareholders and for the contributors and beneficiaries of this plan. Clearly, it is inconsistent with that objective to automatically say that such funds will be indexed to the Toronto Stock Exchange 300 index.

Ironically, index funds in Canada that have the stated objective of meeting the return of the Toronto Stock Exchange 300 index have in fact consistently generated returns below the index. At the same time, active investment managers in Canada have been able to generate returns that have been consistently above the index over the last ten years. Accordingly, with the investment guideline calling for 100% of the funds to be invested in index funds, what this means is that if the next ten, twenty or thirty years are similar to the last ten years, it is going to result directly in achieving returns well below the median returns of other investment managers in this country.

I'd like to refer the committee to a chart that we enclosed in the handout, and that is the chart dealing with active versus passive management. It's based on data from SEI Comparative Measurement Service, the largest measurer of pension assets in this country, and measures on a quarterly basis the results of over 3,000 pension funds in Canada. What we have done in this presentation—the green bar chart—is we have shown the incremental return of the median fund in that sample in Canadian equities over and above the return achieved by the TSE 300 index. If you look at the one-year return on the very left-hand side, you can see that the average manager had a return that was over four percentage points above the return generated by the TSE 300 index.

In terms of a $40 billion fund with $16 billion invested in Canadian equities, what this means is that a 4% incremental return translates in that time period to $624 million—and this is over the latest twelve-month period. If you go back over the ten-year history—and this history, by the way, also relates if you go back twenty years or more—the average incremental return by active managers has been 160 basis points. If you take a $16 billion investment and you're adding 160 basis points per annum over a ten-year period, you very clearly are talking about annual rates of return that are $300 million over and above index funds.

Mr. Kevin Willis: So they approach $3 billion over that period of time.

Mr. Richard Holbrook: Yes, that's a cumulative $3 billion over that time period.

As you project ten and twenty years out, if active management can generate similar incremental returns, you are now clearly talking about a cumulative impact that is going to register in the many billions of dollars as we look forward. Ironically, if you look at all mutual fund investors in Canada, those investors have allocated a grand total of 1% of all of their investment to index funds. Based on recent data, 99% is invested in actively managed equity funds in Canada. The reason for this—and we're talking now about millions of mutual fund unit holders—is that those unit holders believe they want to have representing them management that is ready, willing, and able to achieve the best results, and is not simply content with an investment policy in which the best possible outcome is average.

In addition to that first chart with the green bar, the second chart shows the absolute returns over that ten-year period. Again, if you look at that chart, the darker colouring represents the TSE 300 total return, whereas the red colouring represents again the SCI Canadian equity median.

Mr. Kevin Willis: So those green bars represent the difference between the blue and the red.

Mr. Richard Holbrook: Right, and if you look at this, you can get an idea that we did not include in this chart the returns on the consumer price index or the actual increase. The average CPI increase over the last ten years has been very close to 2%. What we're talking about here over the ten-year period are very substantial absolute returns on the part of the TSE 300 index, but even higher ones by the median returns of other managers in Canada.

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Before we get off that point, I'd also mention that of the 150 clients that we have in Canada, we have absolutely zero clients who have given us an investment management goal of achieving returns at the TSE 300 index. Every single one of our clients has a stated objective of achieving results better than those. In fact, we've been successful in beating those, as have a number of other managers.

The other point we'd like to deal with is the matter of public hearings. We appreciate the fact that you want to have this investment board as open to the public as possible, and accessible and accountable. If you are looking to retain active, busy people who are involved on a daily basis in investment matters, however, from our point of view, it is not going to be a productive exercise to take that whole group and move it from province to province every two years. In fact, in our view it would be more productive to have an annual meeting similar to that of a lot of corporations, in which people are brought forward to their stakeholders to report on their achievement or their investment results and to address that group as to their plans going forward.

In closing, we'd like to make the point that we believe this bill is a tremendous opportunity to demonstrate on behalf of the Government of Canada its commitment to professional management of a fund that is going to be one of the largest in the world. In fact, if it reaches those numbers down the road, it certainly will be—i.e. the $150 billion to $200 billion that's being discussed, for example.

Looking at surveys that have been done over the last year particularly, it's clear to us that more and more participants and contributors to this fund do not have confidence in the way this fund has been handled in the past. They are very much looking forward to better management in the future, and what they clearly want to see is a commitment to achieving a very professional standard that generates the best returns for those participants.

We hope we have given you some cause today to consider changes to the existing proposals in order to perhaps incorporate some features that are going to better serve your objectives. We thank you very much for this opportunity to meet with you.

The Chairman: Thank you very much, Mr. Holbrook, Mr. Willis. We'll move now to the question and answer session.

Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman. I just want to thank our witnesses for bringing some of these issues forward.

I think you raise a lot of very valid concerns about the investment board. I think the concerns about composition, compensation, and the guidelines with respect to real estate are important issues, and I just want to start by asking a question about the issue of real estate. You've talked in here about real property being illiquid. What are the dangers particularly to investors, ultimately people who receive pensions from that kind of situation, over and above the political problems or possible conflicts of interest? You mentioned before that in aggregate, only 2% of pension funds are held in those types of investment. Why is that?

Mr. Kevin Willis: The greatest danger is really the illiquidity of real estate. If you're investing directly in properties and there is a downturn in the markets such as we saw in the early nineties and late eighties, typically you can't get out of it because there aren't buyers on the other side. In the equity markets, though, there is always somebody willing to bet on the other side, to take the opposite direction. We saw that with Confed Life.

What caused Confed's ultimate failure in the early nineties was the downturn in the real estate portfolio. In fact, because of that experience in the early nineties, we have many of our pension clients now actually forbidding the holding of direct real estate investments in their portfolios. Within an equity portfolio, however, you're able to access that market anyway because there are real estate management companies represented there.

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When we feel that market has a positive potential, we can invest in those holdings directly for our portfolios, but through shares, which are much more liquid than actually going out and directly buying properties.

Also, if you're going to hold a real estate portfolio directly—you know, the OMERS and the teachers'—you in fact become real estate management firms. You have to employ real estate managers to actually look after those individual properties. You become almost a developer of real estate in order to maintain the value, especially in a down market. So we really aren't proponents of direct real estate....

Mr. Monte Solberg: I think you have raised a very valid concern here, and I would urge the committee to take a look at this.

The next point I wanted to make was that the CPP has had a return of around 2.5% till now, and I think the actuary was suggesting that 3.8% should be a target for the fund in years to come—a real return. What would you think of a target like that? Is it unrealistically low, in your judgment?

Mr. Kevin Willis: No, that's a suitable return. In my previous experience I've worked at a couple of benefits consulting firms, and actually at Knight, Bain, Seath part of my role is to set investment targets for our clients—a real rate of return to work with them—and 3% to 4% to 5% is certainly a suitable target for real rate of return above the CPI. It certainly has been achievable historically, and especially in recent markets, where the CPI has only been 2%.

Even forgetting about equities, look at a balanced portfolio, which would have historically 40% equities, 40% bonds, maybe 20% foreign equities. Over the last 10 years even diversified portfolios have had an average rate of return of around 11%. Again, that's looking at the median performing fund. It certainly has substantially beat the CPI and been able to get that real rate of return of almost 4%.

Mr. Monte Solberg: I'm also interested in the issue you raise of the active versus passive management. I'm wondering how you would react to the fact that if there is active management, one of the concerns people might raise is the political aspect of this. If you have the CPP investment board effectively investing a large amount of money in certain companies where they could even basically take control of the company, are you concerned that this could have the potential for conflicts and that sort of thing?

Mr. Kevin Willis: Not if it's done through a third party—hiring a group of managers like ourselves. You could certainly develop an internal team. Typically what has happened is some of the larger funds have put together an internal team and they may indeed manage part of the portfolio on a passive basis.

To get away from that conflict, and to have arm's length, you would hire firms like ourselves. We would typically be hired by a consulting firm who has access to a database that has knowledge of all the firms that provide services such as ours. The board then wouldn't have direct input into the actual holdings. We ourselves would have full discretion to put together a portfolio of 35 to 40 names, which we would purchase on the investment merit of the individual companies. The board would have no real or perceived conflict as to the actual companies that would be held on the CPP's behalf.

Mr. Richard Holbrook: I just might add in terms of ownership and voting, whether a portfolio is held passively or actively, you do end up with the same voting potential, for example, but in the case of the passive investment, the voting may be on behalf of the board. Active managers who are accountable for their investment decisions have the authority to vote perhaps as they see it on issues that would improve their results.

Mr. Kevin Willis: Typically we are only allowed to vote for or against, where it is to the benefit of the plan beneficiaries. We cannot vote to the needs of the plan sponsor; it really has to be to the benefit of the ultimate beneficiaries of that fund.

Mr. Monte Solberg: Thank you, Mr. Chairman.

The Chairman: Mr. Jones.

Mr. Jim Jones (Markham, PC): I just have one question of clarification. It is my understanding that in this act the selection of the board of directors is based on proven ability versus regional representation. Is that your interpretation?

Mr. Richard Holbrook: Our interpretation has been that much more of a preference seemed to be given initially to the regional aspect rather than the ability and capabilities of the people who are chosen. Our concern was that this issue not be confused in saying that the first criterion for selection is regional representation and thereafter....

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Mr. Jim Jones: I thought the regional selection was the selection committee, and they were to come up with a list of candidates, but then after that it's based on proven ability. That's my interpretation, anyway.

Mr. Richard Holbrook: Our interpretation was that regional aspect related not only to the nominating committee but also in fact to the directors' selection.

Mr. Jim Jones: Thank you.

The Chairman: Thank you, Mr. Jones.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman.

When you were making the presentation, I think a lot of us around this table felt that with all the money we're making, we all felt like investors. Of course, you presented the abilities of a management firm.

Part of the question was answered in terms of the regional appointment or the regional choosing. But to elaborate more on that, someone else made a presentation earlier about actually having 10 different funds. Can you elaborate on that, the different funds, if indeed you've ever thought about it?

I think it was presented by the C. D. Howe Institute, or the Fraser Institute; I don't know which one it was. They discussed having 10 different funds rather than one huge fund.

It seems to me, from your presentation, that you're afraid of what effect this one large fund will have in the economy. If it were differentiated into smaller funds, would it be more workable, more manageable? I'm getting the impression here from presenters that it would have such an impact, not only today, on the Canadian economy...and wanting to have the 20% rule lifted to outside.

Would you comment on that? I don't see too much on it in your presentation.

Mr. Kevin Willis: There are already a couple of funds above the $40 million, including, I guess, Quebec and the teachers in Ontario. So I don't think there's a fear there. The total assets going into the market are still going to be the same. It doesn't matter whether it's one fund or ten funds.

