After my short opening statement, I'd be prepared to answer questions on anything you'd like to ask about the office and the operations of the office.
Fundamentally, we are very fortunate, I think, to possess in Canada one of the strongest financial systems in the world. It contributes to the strength and innovation of the economy and protects the savings of individual Canadians. The environment in which OSFI operates, both domestically and internationally, is fluid and at times unpredictable. Maintaining a high level of confidence in the safety of money entrusted to financial institutions and remaining a world-class regulator is very important in our plans and priorities.
We are a prudential regulator, and I want to emphasize the word “prudential”. We focus on safety and soundness, not on so-called market conduct issues of how financial institutions deal with customers.
We've had a legislated mandate from Parliament since 1996. Under the legislation, our mandate has four main elements. These are laid out in the material.
The first part is to supervise federally regulated financial institutions and private pension plans to determine whether they are in sound financial condition, meeting minimum funding requirements, and complying with their governing law and supervisory requirements.
The second part is that if there are material deficiencies, we are to advise institutions and take, ourselves, or require management to take, necessary corrective actions. This includes management, boards of directors, or plan administrators. That's the so-called early intervention part of our mandate, common to many prudential regulators in Canada and around the world.
The third part of our mandate is to advance and administer a regulatory framework that promotes the adoption of policies and procedures by regulated institutions designed to control and manage risk. We do that directly ourselves, through guidelines and so on. We also work with our partners in the Department of Finance and other agencies with respect to the federal legislative framework, and we work with other partners--for example, in the auditing, accounting, and actuarial professions, or internationally--who are developing rules and frameworks applying to these organizations.
Last, we are charged with the monitoring of system-wide or sectoral issues that may impact financial institutions negatively, in pursuit of our overall mandate to protect depositors and policyholders. We contribute to public confidence--that's what our statute says we're supposed to be doing--by pursuing our mandate. Our legislative mandate also explicitly acknowledges the need to allow financial institutions to compete effectively and take reasonable risks. That means for a variety of our activities we're in the business of balancing.
Our mandate recognizes that management and boards of directors and pension plan administrators are ultimately responsible for the operation of their entities, and that financial institutions and pension plans can fail. A well-run system in which Canadians and people outside Canada can have a high degree of confidence is very important, of course, for economic performance, so our priorities are generally pretty broadly aligned with broader government priorities.
We have a variety of partner organizations within government and the private sector. We are involved, of course, pursuant to our mandate, in risk assessment and intervention, in setting rules and guidelines, and in approvals under the various pieces of legislation.
In terms of our budget, our spending in the main estimates is $85 million for fiscal year 2006-07. Virtually all of our operating costs--except for $768,000, which is in relation to the Office of the Chief Actuary--are recovered and paid by the financial institutions and pension plans that we regulate and supervise. That's why you see the net number of $768,000 that's in the votes.
Most of the costs of the Office of the Chief Actuary, which deals with the Canada Pension Plan, with pension plans for members of the public service, pension plans for members of Parliament, judges, and so on, are also recovered from the pension plans or departments for which the Chief Actuary provides valuations or other services. The rest of about $768,000 is recovered out of general revenues.
Our financial statements, which we publish annually, are prepared according to generally accepted accounting principles and are audited annually by the Auditor General.
The following gives a little perspective on our costs. About $73 million of the $85 million relates to financial institutions, $5 million relates to private pension plans, and about $4.7 million to the Office of the Chief Actuary.
As I said, we charge back virtually all of our costs to the financial institutions and pension plans or to other government departments. For financial institutions, for a large bank or an insurer, our charges would amount to about $4 million to $5 million a year, depending on the size of the institution. For a smaller or middle-sized depositing institution, we would charge back about $100,000 a year.
Our costs on a main estimates basis rose approximately 1% between 2005-06 and 2006-07. That's largely because of a variety of re-engineering initiatives we put in place to look at how we were doing our basic supervisory activities and other activities, and to keep our costs under control.
It is planned that our costs on a main estimates basis will rise in future at around 4% a year, though the increase will be faster in the pension area where we're adding resources because of the deteriorating condition in that area. They will be less than that in the other areas. That increase is basically reflective of normal inflationary growth for human resource costs and some ongoing investments in enabling technology.
