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Standing Committee on Government Operations and Estimates


NUMBER 053 
l
1st SESSION 
l
42nd PARLIAMENT 

EVIDENCE

Monday, October 31, 2016

[Recorded by Electronic Apparatus]

  (1000)  

[English]

     Colleagues, we'll start. It's 10 a.m. We're missing a couple of our committee members, but I'm sure they will be here in just a few moments.
    Ms. Stairs, welcome to the committee. I think you know how things work around here, but very briefly, we'll ask you for an opening statement of five minutes or less, followed by a round of questions from all of our committee members.
     Thank you for being here. You're on for five minutes.
    Good morning, and thank you for the opportunity to present today. On behalf of eBay Canada, I appreciate the committee's focus on ways to improve Canada Post, something in which we also have a keen interest. Indeed, eBay participated in phase one of the task force hearings, and I've also written and spoken on this topic in various forums.
    We care about Canada Post for the same reason that this committee and all Canadians should; there are more than one million small and medium-sized businesses, or SMBs, in Canada that rely on Canada Post as an essential part of doing business. It's not overstating the case to say that Canada Post provides critical enabling infrastructure to the Canadian economy.
    Let me begin with some background on eBay. Launched more than 20 years ago, eBay has become one of the world's largest online marketplaces, with approximately one billion listings and 165 million active buyers globally. Here in Canada, eBay is a top e-commerce destination, with more than eight million unique visitors each month who trade more than $1 billion each year.
    In addition to changing how consumers buy, e-commerce has changed the way we sell. eBay has created a platform where anyone can become an entrepreneur, starting with a single listing, and e-commerce is levelling the playing field for rural versus urban retailers. You no longer need to live in a city to access enough buyers to make your business viable.
    Canadian entrepreneurs have been able to make impressive gains through e-commerce, and we should be very clear that Canada Post is a critical partner in driving that success. At present, there's much talk about the innovation agenda, but the reality is that SMB innovation is facilitated by a 200-year-old corporation.
    Canada Post allows small and medium-sized Canadian businesses to participate in the global economy by offering relatively cost-effective access to the world in what could be described as a 21st-century trading route. In terms of significance, this is meaningful trade. Canadian commercial sellers on eBay export at a rate of 99.9%, reaching 20 markets annually, much stronger results than those of traditional SMBs. As a result of their ability to effectively serve foreign markets, these companies find that, on average, more than half of their sales come from international customers.
    Canada Post has more than a 90% share of eBay Canada transactions. There can be no doubt that the micro-multinationals I've just described depend on Canada Post to drive their businesses both domestically and internationally.
    Canada Post is an enabler of small and medium-sized businesses, but it also creates significant challenges for them. For example, this summer's uncertainty around a possible disruption created major business obstacles for Canadian SMBs. While a work stoppage didn't occur, Canadian businesses were forced to prepare for the possibility of a strike or lockout. They had to invest time and effort in adopting alternative, and in many cases, more expensive shipping arrangements. Given what we heard from our sellers, we were not surprised when, on July 8, Canada Post announced that its parcel volume had declined by more than 80%.
    Unlike their larger competitors, smaller businesses were not able to leverage their scale to negotiate favourable rates with private couriers, and as a result, many SMBs were forced to create patchwork solutions to ensure they could meet buyer expectations. As Winnipeg-based small business owner Maureen Lyons described to this committee, she had to “offer local pickup for regional sales, courier service for domestic orders, and day trips south to utilize USPS for international sales.” Maureen was one of thousands of sellers dealing with this uncertainty.
    As the risk of a work stoppage extended into August, eBay drafted a letter to the Prime Minister asking for a return to consistent postal services. Within 24 hours, more than 2,000 concerned eBay sellers had signed the letter. Everyone was gratified to see that a negotiated settlement was reached shortly thereafter, but given that it's a two-year agreement, SMBs worry that they'll be facing a return to uncertainty in a matter of months.
    Going forward, we believe that Canada Post should focus on accelerating the growth in its parcel division by expanding its e-commerce services, including affordable tracking and aggressive rate tiering. Further, Canada Post should invest in improved marketing of the e-commerce services it has already created, such as flex delivery, to drive wider awareness and adoption.
    Modernization of customs rules would also drive volume for Canada Post. As the task force noted, Canada's de minimis threshold, the value of goods that can be shipped into Canada before duty and taxes are assessed, is out of line with international standards. Increasing it could accelerate parcel volume growth. eBay Canada concurs and asks that the committee recommend increasing Canada's de minimis threshold.
    As a platform for small and medium-sized Canadian businesses, eBay appreciates the time to appear before you today, and I look forward to your questions.

  (1005)  

     Thank you very much.
    We'll get into questions, right now.
    Monsieur Drouin, for seven minutes, please.
    It's great to be back at the Canada Post study. I've missed you guys for a while.
    I want to thank Ms. Stairs for being here. I appreciate your testimony. You have mentioned how important Canada Post is to some of the SMEs operating on an eBay platform. You said 90% of the transactions on eBay in Canada are delivered by Canada Post. Is that correct?
    Yes.
    I've read your op-ed in The Walrus. You have talked about slower services, and you have also mentioned that in your testimony.
    What do you mean by slower services as a potential revenue stream for Canada Post?
    What we hear from our small sellers and our large e-commerce retailers, as well, is that they would love to be able to offer free shipping to their buyers. It's table stakes in Canada and around the world in e-commerce to offer tracking when you deliver something. The current service offering from Canada Post really only has expensive, fast-tracking services. What would be great would be to complement those with slower services that also offer tracking.
    What we find when we do studies is that there are a certain number of transactions or occasions when people engage in e-commerce. They are looking to have the goods very quickly—the same day, the next day, within two or three days—but there are also a number of occasions when consumers are buying something on e-commerce when they want their item next week or two weeks from now. If I'm buying a Halloween costume in September, I don't need it there the next day. In that case, I might as a buyer, trade off time in order to have free shipping from my seller.
    The challenge right now is that Canadian sellers find it really difficult to offer free shipping with tracking because of the service offering from Canada Post. Complementing the fast, expensive services with slower, less-expensive services that also have tracking would give a better spectrum of services that buyers and sellers could use in e-commerce.
    Have you had a conversation with Canada Post with regard to tracking? Do you know if they have the infrastructure in place or the software in place to do that?
    My understanding is—and I'm going to preface my remarks by saying that I'm not an expert on Canada Post and Canada Post infrastructure—that they have been moving more of their volume to planes and faster modes of transport, and off trucks. There would have to be some rebalancing there in having some volume go by ground as opposed to air.
    The tracking infrastructure exists. I think there's another issue around the tracking of packet services that go through the letter mail channel. I think the infrastructure is a real challenge.
    When we talk to our sellers, there's another key pain point for them. When they compete against American sellers—in most cases you have a Canadian seller competing with an American seller for an American buyer, and that's our most traditional use case in Canada—if the Canadian seller is shipping something very small, then it qualifies for packet, but they are in a catch-22. Either they can send it for not very much money in a packet, but give up tracking, or they can spend significantly more, often the same amount of money as the item price itself, to provide tracking to their customer. That's a really difficult position for a seller to be in.
    In an e-commerce environment, particularly in a marketplace where you're a small business, you don't have a brand reputation, so buyers certainly do want to see tracking. On a platform like eBay, feedback is incredibly important. On one hand, in not having tracking, you risk feedback issues, such as, “Where's my package? It hasn't arrived by the time I expected”. On the other hand, you want to offer value services, so I think there is a real infrastructure issue around tracking on lighter, smaller packet-qualifying items. But on the slower service, that should be something that is relatively doable.
    I'm reading your article. You mentioned that 99.9% of transactions on eBay are exported in Canada.
    When we look at our commercial sellers, those are sellers who do more than $10,000 a year on the platform, and eBay may be all of their business or it may be a small fraction of their business. When we look at that cohort of sellers, we find that almost all, 99.9% of them, export. When they export, we find they do more than 50% on average of their volume outside of Canada.
    This is a great success story in the Canadian economy, where you have small businesses that can reach demand beyond their local market. They can tap into the benefits of exports, and they can be insulated from local market shocks.
    In Toronto, for example, we were hearing about small retailers who lost their business as a result of road construction. If you have the ability to tap into demand beyond your local area, then you can weather those storms and diversify your sales base. Canada Post is key to that, with a 90% share of the volume traded on eBay. They are very much implicated in what we call these micro-multinationals. These are very small businesses who are trading internationally.

  (1010)  

     How would you see Canada Post increasing its parcel business while at the same time increasing your export opportunities?
    When we had a round table with Minister Chagger last year, and we invited a number of small businesses to come to talk to her, they raised only two issues. These are entrepreneurs. They're not looking for handouts, but they are looking for the removal of obstacles.
    Postal rates at Canada Post was a key area of concern. The other area of concern was border frictions, specifically Canada's de minimis threshold, which is that threshold above which duties and taxes are assessed. It currently stands at $20, a rate set in the early 1980s. For that reason alone, it should be reviewed, but the task force noted that an increase in the de minimis threshold would likely increase the parcel volume to Canada Post.
    We see millions of transactions every year, purchases by Canadians that are delivered south of the border or to locations outside of Canada. In some cases, right along the border there are businesses that exist only for this, to receive parcels essentially for Canadians. They then drive them across the border. That's lost revenue to Canada Post.
    Were the de minimis threshold higher, the vast majority of those parcels would be delivered within Canada, and Canada Post would get some of that revenue.
    Thank you very much.
    Mr. McCauley, you have seven minutes.
    Thanks for joining us today. We appreciate that.
    You made a comment that you do transactions of about $1 billion in Canada. Is that correct?
    Yes, it's more than that.
    How much more, exactly, and the names...?
    I can't tell you.
    You mentioned the urban-rural divide. Do you have stats on how much of that $1 billion is through urban and how much is through rural businesses?
    We see the businesses across the country, and we've done a heat map where we looked at commercial activity per capita across the country. We found that the hotbed of e-commerce is Perth, Ontario, perhaps not known to be the e-commerce—
    Wow.
    Yes, exactly.
    We also saw significant hot spots in northern B.C., the southern part of the Northwest Territories, and down the east coast. What we see is that on a per capita basis, these little businesses that are in small towns, by relying primarily on Canada Post, are able to access demand across the country and around the world.
    Last year—
    Do you have any stats that break it out between those hot spots and the big cities?
    I don't have the stats, but I'm happy to share the heat map with you. It's on a population basis, so you can get a sense of where the....
    If you're able to, that would be great.
    Yes, we can send it to the clerk.
    You see urban areas pop, but the fact that you have sellers across the country in rural areas that are able to do business is something that I'm personally very proud of. Every year we have our entrepreneur of the year awards, and last year's winner was a woman who runs a shop that sells skating gear and dance gear in a small town called Blezard Valley, which is outside of North Bay, Ontario. She is tapping into an international demand.
    I going to have to interrupt you because I have a couple of other questions.
    You mentioned aggressive tiering of pricing. Could you explain what you mean by that?
    Yes. It's having pricing based on speed and making real differences between those different services, and also pricing based on volume, so making Canada Post a partner with small and medium-sized businesses. As those small and medium-sized businesses expand and scale, there is a reason for those businesses to stay with Canada Post and volume discounts would occur.
    You mentioned that 90% of eBay transactions are Canada Post. Is the other 10% just a smattering of the other competitors?
    Yes.
    Generally, in the States is it the same, and 90% is with USPS?
    I don't have the numbers, but I think, ballparkish, it's the same. I would say it's potentially slightly lower, but it's significant.

  (1015)  

    The threshold you were discussing, I know is at $20. It came up recently in the National Post. I think it's $800 the other way.
    I understand how it will help Canada Post, but how do you think it would help eBay Canadian suppliers? Would it not be just like a huge influx of competition?
    No, in fact our sellers find it a huge pain point both because it makes their inputs more expensive relative to their U.S. competition, and also because on returns they're often having to pay duties and taxes on inbound returns from foreign customers.
    Okay.
    Regarding the possible labour disruption you were talking about, I can understand what everyone went through. My wife at the time had a small business and she was getting the constant letters from her bank and everyone else to say, “Make sure you're paying.” How do you think it would be best addressed?
    We have to follow collective agreements and the bargaining, so we can't have a no-strike position. How would you have handled it differently besides what Canada Post did, which was to warn their customers that they needed to find someone else just in case?
    I'm not an expert in collective bargaining. I am only really representing the impact.
    Again, I do think the two-year agreement is a real challenge, because the odds of us getting back into the same situation—
    We will be.
    Yes. I think that's a real challenge, particularly as we all want Canada Post to maintain its leading share in parcel delivery. If this happens every two years, it's basically an impossibility.
    Is the U.S. the number one customer for eBay merchants in Canada?
    Yes. The U.S., the U.K., Germany, China, and Australia would be our top markets.
    Do you get any feedback on what USPS does that might be of value to copy up here?
    Yes. If you talk to one of our sellers, they know the USPS postal rates backwards and forwards and how they compare to Canada. They are much more affordable relative to Canadian rates. As I mentioned earlier, tracking on packet services is a key point of differentiation that our sellers find particularly difficult. It hampers our ability to compete with U.S. sellers. I think those would be the key things.
    They also have purpose-built products. Media Mail, which I think still exists, is a purpose-built product for a certain segment. They have flat-rate boxes, which sellers in the U.S. really appreciate.
    Yes, we've heard of that before. Do you think something like that would be of value up here?
    eBay and Canada Post have been working together for more than 10 years. We've had various partnerships. They're on our platform providing label printing services, and we tried to do a flat-rate box test. It was okay; it wasn't amazing. I think, frankly, investing in the products that they have already and complementing them with some slower products and just making the pricing a bit more aggressive would be the things that our sellers would most appreciate.
    You would like to see a slow service option and better tracking.
    It's not so much better tracking. For a long time, tracking was a problem because the points of tracking—
    My understanding is that they are developing stronger tracking.
    Yes. The tracking capabilities are going in the right direction, but it's the pricing of the tracking capabilities. The pricing of services and tracking on letter mail, the packets, the things that are light parcels, are the challenge as well.
    Thank you very much.
    Mr. Weir, you have seven minutes.
    Thanks very much. I really appreciate your testimony.
    I'll start off with a point of clarification. When you talk about eBay Canada having about 90% of its shipping with Canada Post, does that include Purolator, or is Purolator part of the other 10%?
    It's simply Canada Post. It doesn't include Purolator.
    Okay, thanks very much.
    I'm going to almost repeat a question that Mr. Drouin asked, because I think it's a very important one. It seems that your key concern here is about the pricing of tracking and wanting to have maybe a slower and less expensive option. I just wonder what Canada Post has said in response to that concern.
    I raised it at a very high level just in passing, and I got the response that it was interesting and something they would take back. I don't know, where our organizations are more closely linked, what the response has been.
    It isn't where they have been going. They've been going to faster delivery to compete with couriers, which I think is appropriate. They should be offering those services. I think this is more an idea of extending the spectrum and adding a complementary service.

