FINA Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Wednesday, November 27, 2002

¹

1540

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. William Robson (Vice-President, Director of Research, C.D. Howe Institute)

The Chair

Mr. William Robson

¹

1545

¹

1550

The Chair

Mr. Daniel Benedict (President, Ontario Coalition of Senior Citizens' Organizations)

The Chair

Mr. Daniel Benedict

¹

1555

º

1600

The Chair

Mr. Scott Reid (Lanark—Carleton, Canadian Alliance)

Mr. William Robson

Mr. Scott Reid

Mr. William Robson

Mr. Scott Reid

º

1605

Mr. William Robson

Mr. Scott Reid

Mr. William Robson

º

1610

Mr. Scott Reid

Mr. Daniel Benedict

º

1615

The Chair

Ms. Pauline Picard (Drummond, BQ)

Mr. Daniel Benedict

º

1620

Ms. Pauline Picard

The Chair

Mr. Joe Comartin (Windsor—St. Clair, NDP)

Mr. William Robson

Mr. Joe Comartin

Mr. William Robson

º

1625

Mr. Joe Comartin

Mr. William Robson

Mr. Joe Comartin

Mr. William Robson

Mr. Joe Comartin

Mr. William Robson

Mr. Joe Comartin

Mr. William Robson

Mr. Joe Comartin

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

º

1630

Mr. William Robson

º

1635

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Mr. Bryon Wilfert

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

Mr. William Robson

Mr. Nick Discepola

Mr. William Robson

The Chair

The Chair

º

1640

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Scott Reid

The Chair

Mr. Scott Reid

º

1645

Mr. Bill Mitchell (Director, Financial Markets Division, Financial Sector Policy Branch, Department of Finance)

Mr. Scott Reid

Mr. Bill Mitchell

Mr. Scott Reid

Ms. Clare Scullion (Senior Counsel, Department of Finance)

Mr. Scott Reid

Ms. Clare Scullion

º

1650

Mr. Scott Reid

Ms. Clare Scullion

Mr. Scott Reid

Ms. Clare Scullion

Mr. Scott Reid

The Chair

Mr. Scott Reid

The Chair

Mr. Scott Reid

The Chair

Mr. Bill Mitchell

Mr. Scott Reid

º

1655

Mr. Bill Mitchell

Mr. Scott Reid

Mr. Bill Mitchell

Mr. Scott Reid

The Chair

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 030

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Wednesday, November 27, 2002

[Recorded by Electronic Apparatus]

¹  (1540)  

[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Good afternoon, ladies and gentlemen.

    We are on the order of the day, Bill C-3, an act to amend the Canada Pension Plan and the Canada Pension Plan Investment Board Act.

    We'll go for an hour with the Ontario Coalition of Senior Citizens' Organizations and the C.D. Howe Institute. From the Ontario Coalition of Senior Citizens' Organizations we have Anne Dorion, member of the executive--and you are awaiting the presence of Daniel Benedict, who is your president and will be making the presentation, I understand. From the C.D. Howe Institute we have Mr. William Robson, who is the vice-president and director of research.

    We will start with you, Mr. Robson, for up to 10 minutes.

    Mr. William Robson (Vice-President, Director of Research, C.D. Howe Institute): I'll do the big flourish with the watch to give you all a misleading sense of reassurance that I won't run overtime. I'll try to keep to 10 minutes.

    The Chair: If you need a bit more time, I'm amenable to that too.

    Mr. William Robson: Thank you, and thank you very much for the invitation to be here. It really is a pleasure to address this issue. I don't have any fierce attacks to launch, I don't have any elaborate amendments to suggest for the legislation you're considering. As I see what's before this committee, this is very much a follow-up to reform to the Canada Pension Plan that I support, so I'll try to get us to the questions and answers, because that's always more interesting, probably especially so in this case. I do want to say a few things about the context of the Canada Pension Plan, the way it is now, offer some brief comments on some provisions in the bill, and wrap up with a look at the future of the Canada Pension Plan and its challenges, which, obviously, are related to some of the things you're considering.

    As you know, but it is worth quickly repeating, the Canada Pension Plan, when set up, was an unfunded, pay-as-you-go plan, and the fact that we had an unfunded liability of about $440-odd billion at the end of 2000 indicates that this was a problem. The reforms that took effect in 1998 were a colossal encouragement to those of us who are in the public policy business, in the sense that they really showed that sometimes public policy can move in the right direction in a very major way. My enthusiasm is only tempered by the contemplation of the fact that if that started to happen too often, those of us in the public policy business would have to find a different kind of work.

    The reforms changed the intergenerational tilt in the Canada Pension Plan. The stabilization of the contribution rate, I think, has materially improved the chances that the benefits promised will be paid, and I tell young people that. The principles that informed the changes, partly that this is an income replacement program and is not supposed to do other things--we have other programs to do other things--but particularly that the fund is to be managed in the best interests of the plan participants, I think are very important and fundamental as we look forward.

    I also think the accountability measures we now have in place set a very high standard. I just discovered that both John MacNaughton and Jean-Claude Ménard are in the room, so I'll have to tone down the praise I had intended to bestow on both of them and their organizations, but I do think the CPP Investment Board and the chief actuary are integral parts of the reform in regard to its credibility. I've talked about it in this country as an example of far-sighted policy, and also to audiences in other countries, because I think this type of reform is one that the rest of the world needs to look at, and I'd start with the United States.