Some of the increase is also due to additional resources we've put into anti-money laundering and anti-terrorism financing. Our planned staff complement is about 460 employees, and this is relatively static, though we cut it back between 2005-06 and 2006-07 as part of our re-engineering exercise.
Our priorities in the coming year include contributing to ongoing international and domestic efforts to strengthen capital rules, continuing to monitor and take action vis-à-vis the state of federally regulated pension plans, and increasing attention, as I've said, to anti-money laundering and counterterrorism financing issues. That's really in support of efforts being led by other departments--FINTRAC, the RCMP, and so on.
We report publicly on our website, and provide extensive information on aspects of our performance measures, including confidential surveys we undertake of the people we deal with, regulate, and supervise.
While we operate largely behind the scenes, I feel the high-quality work we do is acknowledged every time Canadians put their trust in a federally regulated institution or pension plan.
I look forward to your questions.
I'm not sure which initiative you're referring to. The budget has two initiatives related to pension plans.
One initiative, which relates to private pension plans and which I believe is very important given the deteriorating condition, is further flexibility in the funding requirements for private pension plans. The budget announces the government's intention to put in place regulations to provide for the possibility of private pension plans funding their deficits over ten years rather than five, with appropriate safeguards related to information being provided to plan members and safeguards for what I've called, on various occasions, “downside protection”, because there is potentially some more risk in a longer funding period.
I have been on record for a while now indicating that the funding situation of private plans was deteriorating. The number of plans operating at a deficit has increased. I believe the situation is manageable, but it requires, as I have said, active management. Part of that active management—and I think it is a very important contribution, which I have been on record as supporting for a while—is further flexibility on a temporary basis for funding of plans' deficits. Often, further flexibility will make a difference in allowing private sector sponsors to maintain defined benefit pension plans, and I think that's to the benefit of plan members, provided there are important safeguards, which I've talked about.
This does not involve anything to do with public moneys; it is a change in the funding regulation. My understanding is that the details of that regulation are likely to be pre-published for consultation very shortly. A number of groups over the past year or two have spoken in favour of more funding flexibility.
The second initiative, which you may be referring to, is the budget initiative around the Canada Pension Plan. Really, I'm not in a very good position to speak about that in any degree of detail. The government has announced its intention to put additional moneys into the Canada Pension Plan. The office of the chief actuary, who is independent from me in his actuarial evaluations, will be involved in determining what the impact of that is on the contribution rate, for example. But this is a policy decision the federal government has made, and it's an issue officials from the Department of Finance—the Chief Actuary, if you want, at some point—can come to talk about: what the impacts may be, and the rationale.
But neither of those is putting public money into private sector plans.
There are really several questions there. How did the situation arise? What other actions are then appropriate in order to deal with it?
First of all, as key background, the legislation federally, as in many other jurisdictions in Canada and abroad, deliberately permits defined benefit pension plans to operate at a deficit. It does that because it's highly unlikely that sponsors would otherwise be willing to put in place defined benefit arrangements, given the fluctuations in asset markets, and so on. The regulations currently provide, and this is similar to most other jurisdictions, that so-called solvency gaps, once identified, need to be funded over a five-year time period.
The increase in the deficit position of defined benefit plans arose from several factors, as you said, and a couple of others that you didn't mention.
One, there initially was a pullback in equity markets, if we go back a couple of years. This did not come about over the last six months. It's something that's been developing over the past couple of years, and its something that we at OSFI have been talking about enacting for the last couple of years. Equity markets pulled back a bit; there's been some move back, of course, which has helped.
Secondly, long-term interest rates significantly declined, and long-term interest rates are what go into the actuarial valuation of the liabilities. The lowered long-term interest rates have significantly increased the value of the liabilities, when you do the evaluation of the plan.
There have also been some changes in actuarial rules on how you value these kinds of liabilities. The rules are not set by the government or by OSFI. They're set by the Canadian Institute of Actuaries. In particular, the Canadian Institute of Actuaries changed the rules about how fast you recognize declines in interest rates. Over the last nine months, that has contributed to quite a significant change in the deficit position of a number of plans.
