Order, colleagues and witnesses.
This is the 20th meeting of the Standing Committee on Finance. Pursuant to Standing Order 108(2), we are continuing our study on measures to enhance credit availability and the stability of the Canadian financial system. This is the first of three meetings on the specific issue of pensions within that larger study.
We have three organizations and one individual with us this morning: first, the Canadian Institute of Actuaries; second, the Canadian Association of Retired Persons; third, Federally Regulated Employers--Transportation and Communications; and fourth, as an individual, Mr. Leo Kolivakis.
We'll start with the Canadian Institute of Actuaries and move down the line. We have about five minutes allocated for each organization and individual for an opening statement.
Monsieur Lamoureux, I believe you are to begin. Please give us your opening statement.
Mr. Chair and members of the committee, it is a great pleasure for me to be here today. My name is Claude Lamoureux and I represent the Canadian Institute of Actuaries, of which I am a member.
I have been working with the institute for many years on pension issues. The institute is the national organization representing over 3,800 members of the actuarial profession in Canada, many of whom work in a North American environment.
The CIA's number one guiding principle states that the institute holds the duty of the profession to the public above the needs of the profession and its members. The CIA also assists the Actuarial Standards Board in developing standards of practice for actuaries practising in Canada, including standards governing the actuarial valuation of pension plans.
We appreciate this opportunity to present our views on the issues of Canada's retirement system and workplace pension plans. The institute has been very active on both these subjects for years.
In the view of Canada's actuaries, Canadians are not saving enough for independent retirement. A University of Waterloo study we commissioned asked the basic question, “Are Canadians who are retiring in 2030 saving enough for their independent retirement?” The short answer was no. The study concluded that only one in three Canadians expecting to retire in 2030 is saving at the level required to meet basic household expenses in their retirement, and many may need to sharply increase their annual savings or continue working past age 65 to avoid financial hardship.
The defined benefit plan, an important retirement savings vehicle, is quickly disappearing in the private sector. After years of decline, only 21% of workers are members of defined benefit plans, which I call DB for short. The move away from defined benefit plans, especially in the private sector, should be of great concern to legislators, regulators, and all citizens. This percentage, in fact, may overstate the number of members in DB plans, because today many members are members of both DB and DC plans, but the DB plan is closed to new members, and also members may not get any credit in the DB plan.
The resulting transfer of uncertainty, risk, and cost to individual workers in a defined contribution plan--or worse, no plan at all--is also distressing. Today there is a low level of solvency funding in DB plans as a result of weak markets, increasing risk, disincentives for plan sponsors to fund more prudently, and fiscal barriers to accumulation of surpluses larger that 10% of liabilities. These barriers are worrisome as well. Therefore, defined benefit plans today are less secure than they should be.
A great number of plans were underfunded before the economic crisis hit, and many more are underfunded now. To quote a report from OSFI last Thursday, “The results show that the average estimated solvency ratio of federally regulated defined benefit private pension plans at December 31, 2008 was 0.85, a decrease from 0.98 as reported in June 2008”.
As Canadians with RRSPs and DC plans watched their savings melt away over the past year, it has become clear that defined benefit plans are plainly better for Canadians than other types of plans, but defined benefit pension plans, while superior in nature, need certain conditions to be put in place to make certain they endure. They need a cushion that is linked to the riskiness of a plan's investments. Tax changes are required to allow larger cushions to be accumulated before attracting tax.
Retirees need to be given priority in bankruptcy proceedings. Employers need to be encouraged to fund their pension promises conservatively; side funds can help. Private defined benefit pension plans are as important to Canadians as public plans. However, if the current downward spiral continues, the only members of defined benefit plans will be politicians and public servants. This is an untenable situation, as taxpayers and voters are unlikely to accept that their taxes are being used to pay for retirement plans that they themselves cannot access.
Some have suggested that increasing the CPP benefit might be a solution to the pension problem. This idea needs to be explored.
Canadian banks are said to be the most financially secure in the world at the moment. This is mostly due to the strong regulatory system in place. The same strong approach should be put in place in pensions. Perhaps the notion of a regulator, or of regulators who work together, ought to be studied.
Our goal is not to paint a completely negative picture of Canada's retirement system. Yes, it's being looked at as never before; however, Alberta, British Columbia, Nova Scotia, Ontario, and Finance Canada have either completed or are in the process of reviewing their pension legislation. Good ideas have surfaced in these reviews, and in our view, there has never been a better opportunity to reform the pension system for Canadians.