  (1020)  

    Okay. It sounds as though it's a big priority for your organization, so I wonder what engagement you've had with Canada Post on it.
    Yes, we've brought it up. I haven't gotten anything definitive from them.
    Fair enough. I guess we can try maybe to help put that question to the corporation directly and get an answer to it, because it seems to be an interesting and important point.
    You've talked a lot about the situation where a Canadian and an American supplier might be competing for an American customer, and I take the point that it's probably a common situation. I want to ask about the situation where a Canadian seller and a foreign seller are competing for a Canadian customer, because we've heard in other meetings that there's a real problem with differential rates for parcel shipping within Canada. Canada Post is able to discriminate based on the size of the different markets and those sorts of variables, whereas international postal treaties oblige Canada Post to provide flat-rate shipping to foreign sellers coming into the Canadian market. Is that an issue that eBay Canada also has?
     Honestly, that is not an issue that I'm up to speed on. I think that our small and medium-sized businesses, while they are very much focused on international markets, are seeing significant growth in the domestic market, and increasingly they will be concerned about their competitive niche in Canada relative to foreign retailers and small businesses. Again, I couldn't comment beyond that.
    It is something we've heard quite strongly from small shippers that they're not really able to offer flat or guaranteed shipping rates within Canada, because Canada Post will charge them different amounts, depending on where they're shipping, whereas their foreign competitors have this right to almost a flat rate within the country. It seems like that's something that has been a relatively big deal to other small shippers.
    I think the problem has gotten better. We used to do a survey, and we found that it was less expensive for a Canadian seller to drive something across the border, put it in the mail in the U.S., and then have it sent back into Canada. In 2013, USPS increased its rates significantly on international shipments, and that problem seems to be less of a problem now.
    When you heard from Maureen, she wasn't driving her Canadian inventory across the border to induct it into USPS in order to send it back into Canada. I would say that was probably less of an issue, particularly relative to the U.S., than it had been previously. But on the specifics right now, again, I don't have that information.
    Overall, would you say that Canada Post's services are critically important to your business?
    Absolutely.
    You're happy with the quality of the service. It seems to be improving, and the main questions are about pricing and the availability of low-cost tracking. Would those really be your concerns?
    I think more broadly, yes, absolutely. As we talk about innovation, Canada Post does not get brought up in the innovation conversation as enabling infrastructure for Canadian innovation, but when we talk about the productivity gains and the long tale of Canadian SMBs, having Canada Post be an effective partner is critical to that, particularly as we talk about e-commerce and using the Internet to tap into customers around the world. Having a strong Canada Post is critical.
    Okay. Are there any other specific changes you'd like to see to their services or to their operations to facilitate that support of e-commerce?
    We would very much encourage Canada Post to focus on its core lines of business and not enter into new lines of business that could be distracting to management. They need to continue to focus on their shift from a letter-centric business to a parcel-centric business, and we would be supportive of that.
    I guess one of the challenges Canada Post faces is that there's also a lot of competition in the parcel business, and that just expanding in that area alone might not be enough to compensate for the decline in letter mail. That's where our committee has had some interest in exploring other lines of business. If those other lines of business help to sustain Canada Post and help to allow it to continue offering the services that you rely on, then might that not be reasonable?

  (1025)  

    I think that the competition in the parcel business.... Certainly, there is competition there, but Canada Post has a 90% share on eBay and that is an indication of orders of magnitude.
    We see that the private couriers are cherry-picking the most lucrative weights and dimensions services, but there is a vast set of other businesses and services that need to be serviced. When we talk to our sellers, couriers are often not an option for them. Their economics would not permit them to have that service level.
    Yes, there's competition, but I think we need to not lose track of the huge numbers that Canada Post services and that there are very high switching costs for small businesses in moving off Canada Post.
    Thank you very much.

[Translation]

    Mr. Ayoub, the floor is yours for seven minutes.
    Thank you, Mr. Chair.
    Thank you for being with us, Ms. Stairs.
    I am going to continue along the same lines. You are saying that Canada Post has to stick with its main activity. What is your idea behind that? What are you afraid of? I sense that you do not want Canada Post to open other lines of business because you are afraid of something.
    Can you explain your recommendation to me a little more?

[English]

    I think it comes from two places. One is that in running a business you know that when you open a new line of business you have to allocate resources and executive mindshare to that new business in order to build it. The other thing is in reading the report it seems like there's a fairly definitive statement that banking, for example, is unlikely to be profitable in Canada.
    As someone who has read the report, that's where I come out on that. I think that distracting—

[Translation]

    Does that recommendation for Canada Post come from a discussion with your board of directors or is it your personal view?

[English]

     No, I think that eBay is very much supportive of Canada Post staying with its core services.

[Translation]

    Okay.
    In the last few years, with the five-point action plan in place, what communication have you had with Canada Post and its senior management? How have your business and your area of activity been treated? Was your company consulted? Was information shared?

[English]

    In terms of moving to the community mailboxes and...?

[Translation]

    I am talking in general terms about e-commerce, which is your business' main activity. Have you had discussions with Canada Post about the projections for you area of activity? What are your concerns in terms of Canada Post's service and the new direction it intends to go in? Residential service is one thing. But business service is what you are all about. Was your company consulted? Have you been able to get into Canada Post to discuss it?

[English]

    We have access to them, so we have fairly ongoing...and I'm not part of this. It's someone on my team who is engaged with Canada Post. We're working on our label printing and bringing different rates to our members. They will consult us on new programs that they're developing and get our input. I would say there's a fairly continuous back and forth with them in terms of, not just us asking for things, but being more of a consultant in terms of what our sellers are looking for, pain points, that kind of thing.

[Translation]

    Which of your recommendations did Canada Post accept?

[English]

    In the past, we've worked on a flat-rate box, which was a pilot we ran that was exclusive to eBay. We've gone as far as that in terms of the creation of a new service. Then we were engaged fairly early on with the whole concept of flex delivery, allowing Canadian consumers to reroute packages to a postal outlet that was more favourable to them. I'm sure you guys are aware of the flex delivery program, but we were involved in discussions such as “Would that be a service that your customers would like?”, those kinds of conversations.

  (1030)  

[Translation]

    I am sensing, not so much a confrontation, but a degree of interaction between the commercial side and the residential side, between the access to a residential market, a small one, and access to a clientele.
    Are you suggesting that Canada Post should, through its rates and its flexibility, subsidize in some way the small and medium-sized businesses working in e-commerce? It would allow them to offer better rates. You mentioned free delivery. Is that possible in today's world?

[English]

    Regarding the internal workings of Canada Post, how the different lines of business fund or don't fund each other, and how they use the same infrastructure, again, I'm not an expert on that. I'm here representing the end-users, the customers, both on the business side and the consumer side. How we get there, how we make the sausage, I'm not sure. This is what the committee is tasked with.
    However, I think the outcome is that we need to have a broader range of services so that businesses can pick the ones that make the most sense and deliver value to the customers in a way that makes sense for those customers. Again, the utilization of infrastructure and whether there are subsidies, I think is something that is beyond my expertise certainly.

[Translation]

    Okay.
    Along the same lines, when we went across the country, chamber of commerce officials told us that they actually were ready to pay more if delivery was quicker and the service was of a higher quality.
    Is that something you are suggesting? Would that work for your area?

[English]

    Rather than all the services being priced relatively the same, rate-tiering should be offered so that very expensive services, like same-day delivery or one-day delivery, would have a premium. However, you need to have the flip side, where slower services are your economy service. The challenge there is to also have tracking, but I think that creating those tiers and pricing things in that way makes sense.

[Translation]

    There is talk about the potential for strikes and bargaining.
    What impact does that have on you? Have you been able to quantify the highs and the lows created by the uncertainties of bargaining?

[English]

     We saw a huge impact four years ago in the business. I think the impact, particularly on the buyer side this year, was more muted. Canadian buyers just seemed to carry on buying. What we did see, though, was that our sellers had to scramble, particularly the small sellers. Their cost of doing business really increased significantly over the summer.
    It wasn't that they had to have these alternative solutions in their back pockets; they actually had to be using them because—and there were a couple of points there—at any moment there could have been a strike or a lockout. They would have had to have already shifted their business to these alternatives, which were very expensive and costly to manage. That's what we saw and heard from our sellers, particularly over the duration of the entire summer, that managing these alternatives was very expensive.
    Thank you very much.
    We'll go to our final two interventions.
    They will be five minutes each.

[Translation]

    Mr. Clarke, the floor is yours for five minutes.
    Thank you, Mr. Chair.
    Good morning, Ms. Stairs. I am pleased to see you here this morning.
    You deal with Canada Post directly, in a business sense, of course. When Canadians order things on eBay and their parcels arrive late, to whom do they complain? Do they complain to eBay or to Canada Post?

[English]

    eBay has a money-back guarantee, so if your item doesn't show up, then you come to eBay and we will make you whole. Then we will go and sort it out with the seller. This is why tracking is so important, so the seller is able to justify that they inducted their package, that it went through, and that it was or wasn't delivered. If there's an actual issue with something being lost in the mail, and you can prove that with tracking, then we would go to Canada Post. It rarely happens that things actually get lost. Usually you have a bad actor, so tracking allows you to sort that out very quickly. That's what usually ends up happening. The first line of interaction is the buyer and seller, and then eBay steps in the middle and will use the tracking data to sort things out.

  (1035)  

[Translation]

    Okay.
    I imagine that it happens very rarely, as you said. However, after the tracking process, when people find out that the delay is due to an error on Canada Post's part, what happens? Are databases turned over to Canada Post? Have you set up a relationship with Canada Post to deal with that?

[English]

    We have delivery estimates on the website. As a buyer, when you're buying something you can see the window in which the parcel is supposed to be delivered. As long as there's tracking on that parcel, if the parcel is delivered outside of that, then the seller is not in any way affected. On a platform like eBay, feedback is obviously incredibly important, and the ratings that sellers receive from their buyers is very important. We will protect sellers from bad ratings in the case that the parcel took longer through no fault of the sellers. That's why tracking becomes very important, because if the sellers put something into the mail and they don't have tracking, there's no way to prove that it wasn't their fault and that they didn't just take a really long time getting it to the post office.
    In this setting, particularly a marketplace setting, where you have feedback, and seller ratings are driving economic value because they impact where you rank on search results and they impact the fees that you pay, affordable tracking becomes critical to being able to conduct your business well.

[Translation]

    Has Canada Post ever had to reimburse either you, or the companies that go to your website, because of any delays?

[English]

    I don't think that happens.

[Translation]

    Ms. Stairs, I am sure you are aware of the five-point action plan.

[English]

    I know it more or less, yes.

[Translation]

    Could you tell me what you think about the plan, especially in terms of the way it has been implemented, that is, between 2013 and the moratorium that has been in effect for a year?
    After the five-point plan was implemented, what consequences, if any, have there been for your business?

[English]

    There weren't that many.
    I think the major component of that plan was the move to community mailboxes. I don't think that has had a significant impact on our buyers, outside of their reactions in general. I don't think the reaction on eBay was any kind of differential.

[Translation]

    Okay.
    In recent weeks, our committee has heard a lot of proposals to add services to Canada Post, especially government services. They affect the employees and the offices alike.
    What is eBay's opinion about those additional services? Do you believe that Canada Post will be able to meet your needs as effectively, as quickly and as efficiently if all kinds of services are added? How do you see that?

[English]

     Again I come back to the distraction of the entire corporation with additional unrelated services. I think if there's a positive revenue stream to them, then it might be something worth looking at, but I really am concerned about pulling resources away from the core business.
    Thank you very much.
    For our final intervention, we have Mr. Grewal, for five minutes please.
    Thank you very much, Mr. Chair. I will be splitting my time with the parliamentary secretary.
    Thank you, Andrea. It's good to see you again. We saw each other just last week at the pre-budget consultation in the finance committee, and you were advocating for an increase to the de minimis there. I like to see your consistency, that you're advocating for an increase of the de minimis here.
    It's encouraging to know that Canada Post offers such great service in the parcel business and that 90% of your parcel business is with Canada Post, which is promising. Having said that, it doesn't tell the whole story, because you're just one customer from the Canada Post perspective. I am interested to know how much impact there is on your margins when there is a disruption like the one that was about to occur this previous summer and your guys go to private companies.