    What I should say, though, to close this opening comment on a slightly more sober note, is that if you look at the Canada Pension Plan as a pension plan, it is still something anybody who replicated it in the private sector would go to jail for in very short order. The unfunded liability is continuing to grow at quite a pace. The plan is not intended to be fully funded, as you know, but that means, even as the funds are piling up in the plan, the unfunded obligation is continuing to rise. The cashflow being positive is very important, but when you have a half a trillion-odd dollar liability growing at 6% a year, it takes an awful lot of positive cashflow to close that gap. What that signifies is that the intergenerational tilt in the plan is still quite strong. There is still ample fuel for anybody who wants to cast doubt on the benefits actually being paid, and it's very important, as we go forward, not to think this problem has been solved once and for all, but to remember that scepticism about benefits is still out there and it still has some foundation. Handling the funds inside the plan wisely is really critical for making sure scepticism doesn't grow and people continue to pay their premiums feeling that they're buying a pension more than simply paying a tax that's disappearing somewhere.

    All that said, let me talk briefly about the key provisions in the legislation you're considering. The elements I think are worthy of note are, first, the transfer of more funds to the control of the CPP Investment Board; second, the reporting requirements; third, the foreign property rule; and fourth, the provisions concerning provincial agreement and potential withdrawal from the plan.

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    On the transfer of funds, I don't have any very strongly contrasting opinion to express other than what I'm sure others have said, including those who are supporting this legislation. Better funding of the Canada Pension Plan is critical to its sustainability over the long run, and that means more than simply wrapping up the contributions, it means we need to have investments in assets other than simply government debt. Forced investment in government debt puts an extra layer on what's basically a pay-as-you-go system, because it means the taxpayer is all that is backing it up in the long run, which is, of course, the situation the United States is in. It also means managing those assets wisely, in order to maximize the returns to the participants in the plan.

    I'm on record in front of this committee among other things as having supported the establishment of the Canada Pension Plan Investment Board and the provisions that surrounded it. Nothing that has happened since then has led me to revise that opinion. I've said already that I think the CPP Investment Board is well set up and functioning well.

    After allowing for the uncertainties that always afflict forecasting, to turn to the Office of the Chief Actuary, the report that was tabled this last June indicates, certainly in respect of direction, what we can expect as a result of more of the funds in the Canada Pension Plan being invested by the board, as opposed to the practice with provincial debt. So that's all well and good.

    On reporting requirements, very briefly, the thing I would draw attention to is that the high standard that has been set has already done more good than I think people notice, because it has simply meant a potential problem didn't occur. Faster turnaround can only help. One of the things that really strikes me is that while there have been such big losses in markets over the last little while, there has been attention to the fact that the Canada Pension Plan Investment Board has lost money. The media commentary on this has been invariably, as far as I know, quite sensible in pointing out that this is a very long-term investment. When I have an opportunity to talk to journalists, I point out that when you are ramping up your fund in a big way, as is currently the case with the CPP, this is exactly the time you would want equity markets to be weak. In fact, in a sense, this is a good thing for us. When you have the quick reporting and the high level of transparency, it means suspicions that something else is happening don't have time to build, misleading stories don't have time to develop momentum. The quicker you get John MacNaughton out in front of people, the better for the credibility of the plan. So that's what you want. To the extent that this bill improves that cycle, I think it just builds on success.

    Let me turn to the foreign property rule. After all, what would a witness who didn't complain be, if they just skipped it all? I said, and it is worth repeating, the stipulation that the funds be managed in the best interests of contributors and beneficiaries was critical to the success of the reforms and the credibility of the Canada Pension Plan, and therefore to its sustainability. But there is a glaring exception to that commendable principle, and it appears in the legislation, the requirement that the Investment Board should adhere to the 30% limit on foreign property that applies to other pension plans under the Income Tax Act.

    I think the foreign property rule makes no sense. It creates losers, because it restricts people's ability to invest their pension savings as they think fit, and in all likelihood, they miss out on extra returns. It doesn't create any winners. There's no measurable impact on the cost or accessibility of capital in Canada; people have looked for it and haven't been able to find it. It's unfair. Big people, big pension plans can get around the foreign property rule very easily by the use of derivatives, it costs them a few basis points, but for a small investor it's a much more serious obstacle. If you want to get around it with financial engineering, it costs you big time. So it's not fair.

    It's known to be a bad thing for private companies to invest the assets of their pension plans in their own securities, for obvious reasons. I think some of the same logic applies to a country. As we get relatively older in Canada, we will want to invest our pension savings, in part, in relatively younger parts of the world. It just makes sense as a way of diversifying, so that you can have a better retirement than you would otherwise. The last actuarial report that was done in response to this bill's predecessor showed, on the basis of a relatively modest assumption about higher returns available on foreign assets and a relatively modest adjustment in the portfolio, that you could lower the steady-state rate in the Canada Pension Plan by taking advantage of higher returns. Again allowing for some of the uncertainties that always exist in doing that kind of forecasting, I think, directionally, that's exactly right. You can do better in the long run.

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    As the Canada Pension Plan's holdings get larger with regard to the opportunities that are available to invest here in Canada, the limit is going to matter for other reasons as well. So I am no fan of the foreign property rule, and I don't think it should apply to this or any other pension plan.

    Finally, a quick note on provincial participation in decision-making and potential provincial withdrawal. I think it's very common for people in Canada, and all federations, to look at some of the decision-making machinery that involves both levels of government and think of it as cumbersome and an obstacle to moving ahead at times when you want to. In fact, the shared federal-provincial jurisdiction over the Canada Pension Plan, I think, is an asset in many ways. It wasn't so cumbersome as to prevent us from moving ahead with this reform, that's an important historical fact, and it provides an important bulwark against mismanagement. The provisions in this bill regarding what would happen if a province were to withdraw from the plan I think are a useful reminder that there's a bulwark against the misuse of funds that is potentially very important. The province has that escape hatch if it turns out that this plan, notwithstanding recent good performance, begins to be operated the way such plans in other parts of the world often have been. So I would encourage you all to think of this machinery as useful and important, in the sense that it ought to be serviceable if it is ever needed.