Within the fund, however, there may be a number of different mandates or a number of different structures, depending on what the structure is that's put together and what the investment guidelines are. Really, the total assets will be the same. It doesn't matter how many funds there are.

Mr. Richard Holbrook: Our concern essentially deals with the investment objectives and then the guidelines. We feel it's really critical that in this matter of indexation a policy initially not be adopted that is going to effectively dictate the entire return structure of this fund for decades, potentially.

We're not afraid of any changes in the market. That's the nature of investing. We haven't done any kind of analysis in terms of the impact of 10 different funds versus one, but if you have 10 different funds with bad guidelines, it's going to work just as badly as one big fund with bad guidelines.

So our concern is that you have good guidelines and a proper structure that's going to work well and generate the results you want. If you have the same poor structure, it's just going to mean 10 small mistakes instead of one big mistake.

Mr. Kevin Willis: As well, we would think that a passive portfolio, especially in the TSE 300 market, would have more of a negative effect on the Canadian capital market as a whole than active management. An actively managed market, where we're pursuing companies while other firms like ours are selling them so that there's always someone off to the sides, is reflecting a fully efficient market. As a greater and greater percentage of that market becomes indexed or passively managed, then that information flow isn't being suitably reflected in the market price or the share price of the companies in the TSE 300. So we would argue for active management for that point also.

Mr. Gary Pillitteri: Just to follow up, I'm glad you mentioned the Ontario Teachers' Federation. Since they've pulled out from the province of Ontario, I understand their returns have been 10% or 11% or even better. They are involved in everything, including real estate, and quite heavily.

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Mr. Kevin Willis: Not to 15%, but they do have their own management firm, so you have to be ready to take on additional responsibilities.

The Chairman: Ms. Redman.

Ms. Karen Redman (Kitchener Centre, Lib.): I have one question around the public hearings. One of the things we've heard about from a lot of witnesses is the need for transparency, and I think the government's paid attention to making this a very transparent fund and management. I'm just wondering if you feel that number five in your proposal makes it more transparent than what the government suggested in its revisions?

Mr. Richard Holbrook: It's really a question of the communications of information and the amount of time that's involved in making presentations.

For example, getting back to this question about one large meeting versus ten small meetings, if ten smaller meetings are very time-intensive, that's going to detract from the ability of the directors of this fund to really focus on their most important job, which is achieving the best investment results. So our concern was about getting in a situation where every two years the entire group would be going from location to location reviewing all of their investments, rather than having one forum that would accommodate that in a better way.

The Chairman: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): I appreciated the chart on the difference in the returns historically by active or passive management. I wonder if you could comment on what experience there might be or what evidence there might be that if we, for instance, had a mandatory super RRSP, where we had individuals going out and individually managing—what kind of return experience they might achieve compared to, say, an active portfolio.

Mr. Richard Holbrook: That's a very good question.

One of the things that is not available in some of these measurement services is the comparison of individual mutual fund returns or those of individual retirement accounts or RRSP accounts with an average return for all pension managers. From our experience, the returns of individuals invested in RRSPs and equities has certainly been very positive. The only thing that I could cite in looking at this question is that 99% of individuals choose active management as opposed to indexed funds. So that's the only thing we have. So, presumably, with all of the information available on returns and experience, the participants in those funds have made the decision that they want to invest where they believe they are likely to get the highest return. Those investors currently do not perceive indexed funds as offering the best return.

Mr. Paul Szabo: In principle, though, because of the size of the portfolio, individual funds clearly have a disadvantage to be able to diversify. I assume you, as professional managers, believe that diversification is a big part of the return scenario.

Mr. Kevin Willis: But an RRSP investment is usually invested in a pool with other RSP investors. I think what you're getting at with the super RRSP would be much like a group RSP structure.

We have many clients where there are group RSPs. We give them an option, say, of our ten funds that we offer for all the different asset classes on a diversified basis, and a number of their employees participate in each of those funds. We have one client for whom we do a $60 million portfolio. So it doesn't matter how much the individual puts in there; it's the total size of the fund. He gets a basket of securities that gives him a very well diversified portfolio, just as if he had the whole $60 million. So if you were to set up a super RRSP and then offer a group of a family of funds, much like a mutual fund family, then they would get full diversification. You wouldn't get investment only in terms of if he had a few thousand dollars or $100,000.

Mr. Paul Szabo: But my self-directed plan is very unlikely to be able to perform on average as well as your broad—

Mr. Richard Holbrook: It's possible that the best manager wasn't selected.

Mr. Paul Szabo: Me.

Mr. Kevin Willis: That's a self-directed plan where you could actually pick individual securities too, but if you, on behalf of the CPP members, hire a manager, again to hire those assets, then you use that family of funds.

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The Chairman: Mr. Iftody, do you have a question?

Mr. David Iftody (Provencher, Lib.): Thank you very much for that helpful presentation. I think you've raised some interesting points, particularly the one on the real estate investment. I certainly wasn't aware of that in terms of the legislation. What I'm seeing right now in Hong Kong and Japan and other places is downright frightening. I think people from Toronto will remember the dark days of the late 1980s and what that did to our own economy in the banking system and the multiplier effect, if you will, of that meltdown.

My question was really a technical one. I want to see if I understand this clearly and correctly. You mentioned that the average rate of return after the CPI was around 4%.

Mr. Kevin Willis: That was the real rate of return objective.

Mr. David Iftody: The real rate, okay.

Mr. Richard Holbrook: This is in the Canada Pension Plan.

Mr. David Iftody: Under the proposal?

Mr. Richard Holbrook: Yes.

Mr. David Iftody: You said that was a reasonably realistic return.

Mr. Richard Holbrook: Real rate of return, yes.

Mr. David Iftody: Have you calculated within that 4% what it would cost in terms of administration? What I'm driving at here is this. One of the things we've talked about and debated between the parties and members of Parliament is the actual administrative cost of bringing that return down in some cases by 1%. Could you comment a bit on that?

Mr. Kevin Willis: When you write up investment guidelines and objectives for the managers or for the plan, typically that 4% real return is after costs. You're looking for that real rate of return, so to support us or to take on the risk of active management or even passive management, you calculate what all those fees potentially would be and then your real rate of return is above and beyond that. So we're measured after costs.

Mr. Richard Holbrook: I'd just like to add something in that regard. The common perception in looking at all the advertisements about mutual funds and management expense ratios of 2.5 or 2.75 percentage points totally applies to the mutual fund industry, not the pension fund management industry. The average fees for extremely large funds of this nature are of the magnitude of 20 basis points or one-fifth of one percentage point. That would be in the ballpark in terms of total cost. That is less than one-tenth of what mutual funds charge.

Mutual funds charge because of their extremely high advertising and marketing expenses in addition to the fact that the administrative costs of the record-keeping, telecommunications systems, and other aspects of those funds involve very high expenses. The average expense ratio in pension fund management is less than one-tenth of what it is with mutual funds.

Mr. David Iftody: As an aside and comment, I appreciate your concern as very professional managers and competent people in your field that as a priority you would want, as I think all Canadians would want, competent investors who are going to manage this fund. I think that's largely appreciated. I think most people would be quite sensitive to that.

You're from Manitoba yourself. Reading your biography here, I would be a little bit concerned as a Manitoba rural MP that once again in our humble little province in the centre of the country, where the House of Commons ought to be actually, somehow these differences would be overlooked.

Just for the record, Richard, if I can call you that, as a former Manitoban I would want to make sure that because it is a Canada Pension Plan—and when we talk about Canada we talk about the Northwest Territories and rural Manitoba and Saskatchewan and wherever—those concerns are part of that package. Canadians have a right to some representation, particularly with something as large and as important as this. Those regional differences, not only in terms of background but where you come from and the people you represent in that area, should be included at the table in terms of these investment strategies.

The Chairman: Thank you.

Mr. David Iftody: And I do forgive Toronto for winning the cup, yes.

Thank you, Mr. Chairman.

The Chairman: You should be getting used to it by now.

Mr. David Iftody: Oh, low; very low.

The Chairman: Mr. Willis, thank you very much for your contribution to the process. Certainly you have given us some insightful information to review.

Mr. Richard Holbrook: Thank you very much.

Mr. Kevin Willis: Thank you.

The Chairman: I'm going to suspend for a few minutes and then we'll be back.

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The Chairman: I'd like to call the meeting to order again and welcome Miss Grace Buller, member of the National Action Committee on the Status of Women.

Thank you very much for attending these hearings. We look forward to your comments.

Ms. Grace Buller (Member, National Action Committee on the Status of Women): Thank you, Mr. Chairman and honourable members.

Women face special concerns in preparing for a secure financial future in old age. Women retire earlier than men and they live longer, meaning they will generally spend many more years in retirement than men will. While the majority of women are now in the paid workforce, their earnings on average are still considerably less than men's, making it more difficult for them to save for themselves through RRSPs.

Women are less likely to be covered by workplace pension plans and they have a different pattern of paid and unpaid work throughout their adult lives. They may have periods of time where they have full-time paid jobs, periods when they are working part-time in the paid workforce, and also periods when they are working without pay in their homes, caring for children or other dependent family members.

Among today's seniors, 65% of the income of women aged 65 years or older comes from public pension programs and other government transfers. About 47% of the income of men aged 65 years or older comes from these sources.

The importance of the Canada Pension Plan is very great for women. Changes to the Canada Pension Plan have serious implications for women because the CPP is an essential element of their retirement income, but even more important is the fact that the CPP offers a number of advantages that are not found in workplace pension plans or private retirement savings arrangements.

First of all, it covers all sectors of the economy. The CPP covers everyone, regardless of the sector of the economy where they work. Most women work in sectors of the economy such as business, personal services, and the community, sectors where private pension coverage is lowest. Only 42% of women in paid employment in 1993 belonged to a registered pension plan through their work.

The second important element is that it includes part-time and self-employed workers. Coverage of the CPP extends to all paid workers regardless of whether they work part-time or full-time or are self-employed.

Thirdly, it is completely portable. The CPP is completely portable as people move from one job to another. This feature is particularly important for women who have tended to be more mobile workers, sometimes withdrawing from the paid workforce for periods of time to raise children or changing jobs in search of better pay and prospects.

Fourthly, it accommodates family responsibilities. In addition to the general drop-out provision allowing for the exclusion of 15% of the years between the ages of 18 and 65 from the calculation of average earnings on which the CPP retirement benefit is based, the CPP has a special provision to accommodate family responsibilities. As you know, any periods when a worker had a child under the age of 7 years may be excluded from the calculation of average earnings for pension purposes.

Fifth, pension credits are shared on divorce.