  (1040)  

    The main impact is on whether our sellers can convert. It's whether the listings on eBay have become more expensive and therefore, they're unable to convert. Basically our incentive is aligned with our sellers. We charge fees on successful listings. If the shipping is too expensive, listings won't be successful. It doesn't really impact our margins. It really impacts the top line, whether our sellers are actually creating sales, which we record as gross merchandise volume, which is a key metric in our business.
    It's a driver aspect at the end of the day. You guys don't have any cost implications from it, but your revenue would decrease because people would be shipping less, essentially.
    Yes, so what would happen is that somewhere in eBay that sale would happen. It just would be that the Canadian sellers would be less competitive to U.S. sellers, or international sellers. The revenue moves around. eBay Inc. is in the same position; it's just that our Canadian sellers have lost their competitive edge.
    That makes sense. When you talk about the de minimis, the counter argument to the de minimis is always that sales in retail, and small and medium enterprises, also use Canada Post to ship their parcels. If you look at it from a macro level, if we increase the de minimis by $20, from $20 to $40, that will be a net positive for online retailers, but it would also be a decrease for regular retailers, or so we've heard. Neither of you have been able to provide a study to say what the economic impact is across the board.
    We've heard from the Retail Council of Canada on the finance committee that even raising the de minimis by $20 would really affect small bookstores, small shoe stores, and stuff like that. Do you have any comments on that?
    I think you heard at the finance committee that the retail industry does not speak with one voice on this. We're a member of the Retail Council. The sellers that we're most concerned about are precisely those tiny guys who are penalized in terms of their ability to bring inputs into the country relative to U.S. competition and competition around the world. They have to deal with the exports issue. At the end, this is a threshold that was set in the early eighties, has not been revisited, is a constraint on regional fairness and the ability of Canadians in far-flung places to fill the holes in traditional retail, and is a massive driver of government inefficiency, as the C.D. Howe report pointed out.
     This is my last question. How much of eBay's U.S. parcel business is with the U.S. post?
    I don't have the precise number. It is significant. It's in the same ballpark as what we see in Canada.
    The second question after that was, after the de minimis was increased, how much did the parcel business increase for the U.S. post?
    I don't know. From the U.S. de minimis increase...?
    The U.S. increased the de minimis range.
    Right.
    After the U.S. increased the de minimis range, how much did the U.S. parcel business from eBay go up?
    You are advocating for a de minimis—
    It was already at $200, and our average selling price is significantly below that, so—
    It's still a telling thing. You are advocating for a de minimis based on the fact that an increase in the de minimis will increase the parcel sales of Canada Post, which, in my humble opinion, isn't a terrible assumption. I'm sure that will happen.
    To prove that fact or reasonable assumption—not that everything in Canada and the U.S. is the same—when the U.S. increased the de minimis range, what was the increase to eBay parcels in the U.S. post?
    Unfortunately, even though the question was posed, you are overtime already, so we'll have to wait to get the answer.
    We have a few moments left. Normally, we adjourn about 10 minutes to the hour in order to get the new witnesses to the table, but if there are any one-offs here, a question and an answer for a couple of minutes....
    The parliamentary secretary, or Mr. Grewal, did you have a brief question?
    We'll take two additional questions. We'll have Mr. Grewal for two minutes, and then Mr. Clarke for two minutes.
    I'll keep going. Thank you, Mr. Chair.
    Madam Stairs, by no means did I expect you to have that answer here. I just thought it was a good.... To sell your case even further, I think it's a really good study, and I'm sure the number is available.

  (1045)  

    We know—and this is just eBay data—that there are literally millions of packages that are bought by Canadian customers and shipped to addresses in the U.S.—
    Yes, my friends do it all the time, to be honest.
    I think that this is almost a more salient data point.
    I don't do it, though.
    Of course not.
    Is there a potential for your sellers to increase their volume if there were an economy tier of shipping with tracking?
    Absolutely. They want to be able to offer free shipping. They can absorb a certain amount of shipping costs. Free shipping is a massive competitive advantage for them, particularly if they are competing against U.S. sellers, so if they have a slower, less expensive service—where they can still manage buyer expectations and deliver the goods at a certain time with tracking, but do so in a more cost-effective way—then, absolutely, they can expand their businesses.

[Translation]

    Mr. Clarke, the floor is yours for two minutes.
    Thank you.
    Ms. Stairs, I want to go back to our discussion on the addition of new government services to Canada Post. You said that doing so would create a distraction and would move away from Canada Post's mandate and core activity.
    The suggestions were to have a postal bank, to process passport applications and a whole series of services that now escape me.
    In your opinion, which of those new services would create the greatest distraction that would move Canada Post away from its mandate?

[English]

    Honestly, I don't know what the laundry list is, but I think that the more intensive the spinning up of a new line of service is, and the more widespread it is across the country, as opposed to a niche, the more concerned we are about the distraction.
    It's really about mindshare in terms of.... I read in the report that there are conversations about community hubs in some places, where the post office is the only representation of the federal government. I think that this idea is probably.... We are talking about a handful of places, relatively speaking, so the level of distraction of that, versus spinning up an entire bank, seems to be quite different. I would be much more concerned about the latter than the former.

[Translation]

    Okay. Thank you.

[English]

    Thank you very much.
    Thank you, Ms. Stairs.
    I have one question, because we have a couple more minutes. You mentioned that, in your opinion, it would be beneficial for your clients to have an economy level of service from Canada Post—slower service—but only if it contained tracking. Based on the fact that Canada Post already has a tracking system for their premium products, it seems to me that this would be a fairly easy fix to employ.
    Am I missing something here?
    I am not an expert on this, but I think that the infrastructure has been set up in order to facilitate speedy delivery. Is there supporting infrastructure that can actually do slower delivery, or do you have to put the lower-priced packages into that speedy service and just hold them somewhere? How do you do that on the back end? I think that's the question. How do you match the revenue that you are deriving from the economy service with the cost to deliver?
    I think those are the concerns that Canada Post would have, but I would say—to your point—that the tracking piece has been figured out. I would think that these obstacles are not insurmountable.
     Have you suggested that formally to Canada Post? If so, what has their response been?
    I'm not sure if we've suggested it formally. We've suggested it informally, and they've answered that it's interesting, that they appreciate where it's coming from, and that they'll take it under advisement and look into it.
    Thank you very much, Ms. Stairs, for participating in our review. I know you probably have a lot of better things to do with your time.
    We will suspend for a few moments while our next witnesses approach the table.

  (1045)  


  (1055)  

     Thank you, colleagues. I think we'll start again.
    Before we commence, I have just a couple of comments to the committee members. We will have opening statements from our witnesses, which will be in public. We've also—if you notice on the agenda—tentatively scheduled one hour for public testimony and one hour in camera. However, we have the ability as a committee to go in camera for as long as we wish. For example, if all of the questions that you have for our witnesses pertain to commercially sensitive information, you can certainly mention that to us. We'll gauge the committee's willingness, and we could go in camera almost immediately after the opening statements, if that's something that the committee members would like. I want you to be aware of that. We're not forced to have one hour public and one hour in camera. We can have as much of the testimony in camera as we would like.
    We will have the opening statements on the public record, and for that, Mr. St-Jean, you have five minutes, please. Then we'll go to Mr. Spear.

  (1100)  

    Good morning, Mr. Chair and members of the committee. Thank you very much for the invitation to testify today. Here with me are partners Uros Karadzic and Pierre Lanctôt. Pierre is here to conduct the financial assessment, and Uros is here to review all of the pension issues.
    The mandate that we received from the task force was to review four streams of work.

[Translation]

    Our analysis focused on four areas. First, to review and validate Canada Post's financial performance in the last five years. Second, to evaluate the financial impact of the resumption of payments on the pension plan solvency deficit. Third, to provide an independent assessment of Canada Post's projections to 2026, including the measures in the five-point action plan. And finally, to validate the annual savings target of $400 million to $500 million from the move to community mailboxes and to assess the possibility of keeping door-to-door delivery.

[English]

     If I may make this point to the committee, the major findings that we would like to bring to your attention will be dealing with three issues. First is the financial position of the corporation; second is the cost savings associated with the CMB, or community mailbox program; and the final one is the pension situation.
    Starting with the financial position of the corporation, as we recall, the one-time strategic price increase of April 2014 and the growth in partial volumes have briefly curtailed the ongoing weakening of Canada Post's financial position. Looking ahead, the financial position projection to 2026 paints an unsustainable future, with over $700 million per year of run rate loss. Drivers for these negative results are multiple, but include the continuing mail erosion driven by electronic communications; inflationary cost pressures; the network growth linked to the Canadian population increase; competition, including new service providers, lower-cost service providers, and disruptive technologies; and the funding requirements of the pension plan. Our analysis leads us to believe that Canada Post's projected loss is at the optimistic end of the acceptable range of estimates. It could be higher.
    A major element of the negative financial results is the labour cost structure. When we looked at the productive hours for Canada Post's inside employees, it's approximately 68% more expensive than that of competitors. The cost of delivery agents is approximately 26% higher. Labour accounts for 70% of the cost of Canada Post. Making up such differences is very challenging, especially at a time when the future of the corporation is dependent on its ability to compete in the parcel delivery business.
    Maybe I'll say a few words on the

[Translation]

    community mailbox program.
    The initial proposal was to find savings in the order of $450 million per year. We reviewed the hypotheses and tested them. We also reviewed the partial implementation of the program up until it was suspended in the fall of 2015. We believe that the figure of $450 million makes sense.
    Making those savings is essential to temporarily stabilizing Canada Post's financial situation. If the program were not relaunched in a form more or less in conformity with the initial proposal, Canada Post would quickly run out of funds, requiring it to borrow an estimated $2.9 billion by 2026.
    Now, I would like to say a few words about the pension.

[English]

     The pension liability of Canada Post is large in relation to its revenue. A number of factors have led to this. Some are challenges common to all pension plans in Canada, and some are unique to Canada Post. All plans in Canada have been negatively impacted by a low and declining interest rate environment, by an improvement in the longevity of Canadians, and by a volatile asset return.
    In addition, Canada Post's exemption to make solvency payments in recent years has released some funding pressure in the corporation, but has resulted in fewer assets in the plan and, hence, a larger pension liability.
    Most employers in Canada with pension plans have moved to defined contribution plans. While Canada Post has moved in a similar direction in recent years for some of its management and all of its executive employees, the vast majority of employees are covered under a defined benefit plan with indexation. Changing the plan for future employees will only contain the growth of the challenge. It will not yield any meaningful relief to the corporation's financial position in the short or medium term. The current deficit is a problem that will not go away by itself.
    Finally, we propose a number of ways to deal with the solvency deficit. They all have pros and cons. Some are easier to implement than others. None are without consequences. The decision to choose one or another solution is an issue of equity between pensioners, employees, taxpayers, and future generations. It's clearly a policy issue.

  (1105)  

    On this note, we thank you, Mr. Chair, as well as on behalf of our colleagues.
    Thank you very much.
    Mr. Spear, you have five minutes, please.
    Good afternoon, Mr. Chairman and committee members. Thank you for inviting us to appear before you today.
    Oliver Wyman is a leading global management consulting firm. We're part of Marsh & McLennan, which is a $13-billion global risk management and advisory services firm. We combine deep industry knowledge and specialized expertise in strategy, operations, risk management, and organizational transformation. We help companies optimize and improve their business performance and accelerate organizational effectiveness in the most attractive areas of opportunity. Our firm's credibility is established by more than 40 years of experience serving “Global 1000” clients. We have a staff of more than 4,000 and offices and operations in more than 50 cities in 26 countries.
    Specifically, we're organized by industry vertical, which means we bring domain expertise to each project. I'm representing a team of two other partners who were involved. I'm part of our transportation practice. We had a lead from commercial banking, as well as our European global transportation practice leader and three full-time consultants on the project.
    Oliver Wyman was engaged by the task force to assess the planned and potential business operations in both traditional and new lines of business. Simply put, my colleagues from EY were focused on the core business and baseline performance, while we were focused on the potential new areas of opportunity for Canada Post.
    Based on our international experience, we identified almost 40 initiatives that had potential for CPC, which were included in detail in the report. These included new lines of business, changes to existing services, as well as changes that were leveraged to an existing asset model. We created a filtering methodology for evaluating the long list of ideas and focusing on the highest value areas of opportunity. This iterative assessment of the long list, according to the filtering methodology, resulted in a short list of opportunities with the highest potential. Development of more detailed business cases and analyses of key elements of each of the short list are included in the task force report.
    Here are a few key findings in terms of the value drivers, in terms of where we would see these areas of opportunity. The key value drivers are as follows. The first is shifting demand; mail volume continues to decline, while parcel volume is increasing primarily in response to the growth of e-commerce. Next is growing competition; the competition for parcel delivery, as well as adjacent services that replace paper communication is growing fiercely. There's a split business model. Although letter and parcel delivery share assets, they are fundamentally different business models. Further, one has the government exclusivity guarantee, and the other is highly competitive, which is further complicated by the split between Canada Post and the Purolator parcel businesses. Last is the high-cost workforce; labour agreements establish labour cost rates at roughly 20% over private sector rates, which adds further constraints to business flexibility and limits the ability to adapt or change current operations.
    The overall findings were that there are no silver bullets. Some of the options have value and have been deemed worth pursuing. There are no credible game-changing initiatives that would stem the demand trends that we're seeing. Of the highest potential initiatives evaluated, the best opportunities focused on improving or optimizing the current CPC operations in response to declining volumes. Most of these opportunities, however, would require flexibility on the part of the government, policy, and labour.
    There are a few opportunities to increase profitable revenue. Most are insufficient, even in combination, to compensate for the reduction in volumes. Some of those opportunities are advertising and consolidation with Service Canada centres. Many opportunities also fall short based on their fit with CPC capabilities or its cost to serve, and also due to competitive concerns, such as the government putting a subsidized entity in against what is already established private market competition.
    A consistent challenge across many of the areas identified are the labour constraints, especially for initiatives where adjustments to the current labour agreement would be required. Implementation could be as long as five to 10 years in order to match with the schedules for contract negotiations.
    Finally, a number of potential initiatives aimed at reducing cost or increasing revenue could actually undermine CPC by driving away customer volume, while strengthening the competition, potentially accelerating CPC's declining financial position despite the relatively positive benefits. Those might include alternate-day delivery or last-mile delivery for third parties, sometimes referred to as “interliner”.