    I'll sum up by saying that I supported the CPP reforms, subsequent developments have been consistent with the positive view I took, and I see this legislation as consistent with the reform package. So I'm supportive of what's in front of you. The key exception, as I've mentioned, is the foreign property rule, which I don't think should apply to the CPP Investment Board or to any pension plan.

    We're not entirely out of the woods. I would close on that note. The unfunded liability is still growing. As the funds in the CPP grow, so will the temptation to misuse them, and the reason this is a hard sell in other countries is that they look around the world and see how seriously other countries have mismanaged this kind of provident fund. The return on CPP investments for tomorrow's young people is still, after the reforms, not that good. I won't go through the numbers unless anybody wants me to, but when you look at the total contribution rates people are paying and what they could earn with the same money outside the CPP, it's still not good to be in. So you always have to bear in mind that for young people, there's a real issue of constantly demonstrating that the Canada Pension Plan is in fact working well enough, that it's not worth their while to try to get outside it or wind it up or do anything else. The way to do that is to make sure the money that's in the plan is managed in the best interests of participants, because that's how you keep the promises credible and the plan sustainable.

    Thank you very much.

    The Chair: Thank you.

    Mr. Benedict, I would ask you to go ahead for up to 10 minutes.

    Mr. Daniel Benedict (President, Ontario Coalition of Senior Citizens' Organizations): I had a little trouble getting here.

    The Chair: It's not a problem.

    Mr. Daniel Benedict: The Ontario Coalition of Senior Citizens' Organizations, OCSCO, is represented by Anne Dorion, who is a member of its executive board, and myself, also a member of its executive board the immediate past co-chair of that organization. We are both also representing and active members of the Ottawa Seniors Action Network.

    OCSCO is a province-based recognized charitable organization whose mission is to improve the quality and dignity of seniors' lives. In order to carry forward that mission, we pay attention to legislation, regulations, and other events that affect seniors at the community, provincial, and federal levels. We're largely community-based, not-for-profit, and we include ethnocultural, disability, aboriginal, health, recreational, union, and other retiree groups and women's organizations. Our membership includes over 140 such seniors' organizations, representing over half a million senior citizens from across Ontario.

    Bill C-3 would amend the Canada Pension Plan and its Investment Board Act to ensure that the Minister of Finance does not renew provincial securities and similar obligations beyond their current maturities, but instead, turns them over to the CPP Investment Board at a rate of 1/36 per month over the next 36 months after the coming into force of the transitional clause 19. The current level of about 23% of the reserve funds is handled by that investment board.

    Since a high percentage of the members of OCSCO and the local seniors network depend to a considerable extent on the CPP at this stage of their lives, we're understandably concerned by the news of what I refer to as eye-popping multi-billion dollar losses--most recently reported is a $4 billion loss in the first half of fiscal 2003--of our pension money on the stock market. While we can understand that current market trends could cause anyone to lose money in that arena, we do find it disturbing to see a bill that projects turning over 100% of those funds to such speculative handling. To be frank, we find that these developments lead us to express, more strongly than had previously been the case, our concern about the context of CPP investment policy and the stability of its pay-as-you-go structure.

    I'd like to remind you that this is not a balancing act between risks and possible gains or losses, nor is it one of those ordinary, well-advertised “retire early on an exotic beach” insurance company payment plans. This is first and foremost a national social policy aimed at ensuring the adequate and dignified old age of our people. It's a lot easier to talk about the CPP Investment Board being set up when we forget about the setting up of the CPP and the struggles it took in Canada to get a CPP.

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    The 16 million contributors and retirees involved in the CPP are entitled to have their say in the way the program is handled. That is true not only the next time parliamentary elections roll around--and I would urge you to remember that there are parliamentary elections once in a while in this country--but in the ongoing make-up and policy guidance of the CPP administration, including its investment board. The retirees and active contributors and their organizations, unions, and other associations have people with as much to contribute to the decision-making process as do the current business consultants and similar holders of all the seats on the Investment Board. They would also help develop the application of societal values in the choice and structuring of investments along lines that benefit employment, peaceful. environmentally acceptable, human and labour rights-friendly modernized infrastructure, housing, and productive equipment, and similar goals that are considered ethical in our Canadian society. This would give a new and needed dimension to the evolution of a more transparent and responsible use of our funds.

    The current staff of the CPP Investment Board have reportedly shown a willingness to share information on their work. Those major losses we all know about and the attention called to the handling of our funds by the introduction of Bill C-3 can be credited with opening the door to a needed rethinking of the entire question of how and by whom our funds are handled. In its present form, Bill C-3 should therefore not be advanced.

    The Canada Pension Plan exists, if I may sum up, because Canadians want to assure adequate incomes to our elderly, not as a playground for investments. That major goal should be accompanied by fair contribution levels, by the sensible and socially useful employment of the multi-billion dollar investment funds, and by public participation in the decision-making process.

    I'd like to add, in closing, that we have been asked to express the same or similar concerns by a number of other people's organizations. I will eventually turn over to whoever handles the paper here copies of some of the statements, but I want to mention particularly two. One is from Faith Partners, or Partenaires religieux, of Ottawa, signed by the Reverend Bill Jay, who is the advocacy committee chair. The other is a copy of a letter to the director of the Investment Board by the Congress of Union Retirees of Canada, l'Association des syndicalistes retraités du Canada, Larry Wagg.

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    The Chair: Thank you very much.

    Now we'll go with questioning.

    We'll start with Mr. Reid, up to 10 minutes.

    Mr. Scott Reid (Lanark—Carleton, Canadian Alliance): Thank you.