These are tough times, but they will pass. While governments have been responsive to short-term relief for pension plans, we need to think about long-term legislative and regulatory reform to ensure that DB plans survive and thrive.
The current problems of defined benefit pension plans cannot be solved overnight. We have seen stock markets decrease by 50% from the top, and in the last few weeks these markets have rebounded by 20% to 25%. If you do the math, that means that the stock market is now at 60% of the peak.
Clearly DB plans are not the only ones that can be invested for the long term, but they're one of the main ones. Last Sunday, the program 60 Minutes demonstrated that the 401(k) plans in the U.S., the equivalent of our DC plans, have been a boon to the financial services industry but have not served their members well over the years.
The same can be said in Canada. Assuming we cannot reverse the trend to DC plans, we must ensure that people have good DC plans that provide them with the possibility of accumulating assets and of enjoying professional investment management. The role of a large DB plan or a professionally managed DC plan, in part, is to try to sell when stocks are expensive and to buy when they are cheaper. This is the opposite to what we see in mutual funds, where the public tends to buy when everyone is euphoric and sell when everyone is pessimistic.
Merci de votre attention.
Our acronym is the legal name for the Canadian Association of Retired Persons, but we now use the name CARP because we act for people who are retired as well as those who would like to retire—and in this climate that's going to be a major challenge.
We're a national non-profit, non-partisan organization with 330,000 members across the country and 23 chapters. We advocate for the quality of life of Canadians as they age, and retirement security is one of our three main advocacy pillars. We're here to give you our perspective on retirement security as we see it.
There are huge challenges, which everybody is aware of. The demographic challenge is the first. The population is aging. The population of those aged 65 and plus numbered 4.3 million in the 2006 census, or 13.7% of the Canadian population. By 2026, it's expected to nearly double to 22% of the Canadian population. Those are the people who are 65 plus. However, people who are 45 plus and 55 plus are also thinking about retirement. Some already have. Those who are 55 plus numbered eight million in the 2006 census, or 25% of the population. Those who are 45 plus are the ones we particularly speak for, and they numbered some 13 million in 2006, or 41% of the population. That's nearly half of the population. I might point out that this part of the population is the most active part and has the most regular voters.
People are living longer and healthier lives. The most important premise for them is that they not outlive their money. The issue of retirement security has always been a challenge, but particularly in this market.
If we look at the context they're facing, most people know there is OAS and GIS to ensure they have at least $14,000 per annum. But as everybody knows, you cannot live on that. The Canada Pension Plan and the Quebec Pension Plan have a maximum payout of about $10,000.
Private pension assets consist of employer pension plans and RRSPs. That's all we have, but there's a lot of money in Canada in those. In private pension assets, there is $1 trillion in EPP or employer-sponsored pension plans and some $600 billion in RRSPs and other private savings.
That sounds like a lot of money, but the difficulty is that it's not distributed evenly. What we find is that there's a concentration, with 31% of families with $100,000 or more in retirement assets holding 90% of all retirement assets. In the public sector, as Mr. Lamoureux has mentioned, 85% of public sector workers have access to private pension plans, but only 26% in the private sector have any kind of access to a pension plan.
Where does this leave us? Of those without any pension savings at all, whether in the form of an employer-sponsored pension plan or retirement savings or socks under the bed, there are some 3.9 million Canadian families who have no pension assets whatsoever. That's about 29% of the Canadian population. Unattached individuals fair even worse, with 45% of them not having any pension savings or retirement savings. In the 65 plus category, including singles, 27.5% had no retirement savings whatsoever as of 2005, when this survey was last done. The 45 plus and 55 plus age groups fair slightly better, as 23% of them have no pension savings of any kind to get them through their retirement years.
So what are we talking about when we talk about a pension system? The World Bank has defined some core principles that any country seeking to have a pension system should have. One is that the pension system should be adequate, that is, it should provide benefits for the fullest breadth of the population, sufficient to prevent what the bank calls old age poverty and sufficient to be a reliable means of smooth lifetime consumption. Moreover, the pension system has to be affordable for both employers and employees. And it has to be sustainable over the longer term. Importantly, it must also be robust; that is, it has to be able to withstand economic, demographic, and political volatility. In economic terms, we've just had a crushing blow; and demographically, I've described the aging population; and politically, we've had volatility. I'll leave that to this committee.
The robustness of our pension system has been shown to be deficient. In the current climate, you will see headlines that you've never seen before, including the fact that even the gold-plated pension plans, the indexed defined benefit plans, are at risk. Whoever has heard of that?