  (1110)  

     The results of the detailed options analysis are as follows. These are proposed opportunities, not specific recommendations, and they need to be balanced against the other priorities. The first is changing mail delivery service to alternate-day delivery, which would save $74 million per year. Another is easing the 1994 moratorium and the CUPW agreement, which would allow CPC to convert more post offices to franchises. That would save $177 million per year. Then there is rationalizing depots and sort centres to adapt the network to changes in volume and product mix, which would save roughly $66 million per year and would likely require capital expenditures.
    Next, providing services on behalf of the government, enabling consolidation of some Service Canada centres may save roughly $11.5 million per year. Expanding CPC's interliner offering, providing last-mile delivery service for third parties, is worth roughly $10 million per year. Further pursuing synergies with Purolator beyond the ongoing efforts that have already been identified would generate roughly $16.5 million per year. Finally, selling advertising space in the retail locations and on the delivery fleet would generate almost $20 million per year.
    We did do a study of postal banking options and it appears that postal banking is just a marginal opportunity for Canada Post, and when compared to other higher-yielding, lower-risk initiatives explored in the main report, such as adjusting the retail footprint, we did not come down supportive of postal banking as a particularly good opportunity for Canada Post.
    Please note that this report and the related review of CPC's strategic business options contain a substantial amount of information deemed commercially sensitive by Canada Post.
    I'll be more than happy to answer whatever questions I can now, and further in the in camera session.
    Thank you very much, Mr. Spear, and thank you very much, Mr. St-Jean.
    To the committee members, do the questions you will be posing to our witnesses deal with the commercially sensitive information as contained in the report?
    Mr. Weir, I see you shaking your head. Do you have some questions you would like to be in public?
    Absolutely, and I think we have enough time with these witnesses that it would be reasonable to have a fair bit of discussion in public before we go in camera.
    Your point is well taken, Mr. Weir.
    As I mentioned in my opening remarks, we can determine exactly how much time we wish to spend in camera versus public. If there are committee members who want to have questions on the public record, that will absolutely be how we proceed. If, however, you do have questions of a commercially sensitive nature, we will have to suspend and then go in camera.
    I'd like to hear some commentary first, though, if any committee members besides Mr. Weir have other questions you would like to be held in public.
    Go ahead, Mr. Whalen.
    Almost all my questions relate to the documentation, but if Mr. Weir is amenable to doing one seven-minute round in public....
    Do you mean initially?
    Am I getting the sense correctly that, on the government side, you would prefer all of the questions to be in camera?
    There are some questions that have appeared because of their presentations, but I think most of our questions—if I speak for all of my members—are on the report itself.
    Mr. Clarke and Mr. McCauley, what are your preferences?

[Translation]

    Personally, I would choose seven minutes in public first and then we would go in camera to discuss the report.

[English]

    If that is the case, may I make a suggestion just to amend the order of questioning, then, since my understanding is that we will have public questioning on one side of the bench and in camera on the other?
    I'll have a public question.
    Madam Ratansi, you will be in public, and you're on for seven minutes.
    Once again, I will make sure that we're all aware that, if there is any line of questioning in public that gets into the commercially sensitive information, I will suspend the meeting immediately.

  (1115)  

    Absolutely, and I'll try not to ask for any commercially sensitive information.
    Thank you, all, for coming and thank you for your presentations.
     I'm trying to figure out what sort of Canada Post we have for the future, because basically from your quantitative analysis, it appears that Canada Post is doomed for failure. We need to understand that we have to do qualitative analyses as well.
    Mr. St-Jean, your mandate was to validate, basically, the financial statements, so how far did you go? You made statements that on the labour cost—if I got it right—there was something around 68%, but then I hear from the task force report that one says 45% higher than the competition, and the other says 41%. I'm a little confused.
    Could you explain to me what the real figure is of the labour cost in relation to the competition?
     Thank you very much, Mr. Chair and committee members.
     Maybe I could ask my colleague, Pierre Lanctôt, who conducted the detailed financial review, to give you the detailed answers to those questions.
    To answer the first question, we did not necessarily audit the financial statements or do a review of the financial statements per se from an accuracy perspective. We relied on the fact that they were audited by two firms: the Auditor General and a private sector firm that does the audit. What we did is assess the financial performance using the financial statements and also using some other information that was provided to us by Canada Post. We did our own analysis of the performance for the last five years.
    Okay. Canada Post's financial statements show profits for the past 19 years. When you're projecting, when you're doing the extrapolation, and I know you looked at declining volumes in mail, etc., there is.... As we've been in the field, there's a constant challenge. If Canada Post is making profits in all these years, where is this $700 million coming from?
    As Ernst & Young is a very reputable firm, I would like to hear where that disconnect is between what people see as a profitable organization versus a non-profitable organization.
    We looked at the financial statements for the last five years. We did assess the profitability, and we did some analysis to satisfy ourselves that we understood the financial situation.
    On the last five years, of which three were negative and two were marginal-positive years, if I recall correctly, without adjusting, we did look at the one-time event, but in the report, we presented numbers the way they are stated in the financial statements, because that's the information that is known, public, and has been audited.
    When we did the projections, though, we did not project the past.... Essentially, the projections for the future are based on a set of assumptions for the revenues for volume growth—or volume decline, in the case of letter mail—and for increases in costs, some of the measures Canada Post intends to implement, and the general direction of the economy, inflation, and so on and so forth.
    It's not a projection where the last five years were such and the future years will be that. We went by type of revenue and by type of cost, and we looked at specific assumptions for each of them.
    I'm an accountant by trade, so I understand what you're talking about. When you were projecting it, were you taking into consideration any anomalies that took place in previous years that would guide your discretion or decision to project losses?
    Yes and no, in the sense that, very often, one-time information or a one-time event that occurred in the last five years is not necessarily going to be repeating in the future. To understand the past historical performance, we looked at the one-time information, but to project, we try to understand if there is any event that we can foresee. We obviously cannot forecast an unforecastable event. That's why often in financial statements there are differences between projections and the actual, because there are events that are not projectable or cannot be estimated.
    Thank you.
    Mr. Spear, you talked about different venues that Canada Post could adopt, and postal banking is out. We understand, with regard to the concentration in different parts of the world that have adopted it, that ours is a totally different phenomenon, but we have a rural and urban divide. If we were to have social cohesion, what in your presentation or in some of the recommendations—you said they were not recommendations, but suggestions—would be more profitable for Canada Post, with its wide network at the moment, for it to survive or to offer better services?

  (1120)  

    We did evaluate several different business models for postal banking, just to be clear, including going it alone, payday lending, going into postal banking as a consortium play, and more of a real estate play with Canada Post retail branches. By and large, what we found with regard to postal banking was that it required too many capabilities that were non-core to Canada Post and would require a significant amount of risk in terms of getting into the lending side of the business.
    The one business model that might be worth discussing is as a real estate play, leveraging the footprint of Canada Post in markets where banks are retreating, but where there can be consolidation of branches and they can be served by the post office. We identified this as several hundred branches, not the thousands of post offices that exist, so we don't view that as inconsistent with the post office rationalization or footprint rationalization conversion to franchises, which is one of the more economically significant initiatives for Canada Post.

[Translation]

    Mr. Clarke, you have seven minutes, please.
    Thank you, Mr. Chair.
    Good morning, gentlemen. Thank you for joining us today. We appreciate it very much.
    I have a series of questions that I can ask in quick succession. Then I will have some more in-depth questions.
    I really liked reading your report. On page 13, you say that the Canada Post mission has “a dual mandate”.

[English]

     I have a question. If you're quoting from the report—
    No, I mean the task force.
    The task force report. Thank you, let's clarify.
    In the task force report,

[Translation]

    It says that part of Canada Post's mandate is to “provide the same basic and customary service to all Canadians”.
    In reality, that has never been the case. Two-thirds of Canadians already pick up their mail at a mailbox and the other third receives it at their doors. So it might be said that the mandate has never truly been observed.
    What is your opinion?
    Thank you for the question.
    Canada Post's services are provided in the entire country, from sea to sea to sea. There are different service levels, depending on population density. That is a business reality: Canada Post has to tailor its service to the demand. That is what we considered in our analysis.
    Okay.
    Is it normal that, for a workforce of 50,000 employees, there should be 2,500 senior managers? I’m just asking.
    We didn’t really look into that specifically.
    On page 4 of the task force report, there is this comment: “Since 2011, despite having reduced its headcount by about 10% or approximately 5,800 employees, the corporation’s overall labour costs have remained stable at $4.4 billion.”
    What would explain that?
    Essentially, at Canada Post, salaries increase annually. The number of employees was also reduced. In the five-year period that we assessed, the dollar costs therefore were relatively stable.
    Okay, I understand. Thank you very much.
    If I am not mistaken, the study done a few years ago by the Conference Board of Canada forecast a deficit of $1 billion. Three years later, in your most recent study, you forecast a deficit of $700 million, give or take.
    Would you say that the five-point plan allowed the forecast deficit to be decreased by $300 million? Is it the five-point plan that has made for savings of that magnitude?
    We did not really study that specifically. We did not compare Canada Post’s performance in the last five years to the Conference Board of Canada’s forecasts. That was not part of our mandate.
    However, in our report, and in the working group’s report, it can be seen that the savings achieved in recent years brought with them a reduction in costs. Some actions were also taken that brought in additional revenue. That may explain the differences.
    Whatever the case, we did not specifically study the difference between the two.

  (1125)  

    So you do not know exactly which steps—
    May I add something?
    Yes, I am sorry. Go ahead, Mr. St-Jean.
    As we mentioned in our presentation, the figure of $700 million is at the optimistic end of the range of estimates. So it could be higher.
    I understand.
    I think that Ms. Ratansi partly addressed the topic I would like to talk about now. On what were your quantitative analyses based? Which figures, which sources, do they use? If I recall correctly, you said that you were dealing more with forecasts than with prior data.
    Last week, in western Canada, most of Canada Post workers’ union representatives said that you used Conference Board of Canada figures. We heard that over and over again.
    Are you able to confirm or deny that statement?
    We did not use the Conference Board of Canada figures.
    We conducted two types of primary analyses. We used historical results from the last five years and 10-year forecasts up to 2026.
    For the historical data, we used the corporation’s audited financial statements and internal management reports. We also validated some of the information with external public information or with some research that we conducted ourselves.
    For the future data, once again, we took information that exists in Canada Post. We created our own information. We validated the figures, such as those dealing with projected revenue and projected volume, and compared them with some existing analyses or with analyses that we conducted ourselves, to confirm that the estimates were reasonable. The result is a mixture of Canada Post’s public information.
    The Conference Board report was not used in our analysis at all.
    Thank you.
    The moratorium on rural Canada Post office closures has been in effect since 1996, if I am not mistaken. Do you think that, if the moratorium were ended, it would cause an erosion of Canada Post’s infrastructure and would be the beginning of the end of Canada Post?
    Do you believe that the moratorium is a tool being used to preserve the very existence of Canada Post’s public service?
    Thank you for the question.
    No, I do not think that that would be the case. If the moratorium—which dates from 1996 or 1994—were lifted, corrected or amended, Canada Post could continue its presence in a number of areas. Currently, the business model is quite rigid. Lifting or modifying the moratorium could give Canada Post more flexibility, which could work better financially.
    Thank you.

[English]

     Thank you very much.
    Mr. Weir, you have seven minutes, please.
    Thank you.
    Mr. Lanctôt, you are a former senior manager with Canada Post. Is that correct?
    Yes, that's correct, as my colleague mentioned at the beginning, although it was reported that I was a chief financial officer, which was not the case. I was actually a general manager in finance. I'm glad that people gave me a promotion, but that was not the case.
    Voices: Oh, oh!
    Thanks for clarifying that.
    Clearly that background does give you a lot of insight and expertise, which are very much welcomed by the committee. I bring it up because the rationale for having management consultants, of course, is to get an independent and fresh perspective. It's important to be clear that you also have the perspective of Canada Post management, which is certainly an important perspective for this committee. I wanted to make sure that we had it clearly on the record.
    I appreciate that.
    Mr. Spear, your firm, Oliver Wyman, also produced a report entitled “Shipping and Logistics 2016”, which I believe projected a huge increase globally in grocery purchases online and presented this as a huge business opportunity. You didn't see it as being an opportunity for Canada Post, and I wonder why that is.

  (1130)  

    Without referring to the report specifically—I would have to refresh myself on that one—we look at the grocery business as particularly competitive and also more challenging to serve because of the perishability of the goods being shipped. Therefore, the logistics systems required to serve grocery and those required to serve parcel and mail are not necessarily compatible.
    Okay. Just to clarify, the report in question was called “Transport & Logistics 2016”. I think I may have used the word “shipping” a moment ago.
    Certainly, the grocery business itself is very competitive, but we're talking about the logistics of delivering groceries. Canada Post does have some very quick delivery, but is it your sense that perhaps it's just not quick enough to get into that business in an effective way?
    It's not just a matter of speed, and it's not out of the question, but it is a matter of the needs of perishable goods versus dry goods, retail, parts, industrial products, and apparel, the primary commodity groups that Canada Post is shipping, versus perishable goods.
    Okay. That's fair enough.
    One of the things that I wondered about in reading your report is that often it seemed that you would conclude that Canada Post lacked a capability to do something and therefore shouldn't pursue that option. Whereas at other times you would observe that Canada Post actually had an advantage in a certain area, but you then concluded that it shouldn't use that advantage because it would be unfair to private competitors. It seemed that Canada Post couldn't win. Either they lacked the capability, or if they had the capability, you didn't want them to use it.
    You'd have to point to a specific advantage that you're referring to. I do agree that there were a number of potential market opportunities or potential initiatives that would involve subsidizing Canada Post and putting them in competition with private market participants, which we did question as to the fairness, but it's certainly a policy decision and not our decision. If there are specific initiatives you want to refer to, I can try to address them.
     Sure.
    To get into specifics, maybe let's talk about payday lending. It seemed that two objections were that Canada Post wouldn't have a source of funds, which struck me as a very strange objection given that it's a federal crown corporation. The second objection was that it wouldn't have the capacity to make collections, which again seems very strange in view of the fact that it's part of the federal government. Canada student loans has very good collections because it's done by the Canada Revenue Agency.
    It seems to me that Canada Post would actually be exceptionally well positioned to engage in payday lending. It's just that you don't think it would be appropriate for it to utilize those advantages.
    I have a couple of points of clarification. One, Canada Post today isn't a bank. While it is a government crown corporation, it doesn't have open access to borrow. That could be a change, and that would require a change to the banking regulation for this industry and this country, but that is an option, certainly.
    I wouldn't comment on its ability to make collections per se, but it's also true that making loans, assessing consumer credit risk, are not activities that are part of the capabilities that Canada Post has today. There's also some question about the practices of payday lending as an industry and whether that would be of interest to Canada Post as a crown corporation.
    I guess, by definition, it's true that Canada Post doesn't have that expertise right now because it's not currently in the business.
    There are other post offices around the world that have postal banking as a big part of their enterprises. I think in your report you consulted with La Poste and Royal Mail. Is that right?
    We're familiar with La Poste and Royal Mail from their own success in the market, or activities in the market.
    We've also done work with some of the post offices around the world, and in certain cases, even some of the banks. We certainly have one of the largest banking practices among management consultancies in the world.
    However, one of the key observations we made in the report was that in other countries where postal banking had really taken root, we saw a tendency towards either direct subsidization, as in the case of La Poste where it has an exclusive franchise on certain types of bond, or they had established themselves in markets long ago with a physical branch presence, which was much more of a necessity and an underserved need than we see today in Canada. The cost of banking was significantly higher than we see today in Canada. Also, it predated the move to electronic banking, which now negates some of the value of having a significant branch presence.