Sixth, spouses may share pensions at retirement.

Seventh, there is full inflation protection. The CPP is fully indexed for inflation. This is especially important for women because on average they have more years in retirement than men.

Eighth, there is a flexible retirement age. The CPP provides a flexible retirement age anywhere between ages 60 and 70, allowing women who retire prior to age 65, as most do, to claim a somewhat reduced CPP benefit. There are benefits for surviving spouses. The CPP has surviving spouse benefits, and more than 88% of those receiving CPP survivor benefits are women.

The problem of low earnings is very important. Of course we recognize that the CPP is an earnings replacement plan. Such plans are designed to protect a worker's standard of living in retirement by replacing a percentage of her pre-retirement earnings. To the extent that women have low earnings, an income replacement pension plan will give them low benefits. For example, the average retirement pension being paid to women who retired in August 1997 was only $278 a month. This is compared to $506 a month being paid to men who were new retirees in that same month.

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Changes to the CPP that effectively reduce the amount of the retirement pension will be particularly devastating for women, and we will return to this point later in the brief.

It is our position that there is no consideration of the impact on incomes of future seniors. Changes to the CPP are being made solely to reduce the costs of the program, regardless of the consequences for future seniors. There has been no consideration of how these changes might affect the financial security of those who will be retiring in the future.

The overall objective of reforms to the pension system made in 1997 seems to be to reduce the role of public pensions in Canada's retirement income system. The government apparently assumes that people will be able to make up the difference themselves, and all indications are that this is not so. As we have already noted, women are even less likely than men to be able to do this.

Third, there is no analysis of labour market development. The labour market has been undergoing significant changes over the past few years as a result of restructuring, downsizing, and privatization. These developments have had a marked impact on women's paid employment. Statistics Canada's general social survey indicates that 40% of women's jobs and 27% of men's jobs are now what one calls non-standard jobs, defined as one or more of part-time work, temporary work, own-account self employment, or multiple job holdings.

The federal government made a commitment to the International Women's Conference in Beijing to undertake a gender analysis of all proposed policies as they are developed. We recently came across a document entitled, “Gender Implications of Changes to the Canada Pension Plan”. We have come critiques of this. We don't intend to undertake a detailed critique of the gender analysis paper, but there are a number of statements in the paper about differences between women and men that call for comment because they reflect a lack of understanding or information about the disadvantages women face in the paid labour force and in society generally.

For instance, the paper claims that if current trends continue, the gap between what women and men on average receive from the CPP can be expected to narrow for future generations. We feel this isn't so, given that women's earnings are currently only 65% of men's and the percentage of women in non-standard jobs is increasing.

The paper also claims the proportion of women participating in the paid labour force is much higher than in the past. While this is true, the statement is meaningless unless we look at earnings of women in comparison with men, patterns of employment and unemployment, and the percentage of women in low-paying or part-time jobs.

It indicates families are having fewer children and as a result fewer breaks in employment. It is true that fewer children are being born, but at the same time governments at all levels are cutting back funding to social services and thereby expecting the voluntary sector to take up the slack. So we have more and more women who have to leave the paid workforce to care for frail, elderly dependants or family members with disabilities.

On the changes proposed in Bill C-2, the CPP changes now being implemented will increase the contribution rate sharply over the next six years to generate an investment fund that will be invested in the capital market. At the same time, CPP benefits will be reduced. These changes will have the most impact on those who are most vulnerable: women and persons with disabilities. The National Action Committee does not believe these cuts are necessary and we've outlined our comments on the various changes in the paper.

• 1630

Increasing the contribution rate so sharply and in such a short period of time is bound to have an impact on lower-income workers, many of whom are women. The government apparently has not done an analysis of what this impact might be. This impact analysis should be conducted and appropriate ways to address it should be found.

On the second point, the investment fund, the National Action Committee is concerned that the creation of such a large investment fund to be invested in the stock market leaves many unanswered questions. For example, will the investment boards consist entirely of financial professionals, or will there be room for representatives of CPP beneficiaries as there would be on a board of a workplace pension plan with joint trusteeship?

We note the finance minister has already established a nominating committee to advise him on the appointment of directors. We were particularly concerned to note that the committee consists entirely of men who are heads of large private corporations, or senior officials in provincial finance ministries.

There's been no discussion of the possible use of ethical investment criteria for the CPP investment fund, for example. Nor has there been any discussion of how shareholder voting rights associated with the fund's holdings will be exercised. These questions should be thoroughly explored and the public should have an opportunity for input.

The proposal to freeze the year's basic exemption at the current level of $3,500 will have the biggest impact on those with the lowest earnings, most of whom are women. While the existence of the year's basic impact exempts low earners from contributing to the CPP, it also means some very low-income workers whose annual earnings are below $3,500 are excluded from coverage by the CPP. Most of these workers are women. As well, the year's basic exemption provides an incentive for employers to pay workers low wages to avoid having to contribute to the CPP on their behalf.

It is proposed that pensions for people on disability when combined with survivor pensions should be reduced. These two have a great impact, especially on women since they are usually the survivors. We have a negative reaction to this, but I won't go into the details of it as we understand them.

On reducing the CPP retirement pension, Bill C-2 provides for a new way to calculate CPP retirement pensions and the earnings-related portions of disability and survivor benefits. They will now be based on a contributor's average career earnings, updated to the average of the year's maximum pensionable earnings in the last five years, instead of the last three years prior to the commencement of benefits.

While the change is to be phased in over two years, the effect will be to reduce the amount of the retirement pension and other earnings-related benefits in the CPP. The government says if this measure had been in effect in 1997, the maximum retirement pension would have been $724 a month instead of $736 as it is now.

NAC is particularly concerned about this change. As we noted earlier, any reduction in the amount of the CPP retirement pension will have a particularly significant impact on the retirement incomes of women.

On restricting disability benefits, people with disabilities will bear the brunt of the CPP cutbacks. Administration of these benefits will be tightened, workers will have to have more time in the paid workforce before being eligible for disability benefits, and a new formula for converting a disability benefit to a retirement pension at age 65 will effectively reduce retirement pensions for many people with disabilities. NAC is particularly concerned about the impact of these changes on women with disabilities.

Bill C-2 will also reduce the maximum death benefit to $2,500 and freeze it at this level. Under the existing program the CPP pays a lump sum death benefit to the estate of a CPP contributor equivalent to six months of retirement benefits, up to a maximum of 10% of the year's maximum pensionable earnings, or $3,580 in 1997.

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You have a number of options still on the table, but I won't discuss those at the present time.

In conclusion, we reiterate our concern about the way in which the CPP changes have been formulated and are now being implemented without any concern for the impact on the incomes of future seniors.

Women face particular problems in providing for financial security in their old age. Women are more vulnerable when public pension programs are cut back.

We are particularly concerned that changes to the CPP are being made without any credible gender impact analysis, without any analysis of the implications of changes in the labour market, and without any consideration of the interaction of these changes with other elements of the retirement income system.

We believe that public pension programs must be strengthened, not cut back, if women are to have financial security in their old age. It is time to make the well-being of future seniors the focus of Canada's retirement incomes policy.

I thank you.

The Chairman: Thank you very much, Ms. Buller.

Mr. Solberg.

Mr. Monte Solberg: I'm wondering if the National Action Committee has done any work on, or considered at all, what possible impacts there may be as a result of the payroll tax increase on especially young people—and, I suppose, from your perspective, on young women. Have you looked at that at all and have you any thoughts on that?

Ms. Grace Buller: No, but generally the National Action Committee and its membership, who I should say are mainly people in lower incomes, are very much in favour of the Canada Pension Plan, because those women who have contributed, for instance, to RRSPs have often had to cash those in when they've fallen on hard times, when there's been unemployment and they haven't had jobs. Their unemployment insurance ran out and they didn't want to go on welfare—they couldn't, of course—so they had to cash in their RRSPs. I think this is one of the difficulties.

Therefore they feel that the Canada Pension Plan is the best kind of plan that's possible for them. They have problems with it, but generally it has functioned fairly well in the past.

Therefore we are pleased that it is continuing.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): This is perhaps one of the more thorough presentations that we have received. It highlights a number of key issues.

I think you're the only person—if I missed a meeting I could be wrong—that raised the issue of ethical investing, and of course that's a topic that's getting a lot more attention in the U.S. than in Canada so far. The funds in the States are actually starting to earn some pretty good money.

The issue of time out for caring for the elderly is something the sandwich generation is feeling much more of. Traditionally governments have focused on the other end, on raising children, so that's something that perhaps in track two we'll really need to address better. I intend no disrespect to the job of raising children, but it's additionally difficult when you've taken time out to care for a family member in your higher-income earning years.

The issue of disability is something that is quite a concern, and you've raised some good points that we need to look at. How that will impact on people was raised yesterday as well.

So I appreciate hearing some of your perspectives, and if you have some scenarios, that might be helpful.

In our office we were trying to think about some of the people we've dealt with and how the changes will impact on them.

In general, do you support the thrust of what the government's trying to do to make the CPP more sustainable?

Ms. Grace Buller: In general we do, but decreasing the benefits is not what we have in mind. We feel that the benefits will be decreased—not considerably, but when you take five years instead of three years of past contributions, it will decrease. As I mentioned, the average pension from the CPP for women now is only around $270. It's very low. So although the maximum CPP one can earn is $737 a month, I understand most women do not receive that. Most men don't receive that either, because in August, as I mentioned, it was $500-and-something for men and $200-and-something for women.

• 1640

The pensions of women now are low, so if you take five years instead of three they'll be lower yet. If women do have many dropouts from employment, that is, they're unemployed, they're changing jobs, they're raising children so that with the total of all these aspects together, especially with the kind of economy we have now where people do not remain in one job for their whole life, they change jobs constantly.... I think the impact for the new generation of seniors, maybe not even the baby boomers but the generation of seniors after that, will be very severe and to their detriment.

Ms. Paddy Torsney: We heard from some presenters that if we really were going to be inter-generationally equitable we should have actually hit current seniors. I wonder what your thoughts are on that, that we should have actually reduced the benefits for the current recipients of CPP and used that.

Ms. Grace Buller: When you look at my hair, you can think what I'd say to that.

Ms. Paddy Torsney: There are some people around the table who are not receiving benefits and already have white hair, so I have no idea how old you are.

Ms. Grace Buller: Anyway, no, of course we don't. We think that the benefits shouldn't be reduced for either the current seniors or seniors who will be coming up, either the baby boomers or the next generation of seniors. When you see the small amount women are receiving in the CPP, then you do realize that the incomes of women in their retirement will be somewhat jeopardized. Although the CPP is a good program in itself, I would like it to be more generous. That's really our view.