There were also certain plans that took contribution holidays, and there were certain plans that had benefit improvements. They cut into surpluses and perhaps left less room. That's permitted under the rules and regulations, but it may have left less of a cushion to deal with the downturn.
Fundamentally, we have a variety of tools at OSFI, and those were enhanced in the mid-1990s, to allow us to intervene when we think the situation is likely to be too detrimental to pension plan members. We've been very actively using those tools for the past couple of years, certainly since the decline in solvency positions started.
As I understand it, government policy for a while has been designed to have a degree of competition in this marketplace. We're responsible for administering at OSFI our part of the system, which is applications from anyone who would want to enter the market to do this business. As I said in my introduction, our mandate requires us to take account of the need for allowing institutions to compete effectively. So if a financial institution comes to us to set up in the mortgage insurance business, we'll assess, on a broad basis, the viability of their business plan, assuming it's reasonably viable, and their capitalization and so on, but we're then going to, in all likelihood, recommend that entity be licensed to offer the business to consumers.
There are lots of aspects of the marketplace that will affect the availability of mortgage insurance and all those kinds of things that you asked about, one of which is how many competitors there are. But there are lots of other aspects that will affect this, including capital rules, and the nature of the guarantee that's provided to private insurers, which was provided in the first place in order to provide a reasonably level playing field so private insurers could compete with public insurers, with CMHC. Without that system, banks and other financial institutions would get a break on their capital if they dealt with a government guaranteed institution, CMHC, but would not get a break if they dealt with a private insurer, and this is what the guarantee that was put in place was designed to, in part, correct.
So I think there are a lot of aspects that would affect availability of insurance, and so on, and I understand the committee wants to have perhaps a broader discussion of that. I'm certainly happy to contribute, from our perspective, as to what our role is, but our role is fairly minimal in this. We'll make an assessment of the viability and solvency of any new applicant. We'll take account of the fact that we are supposed to allow institutions to compete effectively. So we're not going to impose our business judgment on institutions' judgment. If somebody thinks they can do the business profitably and contribute, in competitive terms, we're not going to say no to that. If their plan is clearly crazy or something, which is highly unlikely, but occasionally we see applications for new institutions that are very ill-developed plans...but assuming that's not likely the case, we have a set of capital rules that will apply to protect safety, soundness, and solvency, and we'll proceed.
Again, please don't take that as any comment on an application specifically in front of us; that's our framework, and I think that framework has served the system in a lot of kinds of markets pretty well over the last couple of years.
I look at regulatory burden from two perspectives: what are our direct costs, and what are the compliance costs we impose on institutions? Broadly speaking, I think we continue to look for and take action on both sides.
Our direct costs, which we charge back to institutions, are $4 million or $5 million per large institution, which is not a large amount, quite frankly, but we continue to look for ways to keep those under control. It's one of the reasons they rose only 1% from 2005-06 to 2006-07 in the main estimates, because we cut out a bunch of heads, re-engineered some processes, and kept the costs down.
Going forward this coming year, we will not impose any additional costs on the property and casualty industry--and we've told them that--because we've again cut back on our efforts there because the situation has dramatically improved.
With respect to compliance costs, we maintain a very open dialogue with the regulated institutions, and we're looking for initiatives on a regular basis to try to keep compliance costs under control. Over the past couple of years, the biggest initiative has been rationalizing our data requests. As far as data is concerned, I like to say it's like a bush in the garden: if you never prune it, it just does this, because the natural inclination of a regulator is to ask for more.
Starting three years ago, we progressively went through our data requests as we were arranging our processes, and we cut the data requests to the insurance industry by roughly 30%. We are in the process of doing that now for the banking industry. They asked that we defer it by about 18 months because they had other IT initiatives going on. We'll come back to it in about another six or eight months, and I anticipate we'll have a similar kind of cutback. We'll also look at rationalizing how we get data in a more efficient kind of way. So that cuts down compliance costs. There are a range of those kinds of things we can keep doing.