  (1135)  

    What about—
    I'm sorry, Mr. Weir, we're out of time, but we will have other opportunities. These gentlemen are with us for the next hour and a half or so.
    Mr. Whalen, you're up next on my list. I understand that you'll be asking questions that you prefer to be in camera.
    Yes, please.
    Mr. Grewal, you will get a five-minute round in camera as well.
    Mr. McCauley, I understand you'd like yours in public?
    No, in camera.
    We will suspend then for just a few moments—
    Mr. Chair, can we go back to public?
    Absolutely, we can go back to public, but for the next few questions we will be in camera.
    We'll suspend for a few minutes to allow that process to take place.
    [Proceedings continue in camera]

  (1135)  


  (1215)  

    [Public proceedings resume]
     We have resumed.

[Translation]

    Mr. Clarke, you have seven minutes.
    Thank you, Mr. Chair.
    Mr. St-Jean, you said that a $700 million deficit is an optimistic figure. What is the less optimistic view? Is it much higher?

  (1220)  

    We looked at all the variables. Canada Post put an estimate on the table that looked plausible to us, but our report indicated that the figure could be higher. It would be hard for me to suggest a figure, but that is the optimistic end of the deficit we forecast.
    I would also like to know if your firm has conducted financial analyses on the postal services in other countries or whether this is the first time that you have done so.
    Over the years, our office has worked with various postal organizations in Japan, in Germany and in England. My colleague has also worked with postal corporations like Canada Post. Earlier in my career, I worked with Canada Post. I dealt with Canada Post when I was here in Ottawa. So we have a good understanding of the postal business.
    Very good, thank you.
    Various suggestions have been made about adding services. In your opinion, which of those services could most likely put Canada Post back on a profitable footing and—at least hopefully—remove its deficit difficulties once and for all?
    Perhaps I could ask

[English]

my colleague, Bruce, from Oliver Weyman, because they looked at more cities, what the options are to generate more revenue and more bottom line.
    Thank you for the question.
    We looked at business opportunities along a number of different lines, including ways to leverage the available labour capacity and the assets of Canada Post. By and large, any incremental or adjacent opportunities were marginal improvements, and sometimes they ran into some of the same issues we were discussing earlier, such as potential acquisitions of a subsidized market participant.
    That said, a handful of opportunities were potential new business gainers. Advertising was one of them. I think it was around $20 million. Certainly, the largest though was not on the new business opportunity, it was more on changing the business model to meet the public need, which was rationalizing the retail footprint.

[Translation]

    In European countries, a postal banking service is currently in operation. Does it work well? What could you tell the committee about it?

[English]

    They are really country specific. Bear with me. There are success stories and there are failures in postal banking across Europe and in Asia. Those that have been established for many decades are significant aggregators of deposits such as in Japan and Italy, which was an underserved market where the post bank has been in existence for quite some time; in others, a post bank launched in 2007 was closed in 2010.
    In Brazil, it's a significant bank, but it's a money-loser. By and large, the post banks that have been most successful have been subsidized where they have been in existence for decades.

[Translation]

    Okay.

[English]

    There are very few unmet needs that would justify a state-sponsored entry into postal banking in Canada today.

[Translation]

    We heard testimony from officials of the Canadian Union of Postal Workers, Canada Post’s biggest trade union. They constantly said that your figures were in error or were based on other figures that were in error.
    Despite that, are you comfortable that the task force report is reliable and that the Ernst & Young study was independent? Is the union being dishonest? Can Ernst & Young state that the figures really were obtained independently and they are not in error?

  (1225)  

    We can confirm that our analysis was done independently. We are satisfied with the figures that we have submitted in our report.
    We are used to conducting due diligence analyses for major companies, specifically in connection with transactions. Like ourselves, the colleagues with whom we work in this kind of analysis are definite: the figures on the table are valid.
    Thank you.

[English]

     Mr. Weir, we're still in public. Seven minutes, please.
    Thanks very much.
    I'd like to pick up where I left off with Mr. Spear about postal banking options in Europe. Mr. Clarke broached this topic as well.
    I want to ask you specifically about Swiss Post. It's been suggested that postal banking only works where the private banking sector is underdeveloped, and that's clearly not the case in Switzerland. I wonder what your thoughts are on the success of Swiss Post as an integrated post office and banking operation.
    I can't comment specifically in any detail on Swiss Post, not being an authority on Swiss Post per se. I can apply the broader lessons that we've been talking about across multiple geographies, such as the success of the banks that are serving unmet needs.
    Depending on the source you choose to cite, the under-banked population of Canada is either 6% or 1%. In our view, it leaves relatively little opportunity to go after new market space with essentially the same capabilities as an established industry and try to compete for that business.
    No, fair enough, but I guess my suggestion is that Switzerland didn't suffer from a lack of banking services, and yet Swiss Post has been very successful in that sector. I take your point that perhaps you're not an expert on Swiss Post, so I've sort of put you on the spot, but I just wonder why, in this research for the task force, there was so much focus on La Poste and Royal Mail rather than on Swiss Post, which seems like a really positive example.
    If there's an opportunity or lesson to be learned from Swiss Post, we'd be happy to follow up. I'm not in the position to state definitively why it was successful there and not in some of the other markets.
    Okay.
    I'd like to ask Ernst & Young about the pension situation at Canada Post. I think you identified it as one of the major financial challenges facing the corporation.
    It really comes down to an accounting choice. If we view the pension in terms of a solvency valuation, then there's this huge unfunded liability, but it's not very realistic that Canada Post would have to shut down its pension tomorrow and pay out all the benefits. A far more relevant accounting metric would be a going concern valuation, which actually shows a surplus.
    Do you think it would be reasonable for the federal government to simply exempt Canada Post as a federal crown corporation from solvency valuation? Would that address a lot of the challenge that you identified?
    That in fact is one of the alternatives listed as a possible alternative to making the contributions. Essentially, extending the current exemptions or making them permanent would be an alternative.
    Again, that changes the cash contributions into the plan, which is what's at issue. It also decreases the contributions to the plan, so from the perspective of benefit security, to the extent that the plan is wound up at some point, then there would be a risk.
    Do you see that type of exemption as a viable option that would materially improve Canada Post's financial outlook?
    Sure. If the exemption continues or is made permanent, then those large contributions that we're discussing would not have to be made.
    Okay.
    To go back to the topic of postal banking, the case has been made that Canada has a very strong private banking sector, and hence there is maybe not as much need or demand for postal banking. But is it also not the case that in part because of restrictions on foreign ownership of banks, the Canadian banking sector could be characterized as an oligopoly, with five big banks dominating the market earning very good profits, and doesn't that open the opportunity for other Canadian-owned competitors such as, potentially, Canada Post?

  (1230)  

    It's certainly a fair challenge to ask is Canada the lowest cost to consumers market for banking services? The answer is it is not the lowest cost. It is a very heavily banked country. It isn't the lowest cost, but it's far from the highest.
    That said, there's little to say that the banks wouldn't respond to the entry by Canada Post in the market with more aggressive pricing—
    Wouldn't that be a good outcome?
    —or they could do that today. I guess the question is, is that the necessary catalyst? If that's what's deemed good policy, then that is a basis.
    I take your point that the banks might respond with lower pricing, which might reduce the opportunity for Canada Post to make money off postal banking, but I think, as you also suggest, there's a really strong public policy argument for provoking the banks to lower their fees. To me, that would be one of the strong points for postal banking.
    Perhaps it's beyond the scope of the study you did.
    It's a very fair question and a challenge to the observations of the report, as opposed to the recommendations.
    I would simply point out that doing so would require significant investment on the part of Canada Post and the government in building skills and capabilities that clearly are not present today and in taking a significant amount of risk. If the goal is to lower the cost of banking services to Canadians, then there are other policy measures one might explore.
    Fair enough. We could let American banks into the Canadian market, but there are other policy reasons we might not choose to do that.
    It's true that getting Canada Post into banking would require some big investments and some capabilities that aren't there now. I guess that's one of the reasons that I think it would be very interesting to look a bit more closely at examples like Swiss Post, where you have post offices that have done so, seemingly, with a great deal of success.
    Thank you very much
    We're now going to Monsieur Ayoub.
     Monsieur Ayoub, do you wish to be in public or in camera?
     In public. You have seven minutes, please.

[Translation]

    Thank you, Mr. Chair.
    Thank you for joining us.
    I have seven minutes. In that amount of time, it is not always easy to ask questions and get complete answers. I am going to try to make my questions short and more direct, without too much preamble.
    Different approaches are possible. Depending on the studies conducted or the vision used to reach a result, Canada Post can be seen as a service or as a commercial enterprise that provides a service using the user-pay principle. You can see it like that.
    Would your study have produced a different vision or different recommendations if you had used a different philosophy or approach—an approach not strictly focused on the business aspects, the profitability, the lack of subsidies, the overall viability? Canada Post could instead have been seen as a service like health care, meaning that there are always costs, but there is no deficit because it is an essential service.
    Would the approach substantially change the results?
    Thank you for the question.
    We conducted a relatively independent study. We considered Canada Post's financial situation without looking at its funding formula or at it being a public service. In that sense, our study has no impact on the model chosen. The principle that the review panel used was that Canada Post had to continue to be self-sufficient. In terms of the financial projections and financial analysis, it had very little impact. I am talking about future projections.

  (1235)  

    We talk about economic impacts, but there are also social impacts. We were able to see that when we toured the whole country. We visited urban areas, but also rural ones. Yes, there are immediate financial impacts, but there are also social impacts.
    Have you considered those in your analysis?
    That was not part of our mandate. We looked strictly at the financial aspect.
    I'm looking at my notes. You talk about cost centres compared to service centres. There's a difference there. Those are two different visions, philosophies.
    Later, when the time comes to make political decisions, we look at the various service options to create new sources of revenue. As I see it, we look at ways to downsize, to streamline processes, and we look for new revenue, whether through marketing strategies or advertising revenue. The idea is to go beyond Canada Post's main activity, which is first and foremost a mail and parcel delivery company. We are even looking at telecommunications possibilities, a postal banking service, and all sorts of other approaches.
    Do we not weaken the corporation when your mandate is very focused on finance and we are trying to break out of the main activity?
    We studied the financial side.
    I'm not sure whether Mr. Spear has any comments on revenue.

[English]

     On the revenue side, what we found by and large, on any of the incremental...what's called the new lines of business, was that potential game-changers like postal banking were evaluated on the merits of the capabilities of the company and the needs of Canadians and whether or not the competitive environment would be conducive to Canada Post as a market participant.
    On other potential new lines of business that were more built around asset leverage or leveraging the existing personnel, we were unable to come up with new activities or new lines of business that generated higher returns than managing the business to its proper scale and its proper network structure to meet the needs of the future, which is declining mail volumes and increasing parcel volumes.

[Translation]

    Should a second phase be added to the study? It is certain that, as consultants, you are happy to hear that, but that's not the goal. The second phase would look at merging some government services. We heard about the prospect of merging services and taking advantage of Canada Post's establishment to save elsewhere.
    I see a lot of work is being done in silos. Canada Post is seen vertically, whereas there are government services across Canada.
    Have you looked at that in your study? Can you shed a bit more light on that for me?
    Yes. Mr. Spear can talk about the study that was done.

[English]

    It's a fair question. We were focused principally on Canada Post, but we did look at the Service Canada centres, particularly in the more rural areas, as an opportunity to potentially both increase service to Canadians in those areas as well as to reduce costs.
    The typical staffing level of a Service Canada centre, given the amount of traffic, was fairly modest, so we were looking to consolidate different government services into one physical entity and with the necessary staff requirement. That, in fact, was one of the savings initiatives that we identified.

[Translation]

    If we want to go a bit further, the socio-economic aspect is still missing. What is the impact of cuts or changes to the services? For instance, we talked about mail being delivered once or twice a week. Your study needs the socio-economic side to know what impact those new options would have. It is a financial report, but the socio-economic side is missing.
    At any rate, that answers my questions. Thank you.

[English]

    You have virtually no time left, Mr. Ayoub.
    Maybe 15 seconds, but it's okay.
    We'll go to Mr. McCauley, for five minutes, please.
    Gentlemen, I want to bounce back to the pension solvency.
     You mentioned that if we just extended the holiday, forever changed the legislation....
    How do you view that from competition like the private sector? Would that not be an unfair advantage for Canada Post over FedEx, or other companies that have to follow the solvency rules?