Ms. Paddy Torsney: I have two other questions for you. Do you have a distribution, or are you referring to something that has come out from Stats Can, which I just haven't seen yet, where if $278 is the average—

Ms. Grace Buller: Yes. Just a minute and I'll tell you where that's from. This figure is from Human Resources Development Canada, the Canada Pension Plan old age security statistical bulletin for August 1997, table 9.

Ms. Paddy Torsney: Does that have a distribution of what percentage of women are earning at the top end and what percentage of people—men and women—are earning at the upper ends as well as the lower ends?

Ms. Grace Buller: Yes.

Ms. Paddy Torsney: All right. I'll get that chart.

Lastly, I know the committee is not really focused that much on track two at this point, but I wonder have you thought much about the minister's suggestion for looking in terms of track two on continual pension credits splitting throughout married people's lives so that there's a little bit more update and there's a little more demonstration, perhaps, of fairness throughout the whole period?

Ms. Grace Buller: I don't quite understand what you mean.

Ms. Paddy Torsney: Rather than pension splitting, credit splitting, at the dissolution of marriage—

Ms. Grace Buller: Oh, yes.

Ms. Paddy Torsney: —which happens and doesn't happen sometimes, there's been some discussion about contributions always being split between spouses and the bank adding up each and every year rather than at some point in the future.

Ms. Grace Buller: Right. No, we haven't really considered that at any great length, but we will.

Ms. Paddy Torsney: There had been some proposals—I'm not sure if you're aware but they come up from time to time. If we're looking at all of the pension system, or the retirement savings system, there might be some more creative use of tax deductions for RRSPs than having they system where in order to claim the deduction you have to have contributed equally to the spouse's RRSPs and that this would help the funds be more equitably distributed. Of course, women who are seniors would have a better chance of having income in their own name.

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Ms. Grace Buller: We would be in favour of that if RRSPs were.... Of course, we have the spousal RRSP now, but—

Ms. Paddy Torsney: But that's an extra. In some families it might not be, but you can get a credit for that. In terms of pension credits from private pension plans and RRSPs, the concept is that as you go through you're always contributing to both of them equally, and working women would be contributing to their working husbands' pensions and RRSPs and working men would be contributing to their wives', so there was fairness and equity as those plans grew and the contributions continued, and that would ensure there was better fairness amongst Canadians.

Ms. Grace Buller: Yes, we could certainly look at that. We haven't really considered it. What we have done really is react to what's going on rather than considering different proposals. We've been very positive generally towards the CPP, with some criticisms. But we certainly think it was a very good proposal when the CPP and the old age security were introduced. These did a lot toward helping seniors in their old age—both of those programs. That's why we really would like to see them continue, both of them, on the same income level as they've been. I think that's our main criticism.

Rather than looking at registered retirement savings plans and private pension plans...again, not that many women have private pensions plans. I think about 42% have private pension plans. Now that women have been laid off from the public sectors, both in the federal and provincial governments, and probably now, for instance—I come from Toronto—in the municipalities..... That's where the large number of private pensions are found, in government. So we'll find that fewer and fewer women will have private pensions. There is cause for concern here.

Ms. Paddy Torsney: Just to illustrate that point even further, in Ontario I think 80% or 90% of the health care workers who have been laid off are in fact women. That has a very dramatic effect when it was an area where they were getting decent benefits.

I encourage you to keep the pressure on for the track two as well. We'll certainly look at the issues you've raised. Track two will depend on a lot of flexibility with the provinces. Obviously different provinces have different attitudes, but I think there is a lot of opportunity in track two to make some more creative changes. The other thing, which perhaps you've highlighted as well, is that all of us need to remember that retirement is a permanent and long state for a lot of people, particularly women. It's not a temporary state, as are EI benefits or, hopefully for some people, illness benefits, or what have you. It is until the end of your life.

Thank you.

The Chairman: Thank you for your remarks, Ms. Torsney. Thank you very much, Ms. Buller.

Ms. Grace Buller: Thank you.

The Chairman: We'll now suspend for a few minutes.

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• 1651

The Chairman: Welcome to the representative from Regal Capital Planners, Ms. Christine Lambert, a financial planner.

Ms. Christine Lambert (Financial Planner, Regal Capital Planners): Thank you.

The Chairman: As you know, you have 10 to 15 minutes to make your presentation. Thereafter we will proceed to a question and answer session. You may begin.

Ms. Christine Lambert: Good afternoon. I'm a personal financial planner. I tend to take the holistic, long-term, lifestyle approach with my clients, and that is what I would like to do with you today.

When I talk about retirement with my clients, I usually ask them at what age they would like to retire. Many of them say they would like to retire at 55. I tell them that if they start work at 25 and work to 55, that gives them 30 years in which to buy a house, raise their kids, and save enough money to live on for the rest of their lives. Life expectancies are increasing. “Freedom 55” means eating cat food at age 85, and most people don't quite realize that.

I also tell them not to expect the government to look after them—which is something Paul Martin has said—because the government, I think, can't take care of itself. We have a huge debt, a massive debt. People say they want to look after themselves so the government doesn't have to, but I would go further than that and say they have to look after themselves because the government can't.

It is actually reassuring to hear Paul Martin say that Canadians should not rely on the government. I think that's a bit of a reality check.

In 1965, I was 3 years old, and John Kroeker was an actuary with the Canada Pension Plan. He spoke out then, saying that the Canada Pension Plan would require higher premiums, that it would be broke by the year 2000 and, although these are not his exact words, that it was a slush fund for the provinces to get cheap loans. He was fired. His career was destroyed. He never worked as an actuary again. And this was done by a government that claimed to listen to Canadians.

I think the government was thinking of its short-term cash windfall and ignored the long-term pain that it caused. It didn't want to see it. It has not seen it. And now we have it. It's right in our face. The government has promised seniors $600 billion, and we don't know how we're going to fulfil that promise. Furthermore, the promised amount is going to increase over the next several years.

Pay as you go simply does not work. There are fewer payers and more goers. The unfunded liability is going to increase so the problem is going to be exacerbated. It is a pyramid scheme, but the pyramid is toppling. Some people call it a Ponzi scheme. I don't. The people who contributed to a Ponzi scheme actually expected to get something in return for their investment, and I do not expect anything back from my CPP premiums.

• 1655

It's now going towards partially funded, which tells me that the government realizes pay as you go doesn't work.

The provinces get to appoint the management board, and they get their cheap bonds renewed.

You say it's not a tax; I don't know who you're trying to fool. It is a tax. It's an unfair tax on people, on their first approximately $36,000 of income. So somebody making $36,000 is going to pay the same tax as somebody making $100,000 or $200,000, and that is simply unfair.

You say it's guaranteed, but as you're showing right now, anything that can be changed by government legislation is not guaranteed.

You say it's a savings or investment for my retirement. If I take a dollar and put it in my piggy bank for 35 or 40 years and then take it out for retirement, I will have one dollar. I will probably lose some purchasing power. On the other hand, if I put that dollar into the Canadian Pension Plan, what am I going to get: 65¢, 50¢? I'm better off putting my money in my piggy bank. So it's not an investment; there's a negative rate of return.

The entire plan that has been proposed is just more of the same. There are more premiums from unfair taxes on the working poor and on businesses. There's more unfunded liability and there are more slush funds.

I don't think you're going to have a tax revolt, as some people have suggested. I think young, educated people will vote with their feet or with their suitcases. Businesses can't hire them here anyway because of the increased payroll taxes.

When you say “Save the CPP”, it's a nice slogan. “We saved the CPP” might win this government the next election, but it's a short-term sound bite, a campaign slogan, about as true as the other campaign promises. You can't back it up. When I ask how you're going to save the CPP, it doesn't make sense.

I suggest we take a step back and look at a long-term, holistic approach. This is a benefit for old people who need it, and as such it should be funded from general tax revenues and targeted to people who need it.

Instead of saying “Save the CPP”, say “We will take care of seniors who have run out of money”. Also, raise the retirement age, because it's just not realistic to have so many years of retirement living. If you take care of seniors who need it, you would be including older seniors who have not worked outside the home for enough years to receive enough benefits to last them.

Spread the tax base. If you consider it a tax, you can receive the money from sources other than people making $36,000 a year and target the benefits to people who need it.

I'm not sure you're going to listen to me; I'm just an innocent taxpayer. But I'd like you to ask yourselves if the IMF thinks this is unsustainable, pay as you go, it will increase the payroll taxes. It will unfairly tax the young and the working poor. It will increase the unfunded liability and increase the slush funds.

Thank you.

The Chairman: Thank you very much, Ms. Lambert.

We'll move to questioning. Are there any questions?

Mrs. Diane Ablonczy (Calgary—Nose Hill, Ref.): You can go first.

The Chairman: Mr. Solberg.

Mr. Monte Solberg: Okay, I'll fire away, Mr. Chairman.

The problem we have with this fund is that we have a $600 billion liability. Are you suggesting that on the one hand by raising the retirement age and possibly, on the other hand, dipping into the surplus, which seems pretty well inevitable now, that would be one of the better ways to deal with this problem, as opposed to hiking payroll taxes 73%? Is that essentially what you're saying?

Ms. Christine Lambert: Generally, yes, but I think when you look for the sources of the money to fund these promises, look at a wide variety.

Mr. Monte Solberg: Yes.

Ms. Christine Lambert: Look at profitable businesses. Make it based on the ability to pay, so people who earn more would contribute more, just like income tax. Look at anything that general tax revenues look at.

• 1700

Mr. Monte Solberg: You've raised an interesting point. One of the issues that I don't think has had enough attention paid to it is the problem that, first of all, the liability is actually going to go up here in the next little while. It will go up to $100 billion at one point—and I forget where in the future—when we hit the point where the baby boomers start to retire.

I guess my concern—and maybe you can reflect on this—is that even once we get over that funding crunch initially, we still don't have a fully funded system. In other words, we again could run into a demographic problem down the road and just visit the same problems we currently have in the next generation.

I didn't hear you say this, but are you proposing that we get right out of this system and go to a mandatory RSP?

Ms. Christine Lambert: That would be one. The transition, of course, will be difficult, but then, this transition is going to be a bit difficult as well, because payroll taxes are being hiked. Any transition is difficult.

I'm not expecting anything out of the CPP. Most people my age are not, as you know. If you step back and look at it as helping older people who need it, those are the ones who need it. Right now we are paying for 66-year-olds who perhaps just started their retirement. They're using that money to go to Florida over the winter. That's great. That's fine. I'm happy for them. But we can't afford that, you see.

You're looking also at 80- or 85-year-old widows who haven't worked and who get the survivors' benefits, which is maybe not quite enough.