    I'd like to address a few questions to Mr. Robson. Let me start by asking one that comes out of an observation you made. You pointed out that it is possible for private and managed pension funds to get around the 30% foreign content rule by means of derivatives. Would that also be possible for the Canada Pension Plan investment fund?

    Mr. William Robson: It would be possible, yes.

    Mr. Scott Reid: That means the effective function of the foreign content rule, although I'm sure this is not its intention, is simply to remove several basis points from the return on those investments without actually causing money to be redirected into the Canadian economy, for whatever purpose it is intended to serve under those foreign content rules.

    Mr. William Robson: That would be the better outcome for the planned participants. The worst outcome for the planned participants would be for the CPP Investment Board to adhere rigorously to the prohibitions of the foreign content rule and forgo the higher foreign returns entirely. Much though it offends my sense of fairness to see the large guys getting around something like that at a lower cost than the smaller guys can, I would say that for the planned participants, it would be better if they were to do that. Nevertheless, there is a cost involved. We're forgoing pension income or lower contribution rates we could otherwise have.

    Mr. Scott Reid: In all fairness, CPP is a very large player, but the people who get money from it are frequently very small players in the economy.

    This is not directly in this legislation, it's a reaffirmation at the beginning of the bill, the manner in which individuals are appointed to the CPP Investment Board. I'm not suggesting that the people who are currently on the board are in any way inappropriate. On the contrary, I have a very high regard for them. But I notice, looking at the method for appointment, of which much is being made by those who talk about there being checks and balances in the system, that they're all appointed by the Governor in Council on the recommendation of the Minister of Finance. The minister appoints them after receiving advice, which he can choose to ignore, from a committee, under subsections 10(1) through 10(4) of the Canada Pension Plan Investment Board Act, and appointments are for a period of, I think, three years. If we look at the history of the way in which the Caisse de dépôt et de placement has had its presidents appointed, the first one, who served from 1966 to 1973, had a distinguished history as an investor for Sun Life, the second was a long-term bureaucrat, and the third, Jean Campeau, had an entirely political focus. Is there anything you might suggest as a further protection to ensure that a similar trail moving away from professional investors to those who are professional bureaucrats with a primarily political focus could be avoided under this plan?

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    Mr. William Robson: There are, obviously, no guarantees available in the imperfect world we live in. There are many examples, as I intimated earlier, of the misuse of provident funds managed by governments, for reasons that lie behind your question, incompetence being the most charitable description of what goes on in many cases. The danger of taking for granted that this kind of machinery will always work well is a real one in Canada, where, in general, the standards we hold our public bodies to are high, so we have reason to think of our public bodies as operating well under most circumstances. I think adding a more formal scrutiny by both federal and provincial parliamentarians is probably the best kind of guarantee we can put in place.

    I really do see the federal structure of plans as a source of strength, despite the fact that at any given moment we tend to focus on the extra friction it causes. I think there are many provinces whose input in areas like this will, over time, prove to be very valuable when it comes to keeping the board of a high quality and focused on maximizing returns. So I encourage the committee to think along those lines. At the moment the obvious problem is that when we have a good board, it's difficult to work up a sense of urgency about the possibility that at some point in the future we would have a bad one, but only constant scrutiny can keep us at the high standard.

    Mr. Scott Reid: The last question I have relates to a projection that was made at the time of the passage of the Canada Pension Plan changes in 1997. At that time projections were made that it would be possible to continue paying out the benefits provided for under Canada Pension Plan at a 9.9% contribution rate in perpetuity. Is it your impression that this is something we can all be very secure about?

    Mr. William Robson: No, it's not. There are any number of assumptions that can cause worry when you're doing that kind of long-term projection. The absolutely critical one is the rate of productivity growth, which is going to affect the rate at which contributions grow compared to the speed at which benefits are paid out, because benefits are indexed to inflation, whereas contributions are indexed to wages overall. There are no firm guidelines available from economic theory or from looking around the world to help us think with great confidence about which way that will go. There are some people who will argue that as labour gets scarcer, as there are fewer workers compared to the number of retirees, we will see some productivity gains, causing us to use labour more wisely, invest more capital, and so on. But I think I can tell a fairly persuasive story that works in the other direction, where diminishing population growth reduces the rate at which we invest, reduces the flow of young blood and new ideas into the economy, and actually causes our productivity growth rates to slow down.

    When you look around the world you can find some support for either point of view. In some European countries it so far appears that they are in a situation where the higher productivity gains are visible with a smaller work force. When you look at Japan, you can see the fear made concrete that in fact, when you get to a point where your population is not growing and is aging, you stop growing, you lose your productivity growth. It may be that now Germany is tipping over into that state as well.

    If that is the longer-term future that awaits us when the labour force stops growing, and if fertility rates continue to decline the way they have, we wouldn't be able to sustain the 9.9% contribution rate. At the moment, based on the best guesses we have available to us, it seems we are going to be able to just skate under that ceiling, and I don't find fault with the projections that have been made. But the really critical thing is the long-term rate of productivity growth, and that's the subject on which we know, in some sense, less than almost anything else that is in the projections.

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    Mr. Scott Reid: Thank you.

    This is not so much a question as a statement for our other two witnesses. Something I always find frustrating when pension discussions are under way, and I'm sure you must find it frustrating as well, is that there is a constant emphasis in the media coverage of the issue suggesting that seniors and young people are, or indeed a hint that they ought to be, perpetually at war with each other over the share of a finite pie. With current life expectancies, the average female who is turning 65, becoming a senior, and therefore being eligible for Canada Pension Plan, has a 50% chance of living to the age of 90, which means 25 years of being a potential beneficiary. So seniors have a long-term interest in the well-being of the Canada Pension Plan. In fact, there are people who are retiring right now who will be receiving Canada Pension Plan at the same time as people who are currently in their thirties. I think it's important that people who sometimes forget it be aware that there is a long-time interest on the part of seniors that is sometimes forgotten in the stability and well-being of the plan.