  (1240)  

    Thank you for that question. I think it's a fair question and a fair perspective.
    Again, it would depend on where the different plans are registered. I talked about, for example, the difference in the level of solvency. If you're a federally registered plan, that might include indexing; whereas, for example, if you were registered in Ontario, indexing would not be included in that solvency deficit. There would be jurisdictional differences as well. It's not all absolutely equal.
    I think the other perspective to take is that Canada Post.... Certainly, this plan is a legacy public sector plan, and the private sector competitors do not have plans like this. There is that dimension to it as well. Canada Post has a legacy plan that the private sector competitors did not originate with.
     This is where we're in a current surplus, but I understand that is because Canada Post has poured in a present value of about an added $2.5 billion, or along those lines, for the solvency payments they're required to do. Is that correct?
    The plan is in a solvency deficit.
    The current surplus is a catch-22, because Canada Post has been required to pour money in for the solvency, so the only reason we're in a current surplus is because of that money they've poured in to match the solvency requirements.
    The plan is not in surplus, other than the small surplus—
    Current.
    —on an ongoing concern basis, if that's what you're referring to.
    That's because Canada Post has thrown in a couple of extra billion....
    Canada Post had the exemption from solvency contributions, so it's not the solvency contributions that led it there. I think the biggest difference is the way these valuations are done. We're assuming a much higher discount rate on an ongoing concern basis, which reduces the liability, and we're assuming a very low discount rate on solvency, which inflates the liability. That is the difference that is accounting for a small surplus here and a large deficit there.
    One of the items you mentioned, not on the pension, but just on door to door, on page 98 of your report you talk about—
    Which report, Mr. McCauley?
    Sorry, the Ernst & Young report, you talked about—
    Mr. McCauley, I believe we would need to be in camera if we want to discuss any of that.
    All right, I will skip that question, then.
    I want to follow up on Mr. Ayoub's question.
    Mr. Spear, you've mentioned quite a few items for revenue raising, but in the grand scheme of things, on a $6 billion a year giant company, they're almost like rounding error items. One of the things we heard from a witness this morning from eBay was to stick to your core, and stick to what you know. Do you think that's a valid way to go rather than chasing a panacea, such as postal banking, or a couple of million dollars here and a couple of million there?
    I do think there is a lot of merit in the strategy of sticking to your knitting and core focus. I think there was a legitimate risk of misinterpretation of our report, which cast a wide net and evaluated almost 40 potential opportunities, which clearly this group did not misinterpret. We purposefully narrowed down those that we felt would not be in the long-term interest of Canada Post or necessary to Canadians, and we settled on around seven or so ideas for consideration. Even within those, there are a few that are relatively modest. If we thought that postal banking was going to be a billion dollar idea for profit generation, then it would have been one of our strong recommendations. It's simply that we don't think the core capabilities are present today with Canada Post.
    Very quickly, if we went to full postal banking, how many dollars would be required to capitalize us, if we were to go with full services across the country in all 6,000.... What's a ballpark figure, in the billions?
    It's a fair question, but it really depends on the line of business that Canada Post gets into. As we've contemplated postal banking, it's more of a storefront services provider and interface to other major banks.
    It's almost like renting out to the other banks.
    That's right.
     We'll have to cut it off there.
    Madam Ratansi, you have five minutes. Do you wish to be in public?
    In public, please.
    Thank you all again.
    I'll make some statements, and then you'll all have chance to respond.
    We hear from the ground, and we have been consulting widely, that for 19 of the past 20 years Canada Post has been making profit, giving dividends, and paying taxes, and it's billions of dollars. The assumptions you've made are probably a little skewed because you had to take data, which was sometimes consistent and sometimes was not consistent. You have answered that in your previous questions, but what I also understood from the ground was that Canada Post management is not thinking outside the box, and it does not have an integrated approach to thinking. Now that's not your mandate, because your mandate was totally different. We have to find a fine balance. When you say to stick to your knitting, if you stick to your knitting and the wool is going, what the hell do you do then? You have to think creatively and outside the box. My question is, what other strategic areas would you look at?
    You're suggesting that Canada Post in its current format might just about disintegrate. Should it?
    Mr. Spear, the question I have for you specifically is about Australia. I looked at Australia, and it is in the same ballpark figure as us with a large land mass and a high rural population, but it has very successful postal banking. With a population of 24 million, it seems to be making $6.6 billion in revenue. What can we learn, and have you had the opportunity for lessons learned? We cannot just pooh-pooh it because maybe in 1968 the postal bank was successful, and then the banking lobby came. We need to be balanced. Give me your analysis of it, and then I'll ask the other question.

  (1245)  

     To your first question, I certainly agree that sticking to your knitting if the wool is running out is not a viable long-term strategy. While we certainly were not mandated to do a managerial assessment of Canada Post, there is certainly no shortage of ideas being explored by Canada Post within the context of that business about how they can leverage it further and make it more profitable. As part of the study, we did get, in some detail, into some of their past investigations of specific business opportunities and where there might be opportunities for both cost reductions and incremental revenue, and we found them to be fairly comprehensive.
    Okay. Because it is referred to in the report, perhaps we won't talk about it at the moment.
    Therefore, my question is for the accountants here. You are EY. Would you give your business to PwC?
    Would we give our business to a competitor? No.
    Good. Why is the corporation opening franchise stores next to the corporate stores and passing on retail business to them? Did anybody talk to them about why this is the strategy? They do not charge a franchise fee. Those are the questions we are hearing from the ground, and we need to know.
    I think my colleague who is here from Oliver Wyman can answer that very specific question.
    I'll do my best. Thank you for the question.
    The question is why Canada Post is franchising in areas that might otherwise have a post office to serve the public need. There are a number of reasons. One is that certain areas don't provide as much coverage within a certain distance radius, so there is a strong case for franchising in those areas. The second is that the franchisees' hours are actually longer than those of a particular post office. While I accept your point that they are creating competition, I would also submit that they are improving service to Canadians by increasing their amount of franchising.
    The next thing I want to know is, what do we do in rural and remote areas that do not have a franchise post office, if we want social cohesion and economic growth?
    I would argue that some of the best opportunities for franchising are in the rural and remote areas, because it doesn't require significant real estate investment and other staffing for thinly used services that Canada Post would offer, and instead allows you to piggyback on investment made by others in that market to provide better service to Canadians.

  (1250)  

    Thank you.
    Mr. McCauley, you have five minutes, please.
    I want to follow up on the retail question. My understanding is that, if you have a Canada Post store and a retail next door, and the retail is selling stamps, etc., that's not shared profit. That's not profit going to Shoppers Drug Mart. They are selling Canada Post services. The more retail you have selling your services.... The monies all go into Canada Post anyway for these services and stamps sold, do they not?
    There is a split, and Canada Post is earning a profit on the services sold by the franchisees. That's correct.
    I'm short on time, so quickly....
    A lot of the issues you brought up, and you mentioned a report, seem to come back to labour and the labour agreement. Going forward, do you see this as a stumbling block, perhaps, for a lot of the ideas that you mentioned, whether it's shared or new services?
    Thank you for the question. I'll address it in the context of the two most significant opportunities—the first being alternate-day delivery and the other being the retail footprint—and maybe turn it over to my colleagues.
    On alternate-day delivery, there is certainly a significant number of restrictions as to how Canada Post can adjust its service footprint and achieve savings by making a change from daily to alternate-day delivery. I want to point out that we did evaluate alternate-day delivery across the board and alternate-day delivery only for mail services, and the latter was what survived as an option. Parcel delivery would remain daily and might even go to six days a week, given the market demand and the profit motive.
    Yes, there are significant constraints, but those constraints are timing issues as to when those savings can be realized, as opposed to whether or not they can be done.
    On the retail footprint, there is the CUPW agreement and the moratorium, which materially limits the number of physical branches that can be rationalized or converted to franchises today. That would require policy action in order to achieve those savings.
     Gentlemen, we're really short of time.
     I've asked before, but now we're in public. Is switching over to community mailboxes the number one thing that we can do to help rationalize costs and continue services to Canadians at a reasonable price?
    When fully implemented, conversion should provide $400 million to $500 million of annual savings. That's certainly an important measure that could be implemented in a relatively short time.
    It's tough to use a crystal ball, but do you see any massive disrupter coming along that could significantly negatively affect Canada Post parcel delivery? We're seeing that in a couple of years it's going to be 50% of the revenue. Uber is talking about getting into parcel drones.
    How big a risk is it that in two, three, or five years from now we're going to have a massive problem because of this?
    It is a big risk. We're seeing changes in technology: 3-D printing will have a significant impact on parcels as goods are being produced or printed closer to reality, and drones.... It's very hard to assess how fast and how—
    It really underlines just how important it is that we as a group come up with some immediate solutions to address these looming losses.
    Yes. It's an important business.
    You're right. The $700 million could be very optimistic. It could be $1 billion if some disrupter comes along and wipes out parcel service delivery.
    Mr. Whalen, you have five minutes, and we're in public.
    Mr. Chair, before I ask questions of the witnesses, I'd like to know whether you would consider it fair game for me to ask them about things that specifically aren't in the report.
    I would; however, I would also ask the witnesses to comment on whether they think it would be breaching any confidentiality.
    Proceed with the question, please.
    Mr. Spear, I'll start with you.
    In the in camera session, we had some discussions. It appears from my perspective that there was no analysis done on whether or not Canada Post should pursue a digital or a future services-style bank at the higher end of the market, accessing SMEs that are already their customers in packaging.
    Are you limited in your ability to assess those aspects of future banking growth by the corporation, or was Oliver Wyman given free rein to assess all possibilities of a profitable bank?

  (1255)  

    That's a good question.
    I would submit to you that we did evaluate all different types of business banking models, as well as retail banking models. Our first filter was the strategic assessment and fit assessment, and the second was the business case. On that basis, it wasn't deemed to be a particularly compelling opportunity or a public necessity, in our view, for Canada Post to get into small and medium-sized banking.
    We've heard a lot about the United States subsidizing its postal service to the tune of $5 billion a year. From your assessment as an international postal expert, do you feel that this provides their industry and their digital marketplace with an advantage that Canada does not enjoy because we don't have a similar subsidy?
    I really couldn't comment on whether the USPS enjoys a superior level of subsidy and whether that translates directly into market advantage.
    Okay, fair enough.
    Now I'll turn to the folks from Ernst & Young.
    Mr. St-Jean, when we looked at community mailboxes as a delivery model, we heard different numbers in terms of how much cost savings could actually be generated. When we tried to determine whether there would be any net effect on revenues, we didn't see any analysis in that regard. When I think of people in suburban Canada who have community mailboxes, they might have a preference to order packages that would be delivered to their door by FedEx or UPS, whereas Canada Post is only going to send it to the community mailbox.
    Did you examine any market differentials between community mailbox delivery versus door-to-door delivery as it relates to future market opportunities and future revenue opportunities for Canada Post?
    When we looked at the community mailbox, we focused on the conversion. We didn't assess its impact on the revenue side.
    So, you didn't examine the revenue side.
    We didn't look at the revenue side because when we looked at the existing population, some are door to door and some are parcel. It was hard to establish any difference between behaviours.
     What length of a pilot do you think Canada Post would need to run to determine whether or not there were any negative impacts on their overall revenue, from a service perspective, on these converted homes? Is it something that they could figure out in a year? Would it require two years to figure out whether or not this reduced service level of community mailboxes has caused attrition in other lines of their business to privatized players? How long should we pilot or examine such a scenario?
    It's very hard to respond.
    I don't necessarily know how long it would take to validate that assumption, but certainly Canada Post has been looking at the impact on the people they have converted from 2014.
     However, the take on parcel delivery for community mailboxes is typically positive. People can get their parcels in their mailbox and they see that as a benefit. So it would have to be—
    Okay, so we see it as a benefit, and yet in all the analysis we have, it's net neutral on the revenue line.
    Was revenue examined, or was revenue simply not examined at all as it pertains to community mailbox conversion?
    We didn't look at the revenue.
    My comment was more about how people are satisfied with the service delivery, not necessarily from ordering more or quantitative—
    But they wouldn't know about the packages delivered by a competitor.
    Canada Post?
    Yes.
    They may know.
    They may know. Okay.
    Thank you very much.
    Mr. Weir, you have three minutes. Very quickly, please.
    I have a question for Ernst & Young.
    How much revenue does Canada Post currently earn from the sale of collectors' items or commemorative stamps?
    That's a good question.
    It's marginal, but I don't have the exact information. It's bundled with the other revenue.
    Okay.
    We did hear from a witness in Yellowknife who suggested that Canada Post is not doing enough to support that hobby, and that if it did more, there is the potential for additional revenue. Specifically, he pointed to a recent stamp collecting convention in New York City that drew thousands of people from all over the world. His sense was that if we could attract events like that to Canada, it would be a significant source of new revenue for Canada Post and also a source of tourism and economic development for the country.
    I wonder if you have any thoughts on that. I'd also open it up to Mr. Spear.

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    As my colleague said, those additional revenues are truly marginal, and they are bundled into the other revenue. It would be truly a rounding error.
    To put this to rest, that's not a major source of revenue, capital—
    It's not a major source of revenue right now, but I take it you also don't see it as a significant source of potential revenue.
    I agree with that. We don't see it as a major source of revenue.
    Okay.
    We heard there hasn't been one of these big international stamp collecting conventions in Canada for a long time. Is that something we should be pursuing? Is there a significant opportunity there, if not for Canada Post, then for Canadian tourism in general?
    I would ask that question more to tourism Canada.
    Okay, but no particular....
    I just note that many options were touched on by the report. This wasn't one of them, so I thought I should put it on the table to see if there were any thoughts.
    I would ask tourism Canada to answer that question.
    Gentlemen, thank you very much for being here. Your testimony has been excellent and very informative, and I think very helpful for our committee.
    Should there be additional information that committee members are looking for, would you accept any written questions?
    A voice: Of course.
    The Chair: Subsequently and conversely, should there be any additional information that you wish to transfer to us, please get hold of our clerk and get that into us as quickly as possible.
    Thank you so much.
    We will suspend for a few moments while we get our next witnesses.