So if you look at it like a social program, which is what its intention is, then it opens up a wide variety of possibilities of the funding and targeting of benefits.

Mr. Monte Solberg: Thank you.

The Chairman: Mrs. Ablonczy.

Mrs. Diane Ablonczy: My question is about disability. If we move to the system you and Mr. Solberg were just talking about, and Reform has talked about, then of course people would still want to have disability coverage. I'm wondering if you deal with that as a financial planner, ensuring that your clients have disability coverage.

Ms. Christine Lambert: I don't actually sell disability insurance. I used to work in vocational rehab and with workers' compensation.

Again, the trouble with this is that somebody who is disabled is entitled to certain benefits under CPP, based not on what they need or their other sources of income but on how many years they've worked.

Do you see what I mean?

Mrs. Diane Ablonczy: Yes. I understand that. My question was whether you have costed out what it would mean for a Canadian to have disability coverage through a means other than CPP or to supplement CPP coverage. I know that varies, depending on age and stage, but how would people cover that need in other ways?

Ms. Christine Lambert: Disability insurance? I don't deal with disability or life insurance in my practice.

Mrs. Diane Ablonczy: Oh. I'll have to pick on another expert, then.

Ms. Christine Lambert: Now, when I worked in vocational rehab I worked for car insurance companies on the claims end of things. Some of these people were long-term disabled. The insurance company would try to close their files and sort of pushed them to apply for CPP so that they didn't have to deal with it. It's a thing of last resort.

You also have workers' compensation. Then you have people who have never worked, who are essentially on welfare.

Mrs. Diane Ablonczy: The other question I had was in reference to your mentioning in this brief that educated people will vote with their feet. Other people have said that the brightest and best of the youngest will leave the country because of these burdens.

Is this just speculation on your part or do you have any studies that might show that?

Ms. Christine Lambert: No, I don't have numbers. I have my own experience from speaking with clients. I live and work in Ottawa. My clients are in Ottawa and Nepean. A lot of them are high tech. They have options. They're looking at going to the States or going to Europe. Some of them have, and they may or may not come back.

• 1705

There is one person in particular I'm thinking of who is going to go to the States simply to put a lot of money together. He may go to Europe or come back here, but he can't put that level of money together by staying here because the taxes are too high.

Mrs. Diane Ablonczy: So at this point it's just anecdotal evidence for you.

Ms. Christine Lambert: Yes.

Mrs. Diane Ablonczy: It's not part of a long-term trend.

I have one last question, Mr. Chairman, if I might. I talked to one financial planner—this is a little different—who is advising his self-employed young clients to form a company. He said they should not pay themselves a salary through the company but simply pay themselves dividends, which are not pensionable earnings. They avoid paying CPP premiums that way.

Ms. Christine Lambert: And income tax.

Mrs. Diane Ablonczy: Have you heard of this financial advice? Is this widespread? I guess what I'm saying is: are there CPP tax-avoidance measures being talked about in financial planning circles that we need to be aware of?

Ms. Christine Lambert: In any plan we come up with, taxes and inflation are the things we have to deal with.

As far as taxes go, when a client wants to start their own business, that takes a lot of work. We will suggest they see an accountant. The tax situation is one concern. It's a major concern.

I'm sure there are people who set up their own corporations specifically to avoid tax, but that tends to get complicated. None of my clients have done that.

Mrs. Diane Ablonczy: Okay. I was just curious. I don't think we've had any other private financial planners before the committee. Have we, Mr. Chairman? I haven't been to every single presentation.

The Chairman: Private financial planners? I don't think we have.

Mrs. Diane Ablonczy: I was just curious about what you as someone out on the pavement found out about these things.

Ms. Christine Lambert: It is there. Yes.

Mrs. Diane Ablonczy: Okay.

The Chairman: If I could piggyback on your questions, Mrs. Ablonczy, it's quite interesting that you say that. You're pretty critical of the CPP. I think that's self-evident.

Can you tell me of one firm in the entire world that can offer the same benefits? I'm talking about disability, the retirement package, and all the other characteristics of the CPP. Insurance is really all about pooling risk, right? You have 30 million people. That's what the government is doing: pooling the risk for 30 million people. Is there a firm out there that can provide you, for the same amount of money that we pay to CPP, the type of coverage the CPP gives an individual?

Ms. Christine Lambert: No.

The Chairman: There isn't.

Ms. Christine Lambert: I'm sure they'd go broke.

The Chairman: Yes.

Ms. Christine Lambert: You don't know where the money's coming from.

The Chairman: So that's the security.

Ms. Christine Lambert: Is it security, though? How long is it going to last? How long can we have this unfunded liability and all the promises where the money—

The Chairman: So you don't want people to have income security during their retirement years at all.

Ms. Christine Lambert: Oh yes, I certainly do. We plan for it.

The Chairman: You plan for it privately.

Ms. Christine Lambert: Well, yes.

The Chairman: So if you're not making any money and you can't invest in a plan, then you get nothing at the end of it.

Ms. Christine Lambert: If you're making $20,000 a year, which isn't a lot, you can put some of that aside. But say you're making $20,000 and you're spending $22,000 to $24,000 because you want to be more comfortable than you're able to. We've been living beyond our means, and I think this plan and this bill is more of the same. It's always nice to say this is guaranteed and it will always be there for you, but how is it going to be there? You don't know where the money's coming from.

Do you see what I mean? Any private company who promises all these wonderful things at a certain level—

The Chairman: The money is coming through the contributions. Actuarially, it's been proven that you can sustain this plan even at a steady rate.

I don't want to get into a debate. The point is that you said—

Ms. Christine Lambert: The premiums are increasing.

The Chairman: Okay, but you basically said there is no—

Ms. Christine Lambert: This is why it's not being funded: the premiums are increasing.

The Chairman: Yes.

• 1710

Ms. Christine Lambert: This is what Mr. Kroeker told the government 30 years ago.

The Chairman: I also get from your statement that if in fact the increase, the 9.9%, is able to deliver on the CPP and its various elements, then it's a bargain. You said no private company can provide this sort of thing.

Ms. Christine Lambert: That's right. Who is it a bargain for? Who pays for it? That's what I'm saying. It's always nice to promise people things, but if you spend more than you take in, eventually you're going to go bankrupt. It's not sustainable.

The Chairman: Let me reword this question. I'm talking about people born in 1960. If I want the same protection that the CPP gives me as an individual, how much is that going to cost me if I want to develop my own plan? Is it going to cost me $1,000, $2,000, $3,000?

Ms. Christine Lambert: I would ask Mr. Kroeker or an actuary. It will definitely cost. I'm glad to see you're looking at the cost, because there is a cost there. When you don't pay enough to cover those costs, you're getting a bargain but eventually somebody else is going to have to pay for it. It has to be paid for.

The Chairman: So we're getting a bargain.

Ms. Christine Lambert: Yes.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: You made a statement that the unfunded liability is going to increase. Can you explain that?

Ms. Christine Lambert: I would assume it will be when the baby boomers start retiring. The promise that is made under this bill is that they will get a certain income. The money we promise to seniors is going to increase. Wasn't it Mr. Solberg who mentioned $1 trillion?

Mr. Monte Solberg: Eventually the total liability climbs to $1 trillion from $600 billion. I think that's correct, isn't it?

Mr. Paul Szabo: Actually, of the 9.9% that's broken down, 3.8% is going to pay down or to deal with the unfunded liability. That's the fact. The unfunded liability, by going to a steady rate of 9.9% earlier than—

Ms. Christine Lambert: When the total liability is increasing so astronomically—

Mr. Paul Szabo: But there are going to be more funds coming in as well.

Ms. Christine Lambert: Right, but not enough to maintain the increase.

Mr. Paul Szabo: Oh yes. It's a steady state rate and will keep pace. That's why it's called steady state; it will be able to fund the benefits for all retirees sustainably as well as amortize or build up a fund or in fact reduce the unfunded liability. Instead of being two years it's going to be up to five years of accumulated investment.

Ms. Christine Lambert: What's the dollar amount of the unfunded liability? We're talking about $1 trillion up from $600 billion today, and that's where I find it to be increasing. When I went to school, $1 trillion was more than $600 billion.

Mr. Paul Szabo: Just so that you understand, more than one-third of what people will be paying in is actually going to pay down the unfunded liability.

Ms. Christine Lambert: Right. But the end result is....

Mr. Paul Szabo: I have one last question. You probably are aware that today's seniors get out about $7 for every $1 they put in, etc. Based on all the evidence, all the testimony, all the actuarial stuff, right out to the year 2030 or something, people will get a 1.8% return on it. That means they get their $1 out plus a return overall. I really want you to explain to me why you said I'm only going to get a 65¢ return.

Ms. Christine Lambert: In the paper it was 65¢, then it was 50¢, and now it's 1.8% after inflation or whatever the numbers are. I'm not satisfied with those numbers. The point I'm making is I'm better off putting that money in a piggy bank and hoping inflation doesn't—

Mr. Paul Szabo: If you assume that I forgo disability coverage, survivor benefits, and the whole bit, all the insurance components of CPP, the rate—

Ms. Christine Lambert: Who's going to pay for that? That's what I'm asking.

Mr. Paul Szabo: If you're just looking at the actual pension you want to receive and that's all you want to pay for, the rate would be much lower. We could say to NAC and to all the other people, let's get rid of the disability benefits, let's get rid of the survivor benefits, let's get rid of everything else, because you just want it for you and that's it. You can do that and get the rate down to lower than today's rate.

• 1715

Ms. Christine Lambert: Yes. I believe it was reported in the press that Paul Martin was saying that it's not a tax, it's an investment or savings for your retirement. I'm sorry, my point is no, it's not.

Mr. Paul Szabo: For the ordinary Canadian what matters is how much has to come out of their wallet. Whatever you call it—you can call it whatever you want. But there is a little bit of a difference between paying income tax and paying into the CPP, and the thing is that you're putting it into your retirement and under this—I'm not sure if your aware—you're actually going to get a statement each and every year of your accumulated contributions and what your pension is going to be worth.

Ms. Christine Lambert: And who's going to pay for that?

Mr. Paul Szabo: Who's going to pay for what?

Ms. Christine Lambert: Who's going to pay—when I retire, who's going to pay this unfunded liability? You see what I mean?

Mr. Paul Szabo: No, I don't. You're absolutely wrong, quite frankly, because the 9.9% is enough to pay for your pension as well as deal with the unfunded liability. You don't believe that, but—

Ms. Christine Lambert: Then why is the unfunded liability going to be $1 trillion, as we've heard today?

Mr. Paul Szabo: No, no. Well....

Ms. Christine Lambert: It's a promise to seniors that you're making and you don't know where the money is coming from. It doesn't appear by magic.