The only pension fund that is not at risk is the CPP, and it has performed better than all the others we've seen. So the question then becomes, during this economic crisis, which has affected even the retirement security of those with pension funds, what should be done and what should be done immediately?
Well, we have some recommendations. Our first recommendation is in relation to the existing pension funds and the need to rebalance the interests of the employers and the employees—not to put too fine a point on it—because the changes that have been made to the regulations have destabilized some of the pension funds and made them less solvent. That's why we're facing some of the crisis we're seeing now. It's not just the market downturn; it's the fact that all of the rules that were put in place have not been observed.
The second point is that there should be a universal pension plan for all of those who do not have any access to pension savings.
Finally, we should immediately call a pension summit, at which people who represent retirees and plan members have a material seat at the table.
That is for the future. But for the immediate needs of retirees who are facing this crisis, we are recommending increases to OAS and the GIS, and that RRIF withdrawal requirements be removed and that people have access to their own money in locked-in funds.
Thank you very much.
Good morning. I am Siim Vanaselja, executive vice-president and chief financial officer of both BCE and Bell Canada. I am appearing today with Mr. John Farrell. John is the executive director of FETCO. And I'm also appearing with Mr. Brian Aitken, the chief financial officer of Nav Canada. We're appearing on behalf of Federally Regulated Employers - Transportation and Communications.
FETCO is an organization consisting of a number of employers and associations in the transportation and communications sectors, and they all come under federal jurisdiction. FETCO members employ approximately 586,000 employees. Many members are sponsors of pension plans, which are federally regulated.
The current funding regime governing defined benefit pension plans has led to a critical juncture where the very ongoing existence, I'd say, of defined benefit plans is being severely threatened. We are here today to present the way forward, one that we believe strengthens the security of benefits while not unduly constraining the financial flexibility of plan sponsors to maintain appropriate levels of investment in their business. Our recommendations have already been made to the government as part of the public consultation process led by your parliamentary colleague Mr. , and we greatly appreciate this opportunity you've given us to present our recommendations to the finance committee members.
Pension funding is a burning issue, as you know full well. In the case of federally regulated companies, many large plan sponsors are having difficulty continuing to fund their pension contributions under the current rules without significantly reducing investment in their businesses in the form of capital expenditures that they desperately need to remain competitive and healthy. The pension situation predates the current economic downturn, but I'd say the financial market turmoil has most definitely exacerbated this situation.
The current rules for measuring the solvency position of pension funds as well as the current requirement to fund solvency deficits over a short five-year period result in a severely volatile system that can cause swings from surplus to deficit positions, or from small to large deficits from one year to the next, and from requirements for massive cash injections to positions of over-contribution or trapped capital amounting to hundreds of millions of dollars. Clearly, such volatility and uncertainty is untenable in managing business operations that have long-term capital projects, particularly in today's economic climate.
It is our firm belief that without the reform measures we are proposing, companies will have to significantly lower their capital spending programs that fuel economic growth and employment. Sponsors of defined benefit plans are also at risk of having to eliminate their defined benefit plans altogether in order to remain competitive. That does not spell good news for companies, for employees, or for the government.
FETCO represents some of the largest and most well-known companies in Canada, as I've said. And in terms of capital spending plans, I would cite BCE as one example where our plans call for investment of more than $3 billion in Canada this year alone.
For the last four years, our member companies have been advising Finance Canada that the solvency rules require urgent change. Twice in the past three years the government responded with a temporary regulatory fix that addressed only the funding period. I believe the government recognizes that the temporary fixes are no longer sufficient and that permanent change is necessary. In January, the government launched its consultation process on pension reform.
Let me turn to our proposals, which we believe address the important principles of balance, transparency, and benefit security.
FETCO's recommendations were developed with two key objectives in mind: first, to protect the health of pension plans and the security of pension benefits for all plan members; and second, to address the counter-cyclical and highly volatile nature of solvency funding which impedes the capital investment needs of large plan sponsors. I'd now like to turn to my colleague Brian Aitken to describe the specific proposals that we believe achieve these important objectives.
First, I'll mention several of our proposed changes that are designed to address concerns of plan members.
We support, in conjunction with our other recommended improvements, the following conditions being made mandatory: first, a requirement that the plan sponsor fully fund any deficit upon plan termination, either in lump sum or amortized over five years; second, a requirement that each plan file an actuarial valuation report each and every year; and third, a requirement that each plan provide greater financial disclosure to all plan members, disclosure that would include the plan's funded status, the plan's investment policy, and a statement of funding policy. These are important changes that will provide plan members with greater confidence in the security of their pension plans.