    Mr. Daniel Benedict: That's a very good point. It's one of the important parts of our interest in the subject we're talking about here today. The other one is the second half of the expression “senior citizens”. We're seniors--I'm 85 years old, you can tell by looking at me--but we're also part of society. We're concerned about what happens in this society, not only to ourselves or to our grandchildren--much more than my children, I'm worried about my grandchildren now--when they become seniors. What happens to our society? What is the role of pension funds, which are a sizable proportion of the funds the expert speculative handlers play with? Those funds have a role in our society, a responsibility for taking measures to build employment, measures that are socially useful in our society, not just making money.

    We're not a society of people who are just money-grubbers. We're a society of people who worry about our neighbours, who worry about what happens to the people around us, to our cities, to our rural areas. That means big sums of money have a special responsibility. You, as parliamentarians, have a special responsibility to look at what happens to those big sums of money. How are they used? How are they socially useful?

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    The Chair: Thank you very much, Mr. Benedict.

[Translation]

    Have you any questions, Ms. Picard?

[English]

You have up to 10 minutes.

[Translation]

    Ms. Pauline Picard (Drummond, BQ): Thank you, Madam Chair.

    Mr. Robson, I'd like to congratulate you and thank you for your interesting presentation. There were certain points that I wanted clarified, and your testimony did indeed serve to enlighten me.

    I have a question for Mr. Benedict. I sensed from your comments that you felt totally excluded, that is that seniors felt completely excluded from the current process associated with this bill. As I understand it, you were not consulted at all. I have to wonder if you received enough information about the legislative proposal now under review to ascertain if this bill is appropriate for you.

    Mr. Daniel Benedict: I can answer your question directly. Firstly, we weren't consulted in any way. Secondly, in our opinion, it's not just a matter of being consulted in advance. Formulating a social policy for pensions or a national or pan-Canadian pension regime in Canada and Quebec also comes with a responsibility for developing on ongoing process to ensure participation in decision making. I am disappointed that no consultations were held in connection with this bill, but it doesn't have anything to do with governance issues or participation in public organizations. It's not an issue for those who are only concerned about speculating on the stock market.

    I think the bill should be re-examined. In some respects, it's a useful piece of draft legislation because it compels us to take a look at where our money is going. The fact of the matter is that no one gives any thought to consulting the workers, the people who pay into the scheme. Just look at the list you most likely received. The directors of the investment council are reasonable individuals. If we ask them a question, they give us an answer. I'm not criticizing them. It's really more of a criticism of us as a society.

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    Ms. Pauline Picard: Thank you.

[English]

    The Chair: Mr. Comartin.

    Mr. Joe Comartin (Windsor—St. Clair, NDP): Mr. Robson, I think I'm accurate in this. I saw an article in either the Globe and Mail or the Toronto Star, I think 10 days ago, on a weekend, on the front page of the business section. Someone had done a study on investments, I believe, since the Second World War--roughly 50 years, in any event--comparing the equity markets to basic GIC. In Canada over that period of time there was a very slight difference, favouring the equity markets, but within one percentage point or thereabouts. Did you see that report? Have you any comments about that study?

    Mr. William Robson: I didn't see that particular study, but I could offer an observation, if you like, on the best way of trying to fund a pension cost-effectively, if that's what it comes down to.

    Whether or not, over the long run, equity markets do outperform other financial investments as much as popular wisdom would have it is a tough question to answer decisively, because even getting the measures right can be a bit difficult. Whenever you're measuring any kind of index of financial returns, you're measuring the survivors. It's a bit like deciding what life on Earth has been like from the very beginning only by looking at the species that are still around.

    The bigger question that lies behind the Canada Pension Plan reforms is, can you pay a pension that is more generous, relative to the contribution rate, by investing the money in financial assets of one kind or another, as opposed to relying on future tax payments to do it? I think the evidence is a bit stronger that over time it is likely to be a better mix, more generous pension payments at less cost, if we do invest in real assets than if we simply count on tomorrow's taxpayer to foot the bill, as was the case with the pure pay-as-you-go plan.

    So if your question is one about the wisdom of the Canada Pension Plan Investment Board's asset allocation strategy, I would say that it may be that we will find over a long period of time that we wouldn't want to hold as much equity as past performance might have suggested. However, I would repeat the point that with markets having taken the bath they have recently, if success in investing rests in buying low and selling high, then it's nice to buy low. On the bigger question of whether or not we will find that we would have been better off leaving it on a pure pay-as-you-go basis, so that future tax payments were the only source of pensions, as opposed to investment returns, I'm pretty confident that what we've done with investing the money is going to prove to have been a wise decision.

    Mr. Joe Comartin: So should the legislature be giving the Investment Board some more directions about when they should analyse the markets for highs and lows, given that they obviously purchased at a high rate when we took that $4 billion hit?

    Mr. William Robson: The legislature has controlled the initial flowing of funds into the plan at a time that has proved to be rather fortuitous. I wouldn't count on their continuing to exercise that kind of adept control. I think the issue for the legislature is much more one of instructing the board fairly clearly to achieve the best returns it can, but leaving it a fair amount of flexibility and autonomy to manage that portfolio as it sees fit. I would assume that over time, the board itself is going to be doing a certain amount of diversification in its investment strategies so that various portfolio managers who are managing CPP funds can be compared by the board.