Mr. Paul Szabo: I think that maybe what we can do is provide you with a copy of the actuary's report to show what happens when we move to a steady state rate at 9.9% that, in fact, puts us at a rate where we can sustain the benefits for all seniors as well as to build up five years of benefits to be invested to continue to eat away at the unfunded liability. That's what 9.9% does. Raising the rates can't make it worse. It can only improve the situation, you must admit. I don't think you agree with that.

Ms. Christine Lambert: No, I don't. It's a band-aid solution, and it's raising the rates on the first $36,000 of income and that's going to be indexed.

If you look at it as a tax for a social program, then it can come from sales tax, it can come from corporate profit tax, it can come from income tax, surtaxes. It just opens up a whole new way of looking at this, so it's not unfairly funded by people making $36,000, and there's still going to be the unfunded liability.

Mr. Paul Szabo: It's going down because the unfunded liability benefits the present value of all future—

Ms. Christine Lambert: Of future benefits.

Mr. Paul Szabo: —benefits to be paid out.

Ms. Christine Lambert: That's right.

Mr. Paul Szabo: But don't forget, while that is growing, because there are more retirees who have entitlements—

Ms. Christine Lambert: So it's growing.

Mr. Paul Szabo: It is growing, and at the same time this investment fund is also growing. Do you understand?

Ms. Christine Lambert: Yes, I understand.

Mr. Paul Szabo: That's growing, so that you have to—

Ms. Christine Lambert: At the same rate.

Mr. Paul Szabo: —net the two. You haven't done that. You say, oh well, the total amount of benefits could be paid out to all Canadians, whatever share they've earned is growing, yes, that's true as long as you have increased retirees.

Ms. Christine Lambert: But what I—

Mr. Paul Szabo: But if you are also building up the investment pool to underwrite that unfunded liability, you have to deal with the net. I mean, we could theoretically prepay—

Ms. Christine Lambert: Is it going to be—

Mr. Paul Szabo: Why don't we just prepay pension benefits, and then the problem is solved.

Ms. Christine Lambert: Why didn't you start that 30 years ago, when Mr. Kroeker said...? You see what I mean?

Mr. Paul Szabo: So are we supposed to be here and undo history? You want to rewrite history?

Ms. Christine Lambert: No, no, just don't repeat the same mistakes.

Mr. Paul Szabo: Well, thank you, and that's exactly what we're doing.

The Chairman: And that's going to be the final word.

Mr. Nystrom, final question.

Mr. Lorne Nystrom (Qu'Appelle, NDP): Yes, I wanted to just ask a general question. Before I do that, I want to say that I'm a very strong supporter of the Canada Pension Plan and public pensions. I would note for you that it's not just the federal Parliament, but the ten provinces are very strongly in support.

There are only two provinces that don't support the present package. That's the two NDP governments of B.C. and Saskatchewan, and that's only because we don't think it's progressive enough, contrary to what you might argue.

Yesterday I was able to take into Paul Martin's office a petition with over 500,000 Canadians that have signed it, organized by the Council of Canadians and CUPE, the Canadian Union of Public Employees, one of the largest response to a petition in the history of this country. It's not very often you get 500,000 sending in a petition. And they argued for a stronger public pension plan, and that certainly reflects the public opinion out there. I just wanted to mention that to you.

You said that people making $20,000 a year can save money to invest in the future. How many people do you know who make $20,000 that can set aside money to put into RSPs and save for their future.

Ms. Christine Lambert: Not a lot.

Mr. Lorne Nystrom: Well, could you tell me how many you do know?

Ms. Christine Lambert: Not a lot, but no matter how much you make, you should be setting some aside. It's the pay-yourself-first principle.

.172

Mr. Lorne Nystrom: I think you're making a lot of—

Ms. Christine Lambert: Ten dollars a month is a coffee and doughnut every second day. You see, you can do that. This is what I do with my clients, and I have some clients putting aside $50 a month. That's not a lot, and it's not going to get you anywhere, but it's a habit. Do you see what I mean? You get used to it.

Mr. Lorne Nystrom: It's also a habit to buy food for your table when you make $20,000 a year.

Ms. Christine Lambert: Right, and you can't buy as much food as you could if you made $30,000 or $50,000 a year.

Mr. Lorne Nystrom: That's right. That's why we need strong public pension plans. That's why they should be more progressive. That's why they should be based on ability to pay. And that's why we should look at the $35,800 ceiling being lifted—not just indexed, but lifted. I think things like that should be done.

Ms. Christine Lambert: Right. I like the ability-to-pay point.

Mr. Lorne Nystrom: Don't forget that with RRSPs, too, there's a big subsidy there by the federal government. It's about $15 billion or $16 billion a year in terms of a tax expenditure that is subsidizing the more wealthy people in our country.

So I have concerns about anybody who is raising questions about attacking public pensions. As Paul was saying, it's not just the pension part, it's the insurance part as well. It's very important to widows in this country. It's very important to disabled people. It's very important to the low-income folks I happen to represent from an inner-city riding in Regina. Those are folks who can't entirely fend for themselves because of RRSPs and private pension plans. They need something like this, but they need something a bit more progressive than this.

Ms. Christine Lambert: The one problem with that is that with the CPP, if I become disabled next year, my benefits are based on the work I've done over the past several years. For the disability insurance, it's not so much based on need as opposed to past history.

We're now getting old widows who maybe didn't work outside the home a day in their life. They're not benefiting as much as they perhaps should, because they would need.... Do you see what I mean? This is a social responsibility. It's not workers contributing and retired workers benefiting. This is everybody contributing and targeting to people who need it.

As Mr. Kroeker said years ago, this is a colossal fraud; it's well-meaning bungling. And I would like to introduce Mr. Kroeker, who's sitting right here.

Mr. Lorne Nystrom: One thing this bill does is make it even more difficult for people on disabilities, which is one reason why it doesn't have the support of the Government of Saskatchewan and the Government of British Columbia. It makes it more difficult on low-income people. It's not as progressive as it should be. I'm more interested in making it more progressive, and in making sure that we secure our public pension plans. That's extremely important. Also, if you build a strong economy and have people working, there's part of the answer right there for where that extra funding comes from. If people are working, they pay into it. If they're not, they don't.

Ms. Christine Lambert: Right, and that there's a wider variety of sources to fund these social programs is my point. You don't have to have blinders on and look at people making the first $36,000 of income. That's my main point. It's the working poor who are bearing an unfair burden here.

The Chairman: Thank you, Ms. Lambert, Mr. Nystrom.

Mr. Iftody, you had another final question.

Mr. David Iftody: Yes. I know we're pressed for time.

Welcome to the committee, Mr. Kroeker.

Mr. John Kroeker (Individual Presentation): Thank you.

Mr. David Iftody: I represent the riding of Provencher, which contains Steinbach and Altona. I understand that you're from that area.

Mr. John Kroeker: Yes, sir.

Mr. David Iftody: Some time ago, I think you received a great deal of notoriety in the Winnipeg Free Press and other newspapers for your comments years ago about the CPP, and Ms. Lambert has quoted you here in her presentation. How did you know—or did you know?—at that time, thirty years ago, that the plan would go broke, that it wouldn't work? With respect to population growth and change, what kinds of special insights did you have that weren't available to other economists or thinkers on this particular topic? What drew you to those kinds of conclusions without having the information available to any other Canadian citizen at that time?

I'm interested in knowing this because in the way we understand it, I think one of the reasons for the difficulty with the system is the unexpected growth in the number of people and retirees we're dealing with now. Was that the basis of your argument in saying that the plan would go broke? If that wasn't the basis, what was? But if it was, how did you know that and why didn't any of the other economists across the country know? Could you answer that?

• 1725

Mr. John Kroeker: I don't think I had any special knowledge. I wasn't manifesting that I had special knowledge. I was saying we haven't looked into this thing adequately, we don't know where we're going with it, and we don't know if we're going to go broke with it or if we're going to be able to....

[Editor's Note: Technical difficulty]

Mr. John Kroeker: The maximum earnings for contributions at that time was something like $5,000 a year. The maximum annual contribution for an employee was $88. You're looking at something like $1,200 in your current revision.

I had no special insight. I simply said we hadn't really looked into the thing sufficiently. I said that maybe we could support it at that level, but maybe we couldn't. There was essentially no actuarial advice accepted at that time.

One of the senators on the task force at that time said “What do actuaries know?” Maybe there's a limit to what actuaries know, but there are certainly factors that actuaries realize have to be taken into consideration. I think it was perfectly foreseeable. The thing that was disgraceful was that the actuarial professional was prepared to sit back and say they would let the politicians play their games.

Mr. David Iftody: So at that time, then, when you were protesting that the system could go broke, you really didn't know why. You were just uncomfortable with it.

Mr. John Kroeker: I was uncomfortable with the work that had been done to that point. It had not been adequately studied or examined. There were a lot of competent actuaries in the civil service and elsewhere, and the ones in the civil service, as my example shows, shortly thereafter were wise enough to keep their mouths shut, not because they necessarily agreed with the official government line, but because they were keeping their employment secure.

Mr. David Iftody: I see.

Thank you very much, Mr. Kroeker.

The Chairman: Thank you very much for an interesting presentation.

Next, after a couple of minutes, we'll hear from the representatives from the Canadian Association of University Teachers.

• 1728

• 1732

The Chairman: We call the meeting to order. We're just going to deal with some housekeeping items, and then we'll go to the presentation of the Canadian Association of University Teachers.

Somebody will have to move that the committee approve the proposed budget of $82,600 for the period October 2, 1997, to March 31, 1998, and that the chair be authorized to present the said budget to the liaison committee.

Moved by Mrs. Redman, seconded by Ms. Torsney.

(Motion agreed to)

The Chairman: Secondly, that in the accordance with the Board of Internal Economy guidelines the committee approve the reimbursement of one week's per diem to a maximum of $198 to Ms. Claudia Caissie, interpreter, for the theft of her wallet while travelling with group B.

Moved by Mr. Szabo, seconded by Mrs. Redman.

(Motion agreed to)

Mr. Monte Solberg: Mr. Chairman, I trust all members were searched after that.

The Chairman: Yes.

Mr. Monte Solberg: Those group B people.

The Chairman: All those travelling with group B. That's not me.

Some hon. members: Oh, oh.

The Chairman: Third, that the committee hire a French and English editor to review the text of the committee's report to a maximum not exceeding $5,000.

An hon. member: So moved.

(Motion agreed to)

The Chairman: Fourth, that the committee authorize the printing of the dissenting opinions of the Reform Party of Canada and/or the Bloc Québécois and/or the New Democratic Party and/or the Progressive Conservative Party of Canada as appendices to this report immediately following the signature of the chair, and that the dissenting opinions be submitted to the clerk no later that 5 p.m. on Wednesday, November 26, 1997.