We also believe that the best security for plan members is a financially strong plan sponsor. To further enhance that security and justify that confidence, other improvements are also needed. The first is a permanent extension of the solvency deficit funding amortization period from five years to ten years without conditions such as member consent or letters of credit.
The second is a discount rate for solvency calculations that is better aligned with the marketplace and that takes into account the long-term nature of our pension liabilities, which extend decades into the future. The AA corporate bond index is the preferred benchmark discount rate. The former Governor of the Bank of Canada, David Dodge, provided BCE and Bell Canada with an expert opinion highlighting the importance of a prescribed discount rate that is more stable and better representative of the true discount. He notes the disconnect between using a discount rate at a point in time to measure liabilities that stretch decades into the future. Canada's solvency funding rules are among the most conservative in the world, in particular when compared to the United States and the United Kingdom.
The third improvement we are seeking is to allow sponsors to retain asset-smoothing methods for solvency funding purposes without a deemed trust requirement.
And finally, the fourth improvement, for sponsors of indexed plans, is the exclusion of indexing from the calculation of solvency liabilities when determining solvency amortization payment requirements. We believe that our recommendations work extremely well to provide balance. The extension of the amortization period is the first. It's designed to calculate the funding to require all future pension liabilities as if the plan sponsor were poised to terminate or wind up the plan. The unfortunate consequence of this is that the resulting funding requirements can be very large and thus actually pose a harmful risk to a company's financial health. Lengthening the amortization period to 10 years is critical to making solvency funding more manageable for companies.
Recognizing the need for a balanced approach, and therefore in conjunction with the longer amortization period, the second change we would need to talk about is the new requirement for the annual funding of valuations.
Employees and pensioners seek confidence that their fund is well capitalized. The annual assessment will bring greater certainty. It mitigates significant fluctuations in capital requirements and guarantees immediate intervention in the case of solvency deficits. I wish to point out that the Canada Labour Congress, as well as other pensioners' associations, support these annual assessments.
Our firms have analyzed the figures and I can say with confidence that an amortization period of 10 years, coupled with annual assessments, would have very little impact on contributions over the long term, as well as over long-term assets, relative to current rules. Nonetheless, having significantly less unstable contributions would have been an enormous advantage for our companies.
In conclusion, the implementation of FETCO's recommendations will result in significant benefits, as follows: first, the volatility of solvency funding will be smoothed out; second, without that volatility, companies will be able to plan their capital investments more effectively and have more to invest during periods when investment is needed most; and third, pension plans will continue to be properly funded and members fully protected.
Thank you for inviting me. I'm grateful for the opportunity to be here today.
I would first like to emphasize that I am here as an independent analyst who is very concerned about the current pension crisis. The views and opinions expressed today are solely mine and do not represent those of my current employer or any other organization.
Let me begin with a brief introduction of my background. I was a senior investment analyst to two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board, PSP Investments. My experience allowed me to gain valuable knowledge across traditional and alternative investments, such as stocks, bonds, hedge funds, private equity, and commodities.
In 2007, I completed a detailed report for the Treasury Board Secretariat of Canada on the governance of the public service pension plan. This report was an independent review of the plan's governance structure to address some concerns raised by the Office of the Auditor General of Canada.
Let me now get to the matter at hand. Last year was a particularly difficult one for global pension funds, as very few funds escaped the stock market rout. The OECD weighted average ratio of private pension assets to the area's GDP reached 110% in 2007. By October 2008, the total OECD private pension assets were down to about $23 trillion U.S., or about 90% of the OECD's GDP.
The impact of the crisis on investment returns has been greatest among pension funds in countries where equities represent over one-third of total assets invested, with Ireland the worst hit, as it was the most exposed to equities, at 66% of total assets on average, followed by the United States, the United Kingdom, and Australia.
For their part, Canadian pension funds suffered the steepest decline on record, with an average loss of 15.9%, according to RBC Dexia Universe. The Office of the Superintendent of Financial Institutions released the results of its latest solvency testing of federally regulated private pension plans. The results show that the average estimated solvency ratio of federally regulated defined private pension plans at December 31, 2008, was 0.85, a decrease from 0.98, as reported in June 2008.
The financial crisis exposed some serious governance gaps among Canadian private and public pension funds. I will now outline some of the more important governance gaps and make some recommendations on how we can address them.