    But having gone through the reform process and heard some of the sources of concern many people express about the way the Canada Pension Plan was run and about what might happen to it, I see, first of all, the forced investment of funds in provincial government debt at concessional interest rates to have been a very serious point of criticism from participants in the plan, especially young people, who were afraid they might not get their benefits or weren't going to get very much for the money they were putting in. I would also say--and this, again, draws on the rather dismal experience around the world--any suggestion that there was political direction being exercised to steer the Canada Pension Plan Investment Board's money into industrial policy or other politically driven purposes would have a similar effect on confidence in the plan.

    If I could take this opportunity, I want to make a two-sentence response to something that was said earlier about the roles and responsibilities of these large pools of money. Public policy offers an enormous basket of tools to deal with different types of problems. To deal with poverty among the elderly, we have income transfer programs, the GIS and OAS. We might have criticisms about how they function, but when we want to address redistribution, those are the tools we can use to effect any amount of transfer we like. If we are concerned about inadequate investments in infrastructure, we can pay for those through government budgets. We have enormous taxing power, and we can devote enormous resources into infrastructure beyond what we do now. If we think investments in the economy are not being made wisely by private investors, we can change the tax laws to steer investments in whatever direction we see fit. There are any number of tools we can use to achieve various types of industrial and social policy objectives. I would submit that the Canada Pension Plan money is not a tool that ought to be used for one of those purposes. Its purpose is to provide the best pensions we can manage for the price that we're paying. We have endless number of tools we can use for other purposes. Let's use those other tools and not undermine confidence in the CPP by trying to use it for something it's not designed to do.

º  (1625)  

    Mr. Joe Comartin: That wasn't my question, but since you've used up most of my time--

    Mr. William Robson: I'm sorry.

    Mr. Joe Comartin: --let me challenge you by saying that if one followed that policy, we would invest in some racist country, something I ran into when I was in university and had my board of governors investing in South Africa during the apartheid regime.

    Mr. William Robson: There are many tools we can use. I've complained about the foreign property rule applying to the CPP Investment Board, but it is a broad-based rule that applies to all pension plans. It seems to me that you can use other tools if you think we ought not to be conducting business with regimes in the world we don't like. If we think people shouldn't smoke, if we think people shouldn't drink, if we think people shouldn't eat French fries, there are many other tools we can use. It is not sensible to take a provident fund like this and start to use it for industrial or social policy, because once you have established the principle that other criteria will come into play, there's no obvious place to stop. There is a World Bank study from back in the mid-1990s that's been cited by many people looking at the performance of these funds around the world. The record is terrible. Canada has an opportunity to do much better.

    Mr. Joe Comartin: That's not true, Mr. Robson. Take VanCity and the ethical funds they've generated over the years. In the assessment I and the credit union made of that, those ethical funds have matched anything, and in fact, for the last five years, the last three years in particular, have exceeded the equity markets, because we didn't get into some of the outrageous developments that occurred in high-tech.

    Mr. William Robson: I was talking only about the government-managed provident funds. If investing to do good also pays the high returns, we obviously have a win-win situation and the issues don't arise.

    Mr. Joe Comartin: Let's just pursue that. As it stands right now, you would be willing to let the board invest in companies that are involved in armament sales?

    Mr. William Robson: Yes, I would be--

    Mr. Joe Comartin: And tobacco companies?

    Mr. William Robson: I would let them invest in anything I'm allowed to invest in.

    Mr. Joe Comartin: I don't have any other questions.

    The Chair: Thank you.

    I will go to Mr. Pillitteri, then Mr. Wilfert. If you would like to split the time, we'll finish on time. My apologies to this side, because I took you out of order.

    Mr. Pillitteri

    Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Madam Chair, and thank you, both, for your presentations.

    In your presentation, Mr. Robson, you could have come out a little more clear. I think in your earlier presentations you've come out more specific and clear in your answers. I play very little in the stock market personally, but I do enjoy what you call the benefits of intergeneration, and you did not touch on this. For the seniors who were present, I think you should have touched on that. I became a senior myself and do collect from the Canada Pension Plan, and by having it indexed--and this year it went up--we benefit immensely.

    You did touch on the $540 billion we have as a liability. Most of this liability is accumulated by the deficit and specifically all the plans we've had that are underfunded, specifically the Canada Pension Plan. I'm sorry you did not go into more detail when you said that if you were a young person, 30 years old, and you were to invest $1 in the Canada Pension Plan, your return would only be about $3. But at my age, 65 or 66, for every dollar I put in, I would be getting about $6 back, or a bit better. In the case of Mr. Benedict, he would be getting at least $7 for every dollar he put in.

    So how are we going to support the plan? I also think it should be made clear to the older generation like me that we have benefited by the low amounts of money we have put in and what we're taking out now. If we don't do something, realistically, the ones who are 30 years old are not even going to get $3 back for every $1 they put in. How would you have done this any better, Mr. Robson?

º  (1630)  

    Mr. William Robson: I'll resist the temptation to replay history and talk about what a marvellous governor of the pension system I might have been. I suspect I would have done many of the same things that were done, because we are creatures of circumstance, and certainly there was a time when seniors were very significantly worse off than the rest of the population and there was no serious objection to transferring resources to the older generation through the pension system and otherwise. However, through a mixture of political and economic forces we could spend a long time on, we have now arrived at a situation where, as you say, there's a very large unfunded liability, which is the accumulated difference between what someone would have had to pay to buy these kinds of benefits in a normal pension plan and what was actually paid, which was considerably less. The flip side of that is that going forward, I am informed by Jean-Claude Ménard, the normal cost actuarial rate, what you would pay to get a CPP-like package of benefits now if you were a typical participant, would be of the order of 6%. Of course, people are going to be paying 9.9%, and the difference between those two rates is one key measure of the gap we have to fill, which is going to be paid by young people primarily in order to pay the pensions of older people.