Moved by Mr. Szabo, seconded by—

Ms. Paddy Torsney: May I interrupt for a moment?

The Chairman: Yes, go ahead.

Ms. Paddy Torsney: It's my understanding that Mr. Riis wanted to submit a dissenting report, but he won't be available by November 26. Have you made arrangements?

The Chairman: That's for the New Democratic Party to take care of, really. Mr. Nystrom, will you deal with that?

Mr. Lorne Nystrom: Yes.

Ms. Paddy Torsney: You'll be okay by the 26th?

The Chairman: They'll be okay by the 26th.

Ms. Paddy Torsney: That's what I meant. You will be okay if we move this by the 26th—for you to do that?

• 1735

The Chairman: Okay. Seconded by—

Ms. Paddy Torsney: I'll second it, then.

The Chairman: —Mrs. Redman.

Ms. Paddy Torsney: He's doing it to punish me.

(Motion agreed to)

The Chairman: The next motion is that the dissenting opinions not exceed five pages and be provided in both official languages.

Ms. Paddy Torsney: I so move.

Mr. Lorne Nystrom: I second that.

I think Mr. Riis wanted a bit more than five pages. He wanted me to raise it, that's all.

An hon. member: It could be in any text style.

The Chairman: Yes. Maybe they can give us very small type.

Mr. Lorne Nystrom: I'm only carrying out my duty.

(Motion agreed to)

The Chairman: The next motion is that the committee report be printed in accordance with the policy established by the Board of Internal Economy, 550 copies.

Mr. Paul Szabo: I so move.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): I second the motion.

(Motion agreed to)

The Chairman: The next motion is that a press conference be held after the tabling of the report in the House, at the discretion of the chair.

Mr. Paul Szabo: I so move.

Ms. Paddy Torsney: I second the motion.

(Motion agreed to)

The Chairman: Did we get everything?

Mr. Jim Jones: Is the report out tomorrow?

The Chairman: Tomorrow? I wish.

Mr. Jim Jones: You said it would be available tomorrow.

The Chairman: Tomorrow being...?

Mr. Jim Jones: Thursday.

The Chairman: As you've probably noticed, the researchers are working their—

Mr. Jim Jones: I'm talking about the pre-budget.

The Chairman: That's what I'm talking about as well.

Mr. Monte Solberg: The pre-budgets don't even have to be submitted until Wednesday at 5 p.m.

The Chairman: That's right.

Mr. Monte Solberg: That's when the report will be made public, I gather—the next day or so.

The Chairman: Yes, the next day or the day after. So you'll have plenty of time.

Thank you very much for that.

I now welcome, on behalf of the committee, representatives from the Canadian Association of University Teachers: Rosalind Riseborough, director of member services; Bob Moore, professional officer, research and economic benefits; and Robert Léger, professional officer, relations with governments.

As you know, you have approximately 10 to 15 minutes to give us an overview of your presentation. Thereafter, we'll proceed to a question and answer session.

Ms. Rosalind Riseborough (Director, Member Services, Canadian Association of University Teachers): The Canadian Association of University Teachers, CAUT, represents approximately 28,500 university teachers, academic librarians, and researchers from universities across the country. We're also an active member of the Retirement Income Coalition, which is generally concerned with Canadian pension issues.

We were pleased to participate in the 1996 round of pension consultations on the Canada pension plan. We presented a brief at that time. We welcome the opportunity to follow up on our recommendations. Several of the changes proposed by Bill C-2 support our position, but there are areas where we still have concerns.

CAUT represents a diverse group. University academic staff range from individuals with full career paths to part-timers. All full-time faculty are contributing members of private university pension plans, but the majority of part-time teachers are excluded from employer pension plans.

There are three types of pension plans at Canadian universities—defined benefit, defined contribution and hybrids of these. Integration with the Canada pension plan varies across the country. For academic staff with integrated plans, changes to the CPP will have a significant impact on their pensions.

CAUT is concerned with the piecemeal approach to pension reform that has taken place. Retirement income is based on a balanced package of the public Canada pension plan and seniors' benefit, private pension funds, registered savings plans, and personal unregistered retirement savings. The CPP is a major component for the pensions of the majority of Canadians.

We urge the government to carefully define the role CPP is to play as it relates to seniors' benefits and private pension plans. We stress that the best way to formulate government policy on retirement issues is to address reform in an integrated and consistent manner.

• 1740

CAUT supports the principle of CPP as a public plan and stresses the importance of retaining the plan as a public rather than private sector plan.

CAUT supports the idea of moving toward a partially funded plan to accommodate the changing demographic employment and retirement patterns. We have suggested that an initial goal might be to double the current size of the surplus fund from two years' benefits to four years' benefits. The strategy we proposed is supported by Bill C-2.

The proposed legislation also supports our basic contention that a higher contribution rate will go a long way toward paying for the benefits already accrued and ensuring that future benefits will not be eroded.

In spite of these general similarities in approach, we have concerns about the proposed rate of increase in contribution levels. Our continuing position is that contribution rates be increased to approximately 10% of pensionable earnings over 10 years. The rate of increase envisaged in Bill C-2 is much more dramatic than that recommended by this association.

We believe a sudden and dramatic jump in contribution rates, or too steep an increase in contribution rates, as proposed by the legislation, might cause financial difficulties for both employers and employees. We also believe it is in the country's best interests to ensure a socially secure and fairly compensated workforce.

As one of a set of recommendations to achieve the goals of a partially funded plan, we have advised raising the pensionable earnings ceilings to one and a half to two times the average industrial wage. We note that the Province of British Columbia made a similar proposal after the public consultations were complete. We notice that the governments have agreed to review this proposal over the next two years.

We stress that future modifications not be made in isolation but with a view to coordinating the entire retirement pension system.

CAUT does not support decreasing benefits. Except for the death benefit, Bill C-2 retains full indexing of benefits, as recommended by CAUT. We recommend that future changes to all benefits be indexed to prices or wages, as appropriate.

We have some concerns about the proposed formula for calculating retirement pensions. It will be based on the average maximum pensionable earnings of the five, rather than three, years prior to starting a pension. How this affects an individual pension will depend on the employment and earnings record of the individual. A negative impact will likely be felt by those on partial retirement, those who retired early, before age 60, and those who have followed an unconventional career path. The impact of the change in the formula, as well as the current drop-out provisions for calculating benefits, should be assessed in the next three-year review.

Bill C-2 refers to access to an exchange of confidential information among federal and provincial authorities and the use of social insurance numbers. In general, CAUT recommends that the federal and provincial authorities guarantee that personally confidential information obtained through the administration of the CPP is not used or transmitted for purposes other than administering the plan. The legislation is unclear with respect to garnishment for child support and alimony payments. This has privacy implications that require clarification and review.

The establishment of an arm's length investment board follows the approach recommended by our association. It is imperative that the board be truly accountable to the public and both federal and provincial governments. Thus, it is important to clearly set out the role of the investment board, various governments, the Auditor General and the chief actuary. The board should be mandated to have an open objective and fiduciary responsibility for Canadian citizens.

Commissions, expenses, information and other costs should be reasonable. Thus, the management of the fund should not entail the undue transfer of contributions deducted from earned wages into private hands in the form of commissions and fees. The focus of a public pension fund ought to be the universal provision of adequate retirement income for Canadians.

The proposed legislation follows our advice that there be an expanded and diversified investment portfolio for the surplus fund. The expected 3.8% rate of return on investment appears to be rather conservative. A higher rate of return would go hand in hand with a steady but slower increase in contribution levels.

At the same time, however, it is important to establish an acceptable level of risk for the portfolio. Payments from all loans and investment income should return to the CPP fund rather than to the general revenue of government. It's not clear if this was intended.

CAUT recommends that there be a concentrated effort at educating the public on how the CPP works, how it is funded, and how it affects the retirement financing of Canadian citizens.

• 1745

There are a number of items for further review. The death benefit should be retained, but the next review of the CPP should explore a lump-sum method versus using another instrument or program, such as tax exemption, for this CPP terminal buyout. As it stands, the proposed reduction in the benefit, coupled with a lack of indexing, means that there will be further reductions in real terms for future generations.

CAUT supports voluntary phasing schemes whereby employees can draw some benefits while working on a reduced basis until retirement. It is noted that the issue of partial pensions prior to full retirement will be considered in the next three-year review. This is an important area for university faculty, where there is a growing trend towards early retirement, partial retirement, reduced workload and part-time work.

In general, CAUT believes that a retirement pension plan such as the CPP may not be the most effective instrument in providing disability insurance for Canadians. We recommend that in the next three-year review the government examine the possibility of establishing a comprehensive disability insurance program and the possibility of moving disability benefits to that system.

CAUT recommends that the next three-year review also include an examination of the definition of “spouse” for pension benefits and tax purposes, taking into account the fact that the term is not uniformly defined across Canadian legislation.

That is a summary of our remarks.

The Chairman: We'll now move to the question and answer session. Mr. Iftody.

Mr. David Iftody: I found it a bit interesting and I guess you are probably aware of the concern about the levels of contributions and the increase in contributions. But I want to know if I heard and understood you correctly, that you said you wanted an increase in the levels of contribution and a longer timeframe in order to maximize the returns over 3.8%. Was that what you said?

Ms. Rosalind Riseborough: Not exactly. We said we do think the contribution levels should reach 10%—that's employer and employee contributions combined—but that point should be reached over a longer timeframe than six years. Take ten years to reach that level of contribution, rather than doing it fast.

Then you also asked about investment returns.

Mr. David Iftody: Your comment in the paragraph or the point I think you were trying to make was that by doing this, there would be a greater return than the 3.8% currently anticipated under the fund.

Ms. Rosalind Riseborough: We think a 3.8% return on investment might be rather conservative. We anticipated a higher rate of return on the investment fund, on the surplus fund, which would go hand in hand with the slower increase in contribution levels.

Mr. David Iftody: Okay. We heard a few hours ago from a group from Toronto managing a $10 billion fund, one of the witnesses here this afternoon: Knight, Bain, Seath, Holbrook Capital Management Inc. I don't know if you've heard of them. I thought they were from Toronto. But when I question—

Mr. Lorne Nystrom: Steinbach.

Mr. David Iftody: From Steinbach...I wish they were.

When they were talking about the rates of returns, there was a question from Mr. Solberg from the Reform Party and also from myself, trying to seek clarification on what would be, after CPI, a reasonable rate of return. These gentlemen, in their organization, which is a private sector company, repeatedly made the point with this committee that their objective and what ought to be the objective of this arm's-length board administering this fund is to receive the maximum amount of return for Canadians who are making those contributions. They said that around 4% was very reasonable, indeed. Can you comment on that?