By “governance”, I am referring to the system of structures and processes implemented to ensure both the compliance with laws and the effective and efficient administration of the pension plan and fund. The six key governance areas in a pension plan are oversight, compliance with legislation, plan funding, asset management, benefit administration, and communication. Given the time constraints, I will focus on three of these key areas: oversight, asset management, and communication.
Pension oversight has always been important, but perhaps never more so than today. Several public and private pension plans are in financial trouble, the regulatory environment is rapidly changing, and market volatility is constant. At the large Canadian public pension plans, pension oversight is the responsibility of the plan sponsor, who nominates an independent board of directors to oversee all activities of the pension fund. The integrity of the nomination process varies, but the intent is to keep political interference out of the key investment decisions by public pension funds.
The cornerstone of pension oversight is risk management, defined in the broadest sense to take into account investment, operational, legal, and fraud risks. The board of directors oversees the investment activities of internal and external investment managers, and it must make sure controls are in place to mitigate all these risks. In order to do this, the board of directors needs to have the requisite knowledge on all these risks, as such risks can expose a fund to serious material losses. Importantly, the board of directors has a fiduciary responsibility to ensure activities are being conducted in the best interests of the key stakeholders.
The failure of diversification strategy in 2008 highlighted the consequences of incomplete or poor oversight. The significant losses suffered at the large Canadian defined benefit plans are the consequences of poor risk controls and compensation packages that reward speculation or performance based on bogus benchmarks. By shifting assets out of safe government bonds, first into equities and then into alternative investments like hedge funds, private equity, real estate, commodities, and other risky investments, pension funds have contributed to systemic risk of the global financial system. This process is what I have dubbed as the global pension Ponzi scheme, because pension funds were investing billions into alternative investments, ignoring the securitization bubble, and without due consideration of how their collective actions are affecting the soundness of the global financial system.
Pension funds claim that the shift into alternative investments was done for diversification purposes, to smooth overall returns, and to deliver absolute returns. However, there was another reason behind this shift to alternative investments: it allowed senior executives at pension funds to game their policy benchmarks so they could collect huge bonuses, claiming they are adding added value to overall returns. This is of critical importance, because such executives have clear fiduciary responsibilities, and that is to their plan sponsors and beneficiaries. The reality is that senior executives are able to reap huge bonuses because they're beating bogus benchmarks that do not reflect the risks of the underlying investments. Bonuses are based on, and awarded annually on, achievement versus benchmark. However, these bonuses are never clawed back when in subsequent years these investments fall well short of expectations.
Most of the abuses in benchmarks are concentrated in private markets like private equity and real estate, but similar abuses are also present in other alternative investments, like hedge funds. Illiquid asset classes are typically valued infrequently by external and in some cases internal auditors. With few exceptions, the benchmarks used to evaluate the performance of these asset classes do not reflect the risk of the underlying investments. For example, leverage is commonly used to boost the returns of illiquid assets like private equity, real estate, and infrastructure, yet the benchmarks used to compensate senior executives of public pension funds do not reflect these risks.
Benchmark abuse has also occurred in public markets. The case of non-bank asset-backed commercial paper, ABCP, was an example of how some pension funds invested in assets that allowed them to handily beat performance benchmarks in their cash reserves, ignoring important liquidity risks that arise between the ABCP conduit's assets and liabilities. Hedge fund benchmarks that do not take into account liquidity risk or leverage of the underlying strategies are another example of abuses occurring at public pension funds.
Worse still, some pension funds used government balance sheets to sell credit default swaps, which are basically insurance policies on credit default obligations. Unlike AIG, they did not sell CDS on subprime mortgages, but once the credit crisis spread to all credit tranches, including tranches with triple-A credit ratings, it exposed these funds to material losses.
In a recent speech, the Governor of the Bank of Canada, Mark Carney, stated, “As liquidity in many funding markets has dried up, so has embedded leverage in many pension funds”. I submit to you that the opaqueness of many of the large public pension funds and their increasing exposure to complex derivatives and internal and external investment strategies are hiding the true embedded leverage of these funds.
In conclusion, I want to end with a series of recommendations.
First and foremost, we need to legislate greater transparency in both public and private pension funds. In particular, there should be full disclosure of benchmarks used to evaluate all internal and external investment activities; performance results in public markets need to be reported every quarter and results for private markets on a semi-annual basis; finally, the minutes of the board of directors should be publicly available for public pension funds.
Second, financial audits conducted by auditors need to be augmented by comprehensive performance, operational, and fraud audits by independent industry experts. These audits should be conducted on an annual basis, and the results should be publicly available.