    That's the situation we're in. There's no way we can undo that except by defaulting on the promises in the plan, and I don't favour defaulting on the promises in the plan. But another way of thinking about it is that those rates of returns for various cohorts that show that the youngsters are going to be getting 2% in real terms, whereas their predecessors got 10% in real terms, are nowadays being paid on much larger amounts of money. If I look at the gap between what people are paying into the plan and what it would cost them to buy the same benefits outside it now, for a typical contributor who's at the maximum to cover their needs, it's well over $1,000 a year, and it will rise over time. That's a pretty hefty tax. We can't do anything about it, but what we should do--and here I'm repeating myself, so I'll do it in one sentence--is make sure it's clear for the participants in the plan that the money that's there is being invested for the sake of their benefits. They know some of the money is taxed. As soon as they start to feel that some of the rest of it is also effectively taxed, because it's being steered to some purpose that isn't related to their pensions, political support for the Canada Pension Plan will decline, and I predict we're going to go through another round of reform that will be a good deal more unpleasant than the one we went through.

º  (1635)  

    The Chair: Thank you.

    Mr. Wilfert.

    Mr. Bryon Wilfert (Oak Ridges, Lib.): First, Madam Chairman, I wanted to admonish our vice-chairman for his tardiness, but I understand it's his birthday today, so I guess we'll let him off. I understand he's buying the birthday cake.

    Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): I'm also doing double duty, sitting in Industry next door with Mr. Wilson.

    Mr. Bryon Wilfert: For the record, I would commend to both our witnesses the presentation that was made yesterday by the chairperson, Gail Cook-Bennett, and John A. MacNaughton, the president and chief executive officer of the Canada Pension Plan Investment Board. They had some very salient points that I thought were useful, and I appreciated hearing your comments today and adding to those.

    The comment I wanted to make, Madam Chairman, was on the issue of consultation. Back in 1996 and 1997 extensive consultations, involving 270 individual Canadians and organizations and thousands of phone calls across the country, took place with youth, women's groups, seniors, etc. In 1999, when the Investment Board started to take appropriate steps that came out of the 1997 discussions, the actuary on three occasions indicated that this was a sustainable long-term plan. Since June 6 of this year it has been out, and a number of members of Parliament have been consulting with their constituents on the changes, but it's a natural outgrowth of what happened in 1999, and I just wanted to put that on the record.

    The Chair: I want to thank you, Mr. Benedict, Ms Dorion, and Mr. Robson for joining us today. We appreciate your coming....

    Mr. Tony Valeri (Stoney Creek, Lib.): Madam Chair, I just have one small intervention I'd like to make while you're clearing your throat. I wonder if Mr. Robson could actually calculate the rate of return for our birthday boy here today, since he has the actuarial tables available.

    Mr. William Robson: Can I ask, sir, how old you are?

    Mr. Nick Discepola: I'm 49.

    Mr. William Robson: You, sir, if you are an average participant, are the beneficiary of a princely 4% real rate of return, which is one whole percentage point better than I will receive and double what somebody born this year will receive.

    The Chair: With that, I will thank you all, and we will suspend for a few minutes. Especially given the short notice, I'm glad you got your evidence on the record.

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    The Chair: Okay, we are going to clause-by-clause. We have senior officials from the Department of Finance with us to answer any questions, Mr. Weatherley, Mr. Mitchell, Ms. Scullion, and Mr. Boucher.

    Mr. Cullen.

º  (1640)  

    Mr. Roy Cullen (Etobicoke North, Lib.): I move that we adopt clauses 1 through 20.

    An hon. member: On division.

    Mr. Scott Reid: No.

    The Chair: You want to go clause by clause? Okay, that's fine.

    (Clauses 1 to 4 inclusive agreed to on division)

    The Chair: On clause 5 we have a question. Go ahead, sir.

    Mr. Scott Reid: It's on subclause 5(5). In a fashion typical of Canadian legislation, this is almost impenetrable, so my concern may not have any substance to it. However in looking at this, I'm wondering about the rationale. Subsection 110(2.1) of the act is being repealed. Does it have the intention that's described by the folks who are doing the analysis for us, or what happens now the subsection is removed? That's unclear to me. I'm looking at the explanatory notes on page 7 of tab 3. I'm unclear as to whether this effectively means there is now an open-ended possibility of money being paid into the consoldiated revenue account, so perhaps you could fill me in.

º  (1645)  

    Mr. Bill Mitchell (Director, Financial Markets Division, Financial Sector Policy Branch, Department of Finance): Let me speak to the purpose of these rather complicated provisions. Essentially, they are there to provide for the situation where the CRF has, in effect, CPP money temporarily. It actually belongs to the CPP, but we have it, because they didn't send out the cheque yet, so we didn't actually pay the CPP beneficiary yet. So we have their money, they sent it to us, and there's some kind of delay. The opposite case is the same. When the CPPIB temporarily has CRF money, they will pay us interest on it. It's actually typical of what commercial people, banks, or financial people will do if they have these transactions with each other that go back and forth frequently and they're not always capable of being precise. It's later determined that we have their money for a while. The government had the CPPIB's money temporarily; we pay them interest on it, and the reverse.

    Mr. Scott Reid: I can see that. I'm not so much concerned about the intention as I am about the possibility that there may be an unintended consequence. I'm seeking the reassurance that this unintended consequence is not, in fact, potentially there. It is potentially possible that when the money belongs to the Canada Pension Plan Investment Board, but is in the hands of the consolidated revenue fund, it could remain in the hands of the consolidated revenue fund for an extended period of time. I don't doubt that the proper accounting would take place, so we would know where it properly belongs, but after all, this is a version of what has happened with the money from the employment insurance fund. It has effectively gone into the consolidated revenue fund and been used for other purposes. That's really the question. Is that possible, or am I misinterpreting this? I notice there's no reference in here to a requirement that the money be paid back within a certain length of time. I recognize that there's a need for accounting, but there doesn't seem to be any requirement that it be paid back within a certain length of time.