  (1300)  


  (1310)  

     Colleagues, I think we'll start so we can try to get close to completion on time.
    Thank you to all our witnesses for being here. I'm quite sure that all of you are familiar with the process that we follow. We'll be asking those making presentations to do so in five minutes or less. Following all opening statements, we will have a round of questions from our committee members.
    With that brief introduction, we will start.
    I have the Department of Finance up first with a presentation.
     Ms. Hemmings, you have five minutes. Please proceed.
     Good afternoon. My name is Lynn Hemmings. I'm the senior chief of the pensions team in the financial sector policy branch at the Department of Finance.
    I'm here today to answer your questions about the Canada Post pension plan, but let me first provide you with a bit of context on the funding requirements under federal pension legislation, the Pension Benefits Standards Act, or PBSA.
    Under the PBSA, the federal government regulates the plans of crown corporations and private sector plans covering areas of employment under federal jurisdiction, such as telecommunications, banking, and interprovincial transportation. At this time, there are over 1,200 federally regulated pension plans, and over 300 of those are defined benefit plans. Canada Post's is the largest defined benefit plan under federal jurisdiction, with almost $22 billion in plan assets as of December 31, 2015.
     Under the PBSA, defined benefit pension plans are required to be funded on both a going concern and a solvency basis. “Going concern” assumes the plan operates indefinitely, whereas solvency assumes the plan is terminated and all the promised pension benefits must be paid immediately.
    The intent of the solvency funding requirement is to protect the pension benefits of plan members and retirees by ensuring that plan assets are sufficient to meet the plan's full obligation. In cases where a plan does not have a solvency funding deficit, the PBSA provides the flexibility to fund that deficit over a period of five years.
    Today, some plan sponsors continue to face funding challenges for their defined benefit plans as a result of a combination of factors, including the ongoing low interest rate environment, volatile market returns, and increasing life expectancy of retirees. Over the last 10 years, the government has implemented a number of reforms to provide funding relief to plans to address these challenges.
    In 2006, a sharp decline in long-term interest rates combined with poor investment returns and increasing life expectancies resulted in solvency deficits in many plans. To help alleviate these pressures, the government passed temporary solvency funding relief measures that allowed solvency deficits to be paid over a longer period. Following the implementation of these measures, funding levels in plans began to improve.
    In 2009, following the financial crisis, plan funding levels began deteriorating again as a result of the significant decline in global markets and even further reductions in interest rates. To help plans address these challenges, the government once again passed temporary funding relief measures. As it became apparent that low interest rates and uncertain market returns were becoming the new normal, the government moved to put in place permanent relief measures. These measures included allowing the use of letters of credit to cover solvency special payments up to a limit of 15% of the market value of plan assets and moving to a three-year average for the calculation of solvency ratios in order to reduce the volatility of a plan's deficit.
    For pension plans facing unique financial challenges, the Minister of Finance has the authority to grant funding relief through the use of special regulations. In the case of Air Canada, for example, in order to provide the company with the time needed to restructure its operations, its pension plan was exempted from solvency funding requirements from 2014 to 2020 in exchange for making payments of at least $150 million per year into the plan. As a result of improving its business operations, changes in plan design, and new investment strategy, Air Canada has been able to eliminate its solvency deficit and announced in May 2015 that it was opting out of the special regulations, with the pension plan now in surplus.
    The Minister of Finance has also exempted Canada Post from solvency funding requirements from 2014 to 2018. This funding relief was provided within the context of a continued decline in mail volume and little to no net income generated by the corporation. As with Air Canada, the purpose of the relief was to provide Canada Post with the time to make itself financially sustainable. As this funding relief is set to expire at the end of 2017, we are continuing to monitor the developments in Canada Post's pension plan.
    We look forward to hearing the recommendations of this committee on the business operations of Canada Post, which will help to inform our advice to the Minister of Finance on the pension plan going forward.
    Thank you.

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     Thank you very much.
    Now we have Mr. Skinner, for 10 minutes.
    Go ahead, please.
     Thank you for inviting us to speak with the committee today regarding the Canada Post pension plan.
    I would like to make a few observations about the plan, during which I will make reference to the supplementary document that has been circulated, and then we look forward to taking your questions.
    I'm an actuary with Mercer, which has been the plan's actuarial firm since its inception in 2000. In my role as an actuary, I work on the annual valuations of the plan prepared for funding and accounting purposes. Our valuations are performed according to the applicable legislation and regulatory guidance under the federal jurisdiction, and according to the professional standards of the Canadian Institute of Actuaries. The results of the valuation are presented each year to Canada Post's management, the pension committee of the board, and the pension advisory council, which includes representatives from management and the various unions.
    Joining me is my colleague Michel St-Germain. Michel brings a broader perspective on trends in the pension landscape across the country and over time. Michel plays or has played various roles within the Canadian Institute of Actuaries and the Association of Canadian Pension Management.
    I have a few comments on plan size. The Canada Post pension plan has been growing steadily since plan inception. As shown in figure 1 of the supplementary document, the plan's assets have almost tripled in size between 2001 and 2015. Over that same period, the solvency liability more than quadrupled.
    The solvency deficit at the end of 2015 was about $6 billion, which has grown to about $8 billion so far in 2016. The biggest driver of the increased solvency liabilities and deficits has been the decline in interest rates in recent years. Figure 2 shows that the interest rate net of inflation used to value the solvency liability had fallen to 1.2% at the end of 2015 versus 2.25% 10 years earlier. By June 30, 2016, that rate had declined to 0.08%.
    As it has grown, the plan has become very large compared to the size of Canada Post itself. We've illustrated this in two ways in figures 3 and 4. Figure 3 shows the size of the pension obligation on a corporate accounting basis as a percentage of corporate revenue. This excludes, by the way, the obligation for other non-pension employee benefits which are worth about another $4 billion. This ratio has grown almost every year in the last 10 from 226% to 390% of revenue. To put these numbers in context, the graph also shows the distribution of the same sort of results for organizations in the TSX Composite with DB, defined benefit, pension plans.
    Clearly, the growth of Canada Post's pension plan has far outstripped that of its revenue, which has been consistently around $6 billion per year excluding the subsidiaries over the period shown.
    Besides the fairly flat revenue, another reason for these large ratios is the relative generosity of the Canada Post plan benefits, for example, full guaranteed indexation. Given the current size of the active membership, and given that many of Canada Post's new hires continue to join the DB component, the plan is expected to continue to grow for many years to come.
    Another way to look at relative size is given in figure 4, which shows the employer pension contributions over time also as a percentage of corporate revenue. Canada Post's contribution requirements in the absence of the CPC special relief measures, which Ms. Hemmings described, varied widely between 1% and over 15% during this period.
    In figure 5 we show the historical contributions to the Canada Post plan. The solid blue and red bars show how the employee and employer current service contributions have changed over time to reflect a more balanced sharing of these costs. In addition to current service contributions, Canada Post is responsible for funding any deficits. Going concern deficits must be paid off over 15 years. Solvency payment requirements are more complicated since we are required under federal funding rules to determine the special payments based on a three-year average solvency ratio. There are details on these calculations in figure 8 of my supplementary document, but we won't go through those in detail unless they come up in questions.
    The striped red bars show Canada Post's deficit contributions, which are over $1.6 billion in total, mostly for solvency deficits. There are two items worth pointing out on this graph. Since 2011, agent crown corporations like Canada Post have been permitted to reduce their solvency special payments up to a cumulative total reduction of 15% of plan assets. Canada Post used this to reduce its special payment requirements from 2011 through 2013 with a cumulative special payment reduction of $2.4 billion. That cumulative reduction limit of 15% of assets would have been reached in 2014 with the chance that the remaining required payments could exceed Canada Post's ability to pay.

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     In response to this issue, special regulations were enacted in early 2014—that's the CPC special relief—exempting Canada Post from special payment requirements for 2014 through to the end of 2017. The yellow bars in figure 5 show the special payments that would have been made to the plan if the CPC special relief had not happened.
    In figure 6, we show the expected range of projected future employer contributions over the next five years, based on market conditions and valuation results as at year-end 2015. As shown by the small blue squares, the median projected contribution over this period ranges from about $260 million to $540 million. However, the graph shows that there's at least a 25% probability of required contributions exceeding $1 billion in 2019 and 2020, as shown by the top of the light green bar. Since year-end, market interest rates have declined significantly, so our current estimates of future contributions would tend to be higher than the ones shown on this graph.
    The task force has proposed some options to modify or eliminate solvency funding requirements for Canada Post. The elimination of mandatory solvency funding would relieve much of the short-term funding pressure the plan places on Canada Post; however, significant risks would still remain in the longer term. Even in the absence of solvency special payments, the size of the plan relative to that of Canada Post would remain at least as large. For instance, the relative size of the accounting obligation in figure 3 is not affected at all by contribution requirements.
    Currently, the going concern basis is much less expensive than the solvency basis; however, this is largely due to an assumption that the plan's asset mix—specifically, its allocation to riskier asset classes such as public equities—will yield higher returns than the conservative asset mix required for solvency purposes. While we expect that to be the case on average over the long term, it's not guaranteed to occur over any particular period. It's also worth noting that if members live longer than we have assumed, plan costs could increase.
    Canada Post can reduce the risk of volatility in the net position of the plan by decreasing its allocations to risky assets; however, this will decrease the expected return and increase the cost. It's not hard to imagine the current going concern surplus turning into a deficit due to a bad experience. One year of asset returns like we saw in the market crisis of 2008 could result in as much as $2 billion of special payments being made to the plan over a 10-year period, even in the absence of solvency funding requirements. In addition, assumptions may change over time as the asset mix or the actuary's outlook for the future changes.
    These types of risks are expected with traditional DB plans. It is the size of this plan relative to the size of Canada Post that makes this of special concern.
     It's interesting to note that two of the most well-regarded public sector pension plans, Ontario Teachers' and the Healthcare of Ontario pension plan—HOOPP—are exempt from solvency funding, yet these plans have both taken steps to modify their benefits, particularly the level of guaranteed indexation, to control costs and volatility.
    If Canada Post were to become exempt from having to fund on a solvency basis, we would also encourage consideration of additional changes to address the remaining risks.
    On changes to investment policy, Canada Post plans to gradually reduce their allocation to riskier assets as the plan's position improves over time. This will make the plan less sensitive to changes in market interest rates, although it does not address the current deficit.
    On defined contribution, a defined contribution, or DC, plan like the one offered by Canada Post represents the lowest cost volatility possible for the portion of the plan covered by it. DC designs are increasingly common, particularly in the private sector. Recently, Unifor agreed to a DC plan for new hires at General Motors when it became clear that GM would not be able to afford the DB plan. While extending DC to more members would slow the growth of the DB component of the plan, the problem of funding the existing DB component would remain.
    On risk-shared plans, there are some middle-ground options, which aim to retain much of the predictable benefit stream of a traditional DB plan while significantly lowering cost volatility. Such plans share risks between the employer and members or across the members as a group, which is preferable to individual risk-bearing. One such planned design would reduce or eliminate guaranteed pension indexation, indexing pensions only when the plan's financial position permits, according to rules laid out in advance. Canada Post has been looking into designs like this.
    Another option is a target benefit plan, or TBP. In a TBP, employer contributions would be predictable and clear rules would be set out in advance regarding the handling of surpluses and deficits, with some benefits at risk of reduction in bad times. The federal government tabled a bill earlier this month to permit the establishment of TBPs in the federal jurisdiction. We have discussed the TBP concept with Canada Post.

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     While risk-shared plans can work well for the future, benefits already accrued remain in the traditional DB plan, unless members or their unions consent to a conversion to the new plan.
    One final option for consideration is joint governance. Some of the most successful large Canadian pension plans are governed on a joint basis with representatives from employers and members making decisions together. Ontario Teachers' and HOOPP are examples of such plans. Under the right conditions, this can work very well, but we believe that joint governance is best accomplished in conjunction with shared responsibility for the funding of any past service benefits.
    This concludes our prepared remarks. We thank you and look forward to your questions.
    Thank you very much.
    Ms. Cover, you have 10 minutes.
    I'm also an actuary by profession, and I've been asked to speak to some of the key features of the Ontario Teachers' pension plan that contribute to the sustainability of the arrangement.
    The Ontario Teachers' Pension Plan, or OTTP, Board was established as an independent, arm's-length organization in 1990. We are a jointly sponsored pension plan, or JSPP, designed and governed to ensure a balance of stakeholder interest. We have a robust governance structure with clearly articulated roles and responsibilities consisting of an independent, professional, 11-member board. The plan sponsors are the Province of Ontario, more specifically the Minister of Education, and the Ontario Teachers' Federation, which represents the plan members.
    The board's responsibilities include managing the investments of the pension fund, setting key accrual assumptions, including the valuation discount rate, and administering the pension benefits for our 385,000 active and former teachers. Plan sponsor responsibilities include determining benefit and contribution levels by determining how deficits are funded and how surpluses are utilized. The JSPP structure ensures that both plan members, through OTF representation and the province have a voice at the table in these critical decisions and are aware of the associated risks. We are a contributory defined benefit pension plan with full inflation protection provided on benefits earned prior to 2010 and with conditional inflation protection for benefits earned after 2009. I'll speak more to how CIP works in a moment.
    Our teachers currently contribute 12% of their pay, on average, which is matched by the Province of Ontario. Our strategic destination is to have a fully funded plan with the contribution rate of 11% of pay, on average, which is matched by the province, and 100% inflation protection on all benefits. As of the end of 2015, our market value of assets was $171 billion. We recently filed the January 1, 2016, valuation report disclosing a surplus on a going concern basis of $4.5 billion. Note that our valuations must be balanced, as we cannot file an evaluation with a deficit.
    Going back historically to the early 2000s, the plan's funding position and demographic realities have a direct impact on how our assets are managed. We set an asset mix policy by taking into account what the plan needs to deliver its pension obligations. Sustaining benefit levels for future teachers without contribution increases requires consistently meeting our return targets. Today, for a new entrant to the plan, providing a pension fully indexed at an average contribution rate of 11% matched by the province would require a real return of 4% per annum. The plan's demographic circumstances moderate our ability to take risks. The return target and the plan's ability to take risk by managing the impact from potential losses must remain aligned to meet our sustainability objective.
    An important factor over the long term that impacts our return target is the expected lifespans of our members. This ultimately led to the adoption, in 2008, of a custom OTPP mortality table and mortality improvement scales. These tables were most recently updated in 2014, including the adoption of a two-dimensional mortality improvement scale.
    In 2001, discussions began between OTPP and the plan sponsors related to reserving some gains in the fund to create a cushion to protect against the loss in difficult times and to keep contribution rates stable.
    Back in 2003, the sponsors adopted a funding management policy, or FMP, with the objective to provide a guidance framework for decision-making when there is a funding surplus or shortfall. A key component of the creation of the FMP was the concept of funding zones, each defined by a range. The funding zones provide a point of reference for whether action is required by the sponsors, and if so, guidance is provided on how to use any surplus funds or resolve any shortfall, specifically answering the question of when it is prudent to increase or decrease benefits, raise or lower contribution rates, or simply conserve assets for an uncertain time.
    While the FMP outlines preferred mechanisms associated with its various funding zones, it is ultimately the sponsors' responsibility to decide what actions to take.
    In March 2015, a zone for temporary plan improvements was added to the FMP to allow for temporary contribution decreases, surplus distribution, or benefit improvements, so long as they do not increase the long-term costs of the plan.