Third, pension plans need to implement sound risk management policies. Plan sponsors have a responsibility to communicate their risk tolerance for the overall fund, focusing on minimizing the downside risk in the policy portfolio. Importantly, pension fund managers should get compensated for active risk based on clear benchmarks that reflect the risks of the underlying investments, i.e. risk-adjusted returns.
Fourth, whistle-blower policies need to be strengthened so whistle-blowers are encouraged to come forth and disclose any wrongdoings at public pension funds.
Fifth, regulatory authorities need to augment their resources to deal with the challenges at private and public pension funds, as well as other institutions of the shadow banking system; for example, insurance companies and unregulated hedge funds. It is time for the Canadian government to invest more in bolstering regulatory bodies so they can attract more qualified people who understand the increasingly complex investments that these institutions are investing in.
Finally, I have not discussed my thoughts on dealing with the crisis at private pension plans, but my thoughts are that we need to seriously consider scrapping private defined benefit and defined contribution plans, replacing them with a series of large public defined benefit plans that are subjected to the highest governance standards.
I thank you for your time and welcome your questions and comments.
Thank you to all of you for coming to speak to us today on this crucial issue.
I'd like to begin, I think, with a question for Mr. Lamoureux and Mr. Vanaselja, probably, on this issue of volatility in regulations. It strikes me that this is not just random volatility but a particularly bad kind of volatility. When times are bad and the stock market is down, you pay out far more money. When times are good and you have so much cash on hand, you have contribution holidays. I think this is counterproductive. I don't have much time, but I'd like to ask you in general whether you agree, and if you have a proposal to deal with it.
On the second and related issue, I think a lot of people are on the same wavelength in terms of stronger regulation. So would it be your view in particular, Mr. Lamoureux, that pension plans should be required by law not to have more than a certain percent in equity, or rules of that kind?
Volatility is a fact of life when you invest. It doesn't matter where you invest, whether it's real estate, stocks, or bonds; they're all volatile, more or less. Clearly, stocks are more volatile than other instruments, like fixed income, but fixed income in recent years has been very volatile as well.
That's a curse, but it's also an advantage. That's how you're able to make money most of the time—you are paid for volatility. Generally when you invest, you want to be paid for the risk that you take. You have to be careful about this. To limit the percentage of stock that pension funds can invest in may appear to be the right thing to do today, but over the long haul, stocks have outperformed fixed income significantly. To my mind, you can use other tools, like the tool that was mentioned by Siim, in smoothing the value of the asset. I'm surprised that he hasn't recommended that the surplus of a pension fund should not be limited to 10%, but should be much higher. If we had done that in the nineties, I don't think most pension funds would be in the same trouble they're in today.
In the U.S., where's there no limit on the size of the surplus, a pension fund like GM's is still in good shape. At the peak, the assets were 175% of the liabilities. With a limit of 10%, it's impossible to manage a pension plan. You need a much wider band. I would not limit the investment that pension funds can make in stocks or any other type of investment, and I would leave it to each board to decide what is the best for them.
A universal pension plan that is an increase in the CPP, as one example, and is fully paid out, in the current state of affairs, to get people 70% of their pre-retirement income if we cover a higher percentage of the income, would cost somewhere in the neighbourhood of 19% for both--that is, 9% and 10% for employer and employee.
That is actually a better number than that calculated for the teachers. The reason is that a large, widespread fund would have, of course, many more contributors, particularly if were a mandatory scheme. The ultimate goal would be to provide 70% of pre-retirement income coverage--up to about $160,000--of one's salary. You have to factor in a number of those elements before you can actually arrive at what your contribution rate would be, but that would be the amount approximately.
We are assisted on our team by a volunteer named Bernard Dussault. He's the former chief actuary of the CPP, so I have absolute reliance on his numbers. He tells me that had we done this the right way originally, it would have cost 15%, shared between employer and employee.
Thank you, Mr. Chair, and thank you to our esteemed guests here today. As you can tell by Mr. Lamoureux's passion for this, it has garnered a lot of interest across the country, and certainly it should. I've spoken to Mr. Lamoureux on different occasions and understand his knowledge of this.
Just to frame it, we do need to remind everyone at this table that the federally regulated private pension plans account for only 7% across this country. It's quite easy--and I've found it in my consultations--for people to get into a broader perspective, but we're trying to deal with the federally regulated, which actually have 12% of the assets.