We have increased our staff in this area. One of the reasons we've set up OSFI the way we have is to ensure that we can take action when we need to, have the kinds of people we need, and pay them what we need to pay them in order to do our job. That's part of my job--to make sure that happens.
We've been pretty successful over the past couple of years. Very few plans have terminated with losses. In many cases, we have dealt with contribution holidays, gotten money put into plans. We've gotten sponsors, even when they were terminating plans, to fund the deficit in the plan to that point in time, even though the legislation does not now require that--or the regulations do not now require that. We're dealing very actively with this situation. It's not for nothing that we've been called in public places the most activist pension regulator around. That's what we want to be.
We're still balancing things, because the plans have to exist, right? If we set the system so tight that everybody just terminated the plans.... They're volunteer arrangements, as you and I both know, so they have to be voluntarily continued by all the parties. A lot of what we do here is force the parties to recognize the problem and deal with it themselves. We can't always impose our judgment on that.
I'm pretty comfy with what we have. We'll keep adjusting it. We've had some success. We're going to continue to have some success. But this is an ongoing issue, and the responsibility is also on management, boards of directors, boards of trustees, union members, and so on in trying to resolve these situations.
The legislation's regulations require regular disclosure to members in their annual disclosure statements about the solvency position of plans.
We would become involved and aware through several possible channels. We do our own estimates of what we think the solvency of plans is based on the information provided previously to us. We update that. Occasionally we will then say, oh, we think this plan is slipping into problems, and we'll go back and verify before we reach a conclusion.
In some cases, the information will come to us from the plan, from its regular filings. In some cases, the information will come to us separately. Then our involvement depends on the case. For example, if it was contribution holidays, where plans have slipped into deficit but they're still taking contribution holidays, that's permitted by the rules, but sometimes we don't think that's safe and sound. If we estimated the plan had shifted into deficit and was still taking contribution holidays, we went back to the plan and said, look, either you stop, or, if you don't stop, you have to inform all the members and there has to be a formal board resolution. Many of them stop. It depends on the case.
Thank you. The first point I tried to raise as a point of order is that Parliament has agreed in fact to the right of committees to have a say in appointments. So we're not here debating whether or not we should spend time on it or whether or not it's in our purview to do so. That was a change in the last Parliament, for which all parties, I believe, expressed support.
This was seen as a move towards greater accountability, transparency. I think in fact members of the Conservative Party led the charge in getting this change in our entire parliamentary procedure. So for the very first time, in 2005, committees were granted the right to do that. In other words, we're now trying to find the way to actually execute our responsibilities in a proper, responsible way.
I have one suggestion, and it has been tried briefly by our committee. I don't think we had long enough to actually see how it would work.
There aren't many in the area of finance. The chair mentioned 30. Go back to the statistics that were given to us when we studied this last year, and of course with the new government there would be an increase, but between 2003 and 2008, the number of appointments was: 7 in 2003, 9 in 2004, 18 in 2005, 12 in 2006, 9 in 2007, and 11 in 2008. So we're not talking big numbers, and I hope we're not talking about not doing this job of reviewing appointments. We have to figure out a way to do it.
What this motion does is say let's get some criteria from the finance committee so that when appointments come along, we can look at them fairly, not based on our criteria that we make up, but something from the department to show us what kind of position they've got and why the person they're recommending should be considered for that. It actually takes it out of that realm, hopefully, of politics and partisanship and gives us a mechanism by which we can do our job.
When we discussed this in the past, there was clear support for it. In fact, I want to refer to John McKay, who I hope is going to support me this time, when he actually said:
||If I understand the process, what's happening is that the government recommends criteria, they bring them to us for comment, and they then either accept or reject the criteria. But there's transparency. It's there, rather than our wondering how this person is appointed.
He goes on to suggest that as long as we don't have a veto power, which we don't, and we're not suggesting that in this, therefore he could support it.
There were Conservative members at that committee who gave it their absolute 100% support and blessing. I know, of course, that Yvon Loubier and the Bloc have always been supportive because it was consistent with their approach, except for their vote on the budget--whoops, I shouldn't have said that.
But I think it makes sense to have a process. If people don't like this process, then come up with something else, but we can't not do the work that Parliament has said we now have the right to do.