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     Uses of surplus in this zone are paced, and a provision is included such that temporary improvements cease if a significant market event occurs.
    Commencing roughly a decade ago, we began experiencing recurring deficits in preliminary funding valuations resulting from a combination of low returns, a low interest rate environment and increasing longevity. It is necessary to take on risk from an investment perspective to achieve the returns necessary to ensure the sustainability of the plan, particularly in a low interest rate environment.
    Knowing that we will have losses from time to time, we needed to introduce a mechanism for addressing downturns, which would share losses with our plan members, including retirees.
    Our current ratio of active to retired members is 1.4:1, which is expected to continue to decrease and will likely be 1:1 at some point in the future. We have negative net cash outflows of $2.2 billion. We received $3.3 billion in contributions in 2015 and paid $5.5 billion in pensions, which means that strong liquidity management is crucial.
    On average, Ontario teachers retire at age 59 after having worked and contributed to the pension plan for 26 years, and they receive benefits for 31 years on average. Additional benefits may be provided to a surviving spouse for a further period of time.
    We need to ensure that our asset mix and risk management take the aging of the plan into consideration. As mentioned above, the board has responsibility for managing the pension fund and therefore we are constantly focused on risk management and asset allocation.
    It is clear that contribution increases alone will not be sufficient to protect the plan against major investment losses. Along with that is the reality that with an 11% contribution rate, a 4% real return is necessary, a return that is difficult to achieve, particularly in today's environment.
    Therefore, in 2008 the concept of conditional inflation protection was introduced. CIP is not only a powerful lever for managing funding volatility, it also promotes intergenerational equity.
    Benefits earned after 2009 are conditionally indexed in accordance with the plan's ability to pay. There are three service breaks, with different levels of protection as follows: All benefits earned before 2010 are still fully indexed to inflation. Benefits earned after 2009 but before 2014 are conditionally indexed with a minimum adjustment guarantee of 50% of consumer price index. Benefits earned after 2013 are conditionally indexed with no minimum guarantee.
    Consistent with the spirit of a shared risk plan, any inflation payments forgone by plan members are matched by the government via additional contributions to the fund up to the first 50% of inflation protection forgone.
    CIP is an extremely powerful funding lever, and the expectation is that by 2025, fully invoked CIP will be powerful enough to absorb an asset loss of $62 billion.
    As mentioned by my colleague, OTPP is subject to going concern funding requirements and is exempt from solvency funding on a named plan basis under the regulations of the Pension Benefits Act of Ontario.
    In 2010 Bill 120 was passed in response to recommendations by the Arthurs commission to strengthen pension funding rules and to clarify rules for surpluses, contribution holidays, and other funding-related issues. The rationale for the exemption from solvency funding includes that both the province and OTF have a role in selecting the board members that oversee the pension plan, thus promoting good governance.
    The JSPP governance model means that both plan sponsors are involved in and responsible for decisions related to benefit design.
    Funding on a going concern basis is appropriate for our plan, given the size, maturity, and robust governance structure. Because of this, we can use the aggregate cost method, which allows us to factor in the expected impact of future contributions and benefit accruals, whereas resolution of any solvency deficits could be done only via contribution increases, a mechanism at odds with those proposed by the funding management policy and particularly with the ability to share the risk with retirees through conditional inflation protection.
    Solvency-based tests are not a suitable measure for OTPP given our long-term perspective and our joint governance capacity to change future contribution and benefit levels to address funding shortfalls or surpluses.
    In the unlikely event of plan windup, given the size of the plan, it would be impossible to settle benefits via annuity purchases given the limited market in Canada. Thus, there would need to be legislative intervention to allow the plan to continue in some capacity.

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     Finally, we are not subject to, nor a risk to, the pension benefits guarantee fund of Ontario.
    In closing, the plan's sustainability is defined as its ability to meet the needs of the present without compromising the ability of future generations to meet their own needs. The strong governance framework of the plan is key to ensuring its long-term sustainability.
    Thank you very much, all of you, for your presentations.
    Colleagues, we'll have time for one complete round of questions.
    We will start with Monsieur Drouin, for seven minutes.
    I want to thank each of the witnesses for being here today. We certainly appreciate your taking the time.
    All of you touched a bit on the governance issue. I know that the Ontario expert commission recommended at some point that jointly sponsored plans and joint governance be exempted from solvency payments. The rationale provided at the time was that it's a superior governing structure that allows for better risk management.
    I just want to hear from you on that. Do you agree with that? We have one example here, but do you agree with that statement?
    You're correct on the joint governance. The advantage of joint governance is that you can get a consensus from the various stakeholders on the proper balance between security and affordability. That's the reason for it. You have an example here of a group that was able to attain that consensus.
    Having said that, not all joint governance plans are able to achieve this consensus. Reaching a consensus between various stakeholders is a challenge if the number of stakeholders is high, if it includes, for example, non-unionized employees, different unions, and pensioners. But if you can resolve that difficulty of achieving consensus, the plan sponsors or the regulator will get a feel for what is the proper trade-off between affordability and security.
    From your experience, if you look at the past 20 or 30 years, is the trend that when there's a low stakeholder environment, joint governance structures tend to work more?

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    No, it works when the stakeholders are content to agree among themselves, either because they have a common interest or because the number of stakeholders is low. It doesn't work when the interests of the various stakeholders are not aligned or when the number of stakeholders is too high.
    There are very good examples of joint governance and very bad examples of joint governance.
    Do you have an example of a bad joint governance model?
    I won't....
    Voices: Oh, oh!
    We are in public.
    Mr. Francis Drouin: That's fine.
    No, they've made the name.... I will mention that amongst multi-employer groups—I'll let you find examples of multi-employer groups. There are horror stories within those groups.
    Thank you.
    Having said that, I do want to make the point that those multi-employer groups are not JSPP.
    Okay.
    There was another issue that this committee heard from one of the witnesses. One of the recommendations was about ensuring independence from the sponsor. Do you agree with that? I don't believe Canada Post right now has an independent structure. Do you tend to agree that the investment board should be completely separate from the company?
     I would say that's part of the joint governance. That can be one aspect of the joint governance that Michel spoke about. Separating the investment function, let's say, or the benefit policy, etc., from the employer can work. What would the body that oversees it look like instead? It would presumably be some sort of joint body that involves retiree input or member input. That can work, yes.
    Okay.
    To go back to joint governance, and I don't know if you're willing to answer this, do you see Canada Post being able to operate in that joint governance model?
     I don't see why not. I think there's a distance to go to reconcile the members and the corporation to come together to work on something like that, but if the interests are aligned, then I think something like that could be workable, yes.
    You both briefly touched on risk management. In the low interest world we now live in, what types of challenges does that present to funds such as the Canada pension plan? You would know the trends in the market right now.
     On the investment trends, I'd say we see generally more and more plans moving into what we call liability-driven investing where there is a greater portion of the plan fund allocated to fixed income securities, bonds. In the marketplace, they rise and fall more in sync with the liabilities of the plan than would, say, stock investments, equity investments. That's certainly a trend we've seen for the last couple of decades, and accelerating in recent years.
    The biggest problem with that sort of approach at the moment, implementing a de-risking approach like that, is that with interest rates as low as they are, there is sometimes a fear from some plan sponsors that moving it all, or a great deal of it, into bonds now, if rates were to rise, the value of those assets is going to fall. To the extent that there is upward pressure on bonds, that's a risk.
    We hope interest rates will rise, but we've been hoping that for many years now. We keep thinking that it can't get any lower, and yet it does. It's very difficult to predict, of course.
    Ms. Cover, on the Ontario pension plan, when did you move over to a joint governance model?
    I am not sure when exactly that happened, but I will look that up for you and let you know.
    Okay.
     I'll call in, but it was quite some time ago
    Okay, great.
    There are several JSPPs within Ontario, or named plans, including OMERS, HOOPP, and OPSEU.

[Translation]

    Mr. Clarke, the floor is yours for seven minutes.
    Thank you very much, Mr. Chair.
    Good afternoon, everyone. Thank you very much for being here with us today.
    I would like to start with Ms. Hemmings.
    You are talking about temporary measures, such as relaxing the solvency funding requirements. Canada Post is relying on this measure right now.
    Has Canada Post used this measure before or is it the first time?

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[English]

    If I can get some clarification, which measures are you referring to, just solvency relief generally?
    Yes, exactly.
    Solvency relief, whether it's by the letters of credit...is available to everybody. They've taken solvency reduction for three years, as was mentioned, and we gave them special funding relief, one off. However, the other solvency relief measures are open broadly to every federally regulated pension plan.
    Does that answer your question?

[Translation]

    In a way, yes. However, the solvency relief granted to Canada Post at this time, which you refer to in your notes, is for five years and will end in 2017. Is it the first time Canada Post has been granted this particular relief?

[English]

    Yes.

[Translation]

    Fine, thank you.
    Aside from the study on Canada Post our committee is conducting at this time, do you know if your minister Mr. Morneau and the Minister of Public Services and Procurement Canada are holding meetings? As a parallel process to the study by our committee, have the two departments launched cooperative processes to work together to find solutions to Canada Post's current problems?

[English]

    Minister Morneau is responsible for Canada Post, as is the Minister of PSPC responsible for Canada Post business.
    We speak at the official level. We are in constant contact with them in terms of keeping everyone up to date on the status of the pension plan, but that's the extent of our conversations.

[Translation]

    Fine.
    In the last sentence of the next-to-last paragraph in your notes, you say that the purpose of the relief was to provide Canada Post with the time to make itself financially sustainable. In the last paragraph you say that thanks to the recommendations of our committee—and we hope they will be good ones, since the government seems to be counting on them a great deal—you will be able to provide advice by 2017 to the Minister of Finance, following the release of our report.
    However, even if our report contains fantastic recommendations and miracle solutions, in a year, in 2017, when the five-year relief measure is set to expire, it will be too soon for our recommendations or the new measures to have been implemented. Moreover, the Canada Post deficit will not have been liquidated.
    In short, do you know if the Minister of Finance is already considering extending the funding relief granted under the Canada Pension Plan?

[English]

     I don't really think it would be appropriate for me to speculate about what the minister might be thinking at this time.
    Okay.
    Obviously he has concerns, but beyond that....

[Translation]

    Without necessarily speculating as to what the minister thinks, can you tell me, as a public service professional, if you think he is going to have to extend this relief?

[English]

    I think there are a number of options that are on the table, many of which have been mentioned by the expert panel, but I can't really comment on which direction we're headed in. It's not appropriate.

[Translation]

    Thank you, Madam.
    Mr. Skinner and Mr. St-Germain, thank you for your presentation. Math has never been my long suit. I do not understand the graphs at all. My area is political philosophy. However, I would like to understand the situation.
    You talked about the risks that could occur if the solvency obligation was removed. What would those risks be, exactly?

  (1350)  

[English]

     One of the key risks remains the size of the plan relative to that of the organization. Even if solvency were to disappear, the going concern obligation would still represent a very large percentage of the revenue of Canada Post and we expect that to continue to grow. Fluctuations in that financial position and the contribution requirements that could arise from that could be difficult for Canada Post to bear.
    I will say that projections or estimates of Canada Post's future revenue prospects is outside of our area of expertise. I believe others have looked at that, but we know that there are pressures in that regard and, if revenues are not rising, it would be more and more difficult to sustain the plan.
    As I mentioned in my remarks as well, the going concern funding that we have in place in addition to solvency is based on a set of assumptions, and they are only that, assumptions.
    In particular, two of the largest ones would be the return on investment and how long people live, their life expectancy or longevity. If either of those do not pan out as we've assumed, we could end up in a deficit position, either temporarily or permanently if we alter the assumptions at some stage to reflect a growing understanding of reality or change in the circumstances. So the risk that's taken.... In fact, the plan, it's invested in equities at the moment. Some portion of the plan is invested in the public equity market, which carries a good deal of risk, because as you know, stock markets are volatile. We do expect that that sort of investment will pay off in the long run, that it will provide higher returns, but it's not guaranteed.
    Thank you very much.
    Mr. Weir, you have seven minutes.
    I want to start out by drawing a connection with the last panel and I just want to confirm that Mercer is owned by the same parent company as Oliver Wyman. Okay, yes. I just wanted to get that on the record.
    I have another question for Mercer. Does your analysis of the Canada Post pension plan take account of the recent agreement to expand the CPP?
     It does not. No. There's no reflection of the CPP expansion in the Canada Post pension numbers.
    That strikes me as a relatively important point, given that the formula for the defined benefit at Canada Post is structured around a certain assumed level of Canada pension plan.
     I'll address that.
    The plan is designed as a plan structure, a benefit formula, that does recognize an expected level of CPP benefit. That is true. But it is not tied directly to CPP so if someone takes their Canada pension plan earlier than the assumed retirement age of 65, or decides to defer and take it later, that doesn't affect the benefit that comes from the Canada Post plan. There is a very approximate reflection of expected benefits from the CPP, but not direct.
    With the increases that have been announced to the Canada pension plan, we are talking to our clients, including Canada Post, to encourage them to look at their benefit formula, and if it's not an automatic shift—which for Canada Post it's not; for most plans it isn't—do they want to rethink the benefit level because