A couple of presenters today talked about balance, and that's going to be our challenge, to try to bring a balance. As members of Parliament we represent ordinary Canadians, and our concern here is that there have been promises made to Canadians who have worked for 35 and 40 years that there would be a pension there for them when they retired. Those people who have been coming to the microphones and to our meetings are, frankly, very concerned. That's a concern we're hearing from our constituents, so that's why we've asked you to come here.
We need to also remember, in talking about the pension sponsors, that in 1992 we were actually looking at virtually the same solvency issue as we are looking at today. In the early 2000s we were actually looking at bouncing off the ceiling of that 110% surplus, and now we're back into a solvency issue, if you will.
Mr. Lamoureux, you referred to the potential of a side fund. Would it be better to look at that as a solution to allow the sponsors to be able to prepare for what is inevitable? We're facing solvency now, and I guarantee you we'll be facing a surplus again in a few years--I'm not going to project when that may be. Or are we better to look at our tax laws and allow a larger tax-deductible surplus so that they can actually provide for what we know is going to be a downturn?
Clearly, it would be ideal to increase the maximum surplus that can be accumulated in a pension plan, and even to have, like in the U.S., no limit. I know there are certain pension plans--and I was part of an effort to do that--that have been exempted from the 10% limit. I think it's more like 25% for those plans. But in 25%, the volatility is such--and we could predict that even 20 years ago--that you have good years and you have bad years.
You've stated it clearly: the federal government has limited jurisdiction. But in many jurisdictions, if an employer wants to remove surplus from a pension plan when such a surplus exists, or if they sell a portion of their company, they have to share in the deficit. So if you're an employer, the incentive is certainly not to put more money into a plan than you have to, because essentially when there's a deficit you'll have to put more, but if there's a surplus you won't be able to benefit from it. So the idea of a side fund would be to make it clear that this would be to back the pension fund, but this money could be withdrawn more or less.... Rules could be written that maybe when you have a surplus of 10% or 20%, you could withdraw a piece of it. Or if an employer is in difficulty, maybe they could ask to withdraw part of that money without having to share it with the employees and without having to ask their permission.
The current situation is that a lot of employers in the 1990s.... I'm very familiar with the pension plan. We essentially ran it with zero surplus, because we were doing a lot of transactions. The danger is that if every time you do a transaction and there's a surplus, you have to share it, the incentive for the employer is not to have a surplus. So you need to find ways to make that attractive to the employer.
Thank you. That is the central theme that was explored by Monsieur Lamoureux as well when he said that when you say something that goes against the current thought when times are going well, such as that you should be careful because you have to save for a rainy day, you get shot down, and that is the best segue to Mr. Kolivakis.
Leo, I've had the great pleasure of meeting with you a number of times over the past couple of years. I am going to say in all sincerity that the analysis you provided here today should be compulsory reading for anyone who wants to understand the subject of what has gone wrong with our pensions. I can also say that you're in a little bit the same position as the engineer who wrote a very critical piece before the second space shuttle crash in 2003, predicting exactly why the crash would happen if certain changes weren't made; and when the crash occurred, that person was roundly criticized for having written that note, even though everything he said in it was right. It's cold comfort to that engineer, and it's cold comfort to you to know that the predictions you've been making and the analysis that has been out there, both in your blog and in your writings, have all come true. All the things we have seen in the last eight months you predicted for exactly those reasons. A lot of people in Canada should note that at least someone in this country has been on this case. That hasn't made you very popular with the people you made those predictions to, and I find that regrettable.
I want to get back to one part of your presentation and ask you for your analysis on PSP Investments. As you correctly pointed out, the senior officers like to pay themselves bonuses. This year is no different. They'd still like to pay themselves bonuses despite the fact that they lost billions and billions of dollars. The way they are going to try to convince us that they should get a bonus this time around is to say that actually you should look at their results on a four-year revolving basis and not just on the last year.
Based on everything you know--and you're one of Canada's leading experts in the field--what do you think is the appropriate thing this year for the senior cadre executives at PSP Investments? Do you think they should be paying themselves bonuses with the money from those savings?
Thank you, Mr. Chairman.
Thank you to the witnesses. This is a very interesting committee hearing.
One of the things I've been hearing up until now—and it's not the first time we've heard it, it's every time somebody comes before us, it seems--is that it's only normal that losses were or have to be incurred, because, you know, it's expected. Nobody seems to be taking the blame in terms of what has happened or in terms of preventing it. I heard that again today: over the long run there will be declines and there will be upswings.