Ms. Rosalind Riseborough: It sounds like a matter of opinion.

That's one of the other questions. If you take inflation into account, it is hard to foresee what is going to happen in the future. But judging from the trends you see right now, I think it's reasonable to expect higher than 3.8%.

• 1750

Mr. David Iftody: How would extending it beyond ten years, as you suggested, to fourteen years—

Ms. Rosalind Riseborough: No. We suggested ten.

Mr. David Iftody: Ten years. I'm sorry. How would that work a greater rate of return? Could you explain that mechanism?

Ms. Rosalind Riseborough: I think you're confusing two different points. We're talking on the one hand about contribution levels by the employee and the employer. We are saying that the current proposal in Bill C-2 expects the contribution level into the fund will reach 10% in six years. We're saying to do it more slowly so it will take ten years to reach a 10% combined contribution level.

Mr. David Iftody: I understood that.

Ms. Rosalind Riseborough: That's a separate thing from what you'd expect by investing the fund in a portfolio.

Mr. Bob Moore (Professional Officer, Research and Economic Benefits, Canadian Association of University Teachers): The recommendation in the May 1996 brief was a double-barrelled one. The double-barrelled way to deal with the unfunded liability is the actual reduction from your current rate of return of 11.8% to 3.8% in real terms exclusive of inflation, because it's running next to nothing in real terms. That's the target of the 3.8%.

In the new CAUT brief in section 18, increasing the annual rate of the CPP contribution by both employers and employees by 0.4% gets you to your target of 9.9% joint contribution in ten years rather than six years.

Let's back up. When we did the double-barrelled approach, we said you could pay down the deficit with a higher rate of return, and therefore have a lower contribution rate with a higher investment yield.

Mr. David Iftody: I see. Thank you.

The Chairman: Mr. Pillitteri.

Mr. Gary Pillitteri: I just want to follow up on that question, Mr. Chairman.

Really right now the fund is unfunded. Anyone who is receiving a pension right now or is about to receive a pension is benefiting from the system. I think I heard comments a couple of days ago that anyone born before 1947—the breaking point would be 1947—benefits, and anyone who is born after 1947 and paying into it would pay more than he would get out. I could be a year off somewhere.

In trying to reach that 9.9% in six years rather than ten years, aren't we prolonging the agony? If I'm sixty years old, shouldn't I have the opportunity to pay in a little more so I will benefit later on? This is what we want to do.

What you want to do is prolong it. If right now it's unfunded and you're trying to take it to ten years, you're going to get some intergenerational change. For four years those people are not going to be paying into the plan a little more. That's what you're doing.

I understand that instead of 3.8% you could have 4% or 4.5%, but wouldn't it be better if the ones who will be benefiting, starting with me, started paying a little more into the plan right now?

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Mr. Robert Léger (Professional Officer, Relations with Governments, Canadian Association of University Teachers): It's true that people receiving benefits now are “profiting” with the plan. The ideal situation would have been if we had started five years ago to slowly increase. But the point we are trying to make is that it's the abruptness of the increase that we fear. I agree with you that we should start now, because we were unable, for different reasons—

Mr. Gary Pillitteri: For political reasons.

Mr. Robert Léger: Yes. For political reasons, we were unable to do it before, but we still find that it would be better if those increases were gradual.

Mr. Gary Pillitteri: But on the other hand—and I don't want to be argumentative—once we are doing it, let's start getting more funding and let's fund a little faster, instead of prolonging the agony. I think if you take it intergenerationally, we do know that everyone is worried about this baby-boom group. They have most of the capital in their hands. The younger people have a lot less and a lot less ability to pay for it. Intergenerationally, we should give something back to the younger ones who are supporting our pensions much earlier.

The Chairman: Mr. Moore.

Mr. Bob Moore: I was just going to follow up on your earlier comment. In fact, with respect to those born at the peak or at the very beginning of the baby boom in 1947—we won't quibble about a year here or there—if you were to say that by steeply increasing the contributions now there would be an equal return at the end for those contributors, I think that would be different.

But the point that CAUT and other groups are making is that there may be this steep contribution presently, steeper than what CAUT is advocating, but there's no guarantee that they will be receiving in 30 years what those people were contributing at a proportional rate 30 years before. That is the sustainability question the Liberal government is looking at with Bill C-2.

That's the real problem. When you're referring to the bulge in the boa, the pig in the python, or whatever analogy you want, with our members and with Canadians as a whole there's going to be, proportionately speaking, within the next five, ten, or fifteen years, anywhere from 10% to 16% more people retiring and looking for those benefits to which you referred.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney: You raised the issue of confidentiality, which no one else has. We haven't had any presenters on it and haven't really had much focus on it yet.

While I'm a big proponent of privacy and of making sure we protect that, it's my understanding that the changes would be in there to enforce child support payments where they are not being collected or being paid properly and what have you. That kind of information flow between governments is absolutely critical, because so many children are not getting the money that is rightfully theirs. Does that influence your decision, or are you just asking for the fact that it be kept with obviously the highest degree of confidentiality and only used for those purposes in an appropriate manner?

Ms. Rosalind Riseborough: That is an issue that we've raised. To us it hasn't been very clear what direction the legislation is going in, and I guess one of the points that could be made is that there are other means of collecting child support and alimony or whatever, which need to be explored before you use the social benefit or a benefit such as this. We think this should be looked at and clarified.

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Ms. Paddy Torsney: When we made changes on benefits and the collection of benefits for child support, it was illustrated to us time and time again that there are incredible lengths to which people will go to hide income, to create unnecessary problems and antagonisms towards former spouses and their need to collect benefits for their children. Every possible measure needs to be undertaken across the federal government and in cooperation with the provinces, because you can't believe the lengths some people will go to to see that their children don't get the money they're entitled to. And of course we also have the issue of pension credit splitting between spouses who were once married. So there does need to be some sharing.

Until I read the documentation on some of the specific cases, I couldn't imagine that people would go to such lengths to basically screw their children. Again, I have to say that I would hope the information would be used only with the best privacy guidelines, but it has to be available to ensure that Canada's children get what's rightfully theirs. There's no point in making awards if they're not going to be enforced.

Mr. Moore is desperate to say something.

Mr. Bob Moore: It's only in the sense that appended to our brief, in both languages, is our statement on privacy of information and social insurance.

I hear what you're saying, and I know about some of those devious, if not nefarious, means not only for child support, but also for alimony payments and other joint or shared survivor benefits. As you say, I think CAUT's concern is that the privacy of the individual and of the social insurance number for the purpose for which it was intended is respected; that it is not then used for the forfeiture of car loans and other such examples; that, in respect to being shared with the provinces, Bill C-2 does not contain words such as “reasonable disclosure”, does not contain the fact that the authorities do have access.

And with all due respect, although the federal government may feel this way in terms of provincial sharing, this is something CAUT is asking to have reviewed in three years' time. Then, if there are problems that arise with the implementation in the direction you have told us about now, we're hoping it will be assessed accordingly.

Ms. Paddy Torsney: Well, I think that is certainly something I'll ask the officials about, and we can deal with that issue with Mr. Phillips.

But you're absolutely right, there is far too much use and far too many requests for SIN numbers, in abuse of the privacy laws. Too many people don't realize they are under no obligation to give grocery stores and everything else their social insurance number. But on this one case, because of the extreme problems that exist out there, we have to have every tool possible because of the jumping around that people do in trying to not fulfil their responsibilities to their kids. We have to do something.

Mr. Bob Moore: I guess it's just judicious care and caution.

Ms. Paddy Torsney: Yes.

The Chairman: The final question is from Mr. Solberg.

Mr. Monte Solberg: Thank you, Mr. Chairman.

I'm just looking at something in your presentation about the Auditor General:

Thus it is important to clearly set out the role of the Investment Board, the various governments, the Auditor General and the Chief Actuary. For example, the Board should be mandated to have an open, objective, and fiduciary responsibility for Canadian citizens.

Under the legislation, the investment board won't be subject to access to information. Does that concern you? Would you like to see that as part of the legislation?

Ms. Rosalind Riseborough: If you're saying there is no open scrutiny of the performance of the fund, then that's the problem, but our understanding was that this was to be a fully accountable fund. Are you saying there is something—

Mr. Monte Solberg: Well, I can tell you that a finance official, Mr. Hamilton, told us that it won't be subject to access to information legislation. That concerned me, particularly when you're talking about a board that will have control over as much as $100 billion or more. I have serious concerns about that, and I wonder if you share those concerns or if you're even aware of them.

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Ms. Rosalind Riseborough: We weren't aware, so that's a concern we would like to have clarified in that case.

Mr. Monte Solberg: You talk in your report about the need for a more comprehensive disability insurance program, and it's not expanded on in here. I expect that would cost more money if it were expanded. I'm just wondering if you could explain how that would work and how much it would cost.

Ms. Rosalind Riseborough: It appears as if the CPP is doing more than being a pension plan. Our point is that it's not clear whether it's a pension plan or a social benefit. We said the role of the plan needs to be clarified. If it's a social benefit it should operate in one particular way, and if it's a pension plan the structure should be different. At the moment it's a mishmash.

Because we don't have a national disability insurance program, this seems to be the instrument that is used to provide disability benefits. Our point is that maybe it's not the most efficient or appropriate means of achieving that. We haven't gone into detail, but this is a question we would raise. We would recommend exploring another program, such as workers compensation or whatever.

Mr. Monte Solberg: I think it really raises an important point, because right now the provinces have some responsibility here, and often—I'm sure MPs here can relate to this—we see cases ping-pong back and forth. We also hear that the private sector tells many people to try the CPP disability first. So we've become a safety net. We take a lot of the slack off the private system. I guess I share your concern.

I think it does make some sense to separate the two and find a way to ensure that people aren't shuffled from jurisdiction to jurisdiction and from private to public. That's more of a comment than a question, but if you wish to comment on that, please do.

Ms. Rosalind Riseborough: We think that's something that should be looked at. Another point we wanted to make is that the review should be done in an integrated fashion rather than piecemeal. Then we will be able to get a proper picture of where things should go and how everything works together.

Mr. Monte Solberg: I appreciate that. It's a good point. Thanks.

The Chairman: Thank you very much, Mr. Solberg.

On behalf of the committee, I'd like to express our sincerest gratitude for your intervention. You've certainly provided us with important information that will be useful as we go through clause-by-clause tomorrow. Thanks very much.

Ms. Rosalind Riseborough: Thank you very much for your time.

The Chairman: The meeting is adjourned.