    Mr. Bill Mitchell: The basic obligation is that all moneys that aren't used to pay pensions have to be turned over to the Canada Pension Plan Investment Board. These are only moneys that are temporarily in one place or another and actually belong to the other party.

    Mr. Scott Reid: How long can temporary be, and how large can the amount be? Is there a ceiling on how much money can be in the hands of the consolidated revenue fund at a given time? Additionally, is there anything in this legislation, as amended by this act, that puts a ceiling on how long money can be in the hands of the consolidated revenue fund?

    Ms. Clare Scullion (Senior Counsel, Department of Finance): Because interest will be charged on any amounts that are in the CRF, there would be an impetus for the government to pay it to the CPPIB as soon as possible. The sooner they pay, the less interest they would have to pay. That's the impetus.

    Mr. Scott Reid: Right, but there's no actual limitation in the Canada Pension Plan Act, as amended by this proposed legislation, that would require the Minister of Finance to not take more than a certain amount out. I understand what you're saying about incentives, but there's no actual legislation prohibiting an amount that could be as large as he or she might choose.

    Ms. Clare Scullion: The general rule is in section 108.1(1), that any amounts that are not needed to pay benefits or the costs of the program go to the CPPIB, and if for a period of time, which is not determined, there are amounts that stand to the credit of the CRF that should be with the CPPIB, the government will have to pay interest out of the CRF. So if they want to reduce the amount that is transferred, they should transfer it as quickly as possible.

º  (1650)  

    Mr. Scott Reid: But if in fact the federal government chose to just owe that money to the Canada Pension Plan Investment Board and allow interest to accrue at the rates specified in this legislation, it could borrow any amount it chose, which could amount to billions of dollars for an extended period of time. That, in effect, would mean that money is being transferred to the federal government and is going into another form of deficit financing, which would, however, not show up in the national debt figures. Am I correct?

    Ms. Clare Scullion: That is not what is contemplated in the legislation, and I would suggest to you that it would be a breach of the statute. Because this is a plan jointly administered with the provinces, they would certainly have something to say about it.

    Mr. Scott Reid: I certainly think it would be a breach of the spirit of the statute. Is it, however, forbidden in the actual wording of the statute?

    Ms. Clare Scullion: Subsection 108.1(1) says any amounts that are not needed to pay benefits and any amounts that are not needed to pay the costs of the administration of the Canada Pension Plan the minister shall transfer to the CPPIB. There are legislative requirements for the government to transfer funds to the CPPIB. If, for example, there is not enough money to pay the benefits or the costs, there are legislative amendments to require the CPPIB to pay money back into the CRF.

    Mr. Scott Reid: Thank you very much.

    The Chair: Is there anything further on clause 5?

    (Clauses 5 to 14 inclusive agreed to on division)

    Mr. Scott Reid: I have a question with regard to clause 15.

    The Chair: Go ahead, sir.

    Mr. Scott Reid: Clause 15 has the effect of applying the foreign property limits in the Income Tax Act to the CPPIB. I'm just wondering if, in the process of developing and designing this, any work was done in determining what the negative impact of this restriction would be on the long-term risk and the long-term income of the Canada Pension Plan investment fund.

    The Chair: Mr. Mitchell.

    Mr. Bill Mitchell: There was no particular study done on this in relation to the CPPIB. There have been studies done by many independent groups, C.D. Howe for example, on the foreign property rule as it affects all pension plans, and Mr. Robson spoke to that today. The government's policy is to constantly keep this under review. It was just amended to change it from 20% to 30%. Its objective is to balance the financing of Canadian requirements with the needs of pensioners to have a diversified portfolio of securities. The government's view is that the balance is appropriate today. It's a matter that's kept under review all the time, we get lots of input on this, and it's studied by a good variety of people in the country for many of the issues Mr. Robson raised.

    Mr. Scott Reid: Is there anything in this act that prevents the Canada Pension Plan Investment Board from simply doing an end run around this by investing in derivatives, in the manner that was brought up in my questioning of Mr. Robson, in order to simply invest as much as it wants?

º  (1655)  

    Mr. Bill Mitchell: There is nothing in particular in the law. I believe it was 1997 when there was an agreement about the reforms of the Canada Pension Plan, and the federal-provincial agreement called for the Canada Pension Plan Investment Board to strictly adhere to the 30% property limit, which is what they're doing. That was a policy agreement by federal and provincial ministers, and the Canada Pension Plan Investment Board has adhered to that.

    Mr. Scott Reid: I appreciate that, but you understand, of course, that private actors are required to strictly comply with the law, but it does not prohibit them from using derivatives, so it doesn't mean anything.

    Mr. Bill Mitchell: Correct.

    Mr. Scott Reid: Thanks.

    The Chair: Is there anything else?

    (Clauses 15 to 20 inclusive agreed to on division)

    The Chair: Shall the title carry?

    Some hon. members: Agreed.

    The Chair: Shall the bill carry?

    Some hon. members: Agreed.

    The Chair: Shall I report the bill, without amendment, to the House?

    Some hon. members: Agreed.

    The Chair: Okay, ladies and gentlemen, I will try to report this to the House tomorrow. I will also, on Friday, table the pre-budget document.

    Next week it's my intention to call the steering committee for Tuesday, I think at 9:30 a.m. On Wednesday we will have a full committee meeting in camera on future business. The notices will come out for that, so we can discuss the witnesses we may wish to call for our upcoming work.

    We are adjourned. Thank you very much, everyone.