What do we need the experts for? I guess that would be the question, and I can address the question to two or three of the witnesses. Because if over the long term—Mr. Lamoureux, I think you said over 30 years--I invest in the stock market and I'll be at a higher rate, let's just do that. What do I need experts for when I'm going to run into problems, as Mr. Leo Kolivakis has just stated? I can't trust the experts.
Mr. Vanaselja, I think it's one of your organization's recommendations that each plant file an actuarial evaluation report each and every year. How do you run your business if you're not doing that? How do you run a pension plan if you don't provide financial disclosure to plan members? Do we have to legislate this kind of action? Exactly what do you get paid for? This is what I don't understand.
I think you guys got lucky that we get to blame it on the global downturn. There's no accountability here anywhere. Some of the suggestions are good, but where do we start? How do we fix this problem? I mean, it doesn't make any sense. I can't buy the story that people on the boards of directors are looking to put money in their pockets just for themselves. I can't buy that. We can't run on that premise. So how do we fix that?
Maybe if there's anything I could disagree with Mr. Kolivakis on, it is perhaps to not have experts on those boards of directors. Perhaps have Joe the plumber on those boards of directors, because you know what? Maybe he'll just invest in a GIC, because he won't have the expertise to buy ABCPs, derivatives, and whatever else you experts, you so-called experts—not you, but your organizations—are buying out there.
Can I have maybe Mr. Lamoureux comment and even Ms. Eng. Mr. Chairman, if you could control the time, I would appreciate it.
I would like to welcome our witnesses.
We are dealing with an issue that is critical for the general public. We are talking about pensions. Employees who have worked all their lives and who are expecting to receive pension benefits could see them disappear overnight. We see what is happening right now with the automakers, where the market was previously quite solid. People are wondering whether they will receive their company pension. This is a big problem and a major worry for the public.
My first question is for Ms. Eng, who represents retirees across the country.
You talk about protecting beneficiaries and you make suggestions that seem to me to be very random and unlikely to be effective. In your second recommendation, you propose universal access to benefits for approximately one-third of Canadians. These would be people who did not manage to put aside enough money for their retirement. I find that a rather strange idea.
How would we determine who would benefit from universal access? Would it not be better to recommend that all employees receive a higher universal government pension, instead of asking the government to step in to clean up the mess caused by companies that do not meet their obligations?
I think one of the most significant risks that pensioners face today is on the termination or wind-up of a pension plan. Today there's no debt contract created between the retirees, the employees, and the sponsoring company. Our proposal is that when a company terminates its plan there would be a debt obligation created whereby the sponsor of the company would have to fund those pension obligations, either up front or over a period of five years. We would like to balance that proposal, which strengthens the benefit security for employees, with the ability to extend the funding of solvency discount rates from five years to ten years, again recognizing the long-term nature of those liabilities and recognizing that the reality is that most companies are going concerns. Nav Canada, Bell Canada, many of the members we represent have been in existence, like Bell Canada, for over 100 years, and will hopefully be in existence for another 100 years. If we can protect employees at the time when a plan is terminated or wound up, we believe it's appropriate to extend the time horizon for funding.
And also, recognizing that the going concern valuation already allows 15 years of funding, it seems to us quite punitive to have a short five-year period on solvency funding.
Mr. Chairman, when we talk about sustainable development, we immediately think of the environment. In reality, sustainable development means thinking about the effect that every government decision will have on future generations.
Over the past two years, we have seen the collapse of two major sectors of our economy, the forestry sector and the manufacturing sector. This is a matter of political debate. Our view is that the Conservatives are responsible because of the bad choices they made in reducing taxes across the board. By definition, a company not making any profit in the manufacturing or forestry sector received nothing from those initiatives. So the benefit went to the most profitable companies such as the banks and big oil companies.
One of the effects of that is that, before the current crisis, 350,000 jobs had already been lost in the manufacturing and forestry sectors. Those were high-paying jobs that often came with pension plans as well. For months the government kept telling people not to worry because those jobs were being replaced by new ones. But if you want to know what this really looks like, look at the former site of the GM plant in Boisbriand, which is now one of those huge shopping malls. Everyone, of course, has the right to work in a store, but if you earn $12 an hour selling clothing, you have no pension plan and it is pretty hard to pay for your family's needs.
Ms. Eng or Mr. Lamoureux, have you had a chance to look at the long-term impact of this structural change in our society? We are losing hundreds of thousands of high-paying jobs in sectors where there were pension plans and replacing them with lower-paying jobs, without pension plans, especially in the service sector, such as shopping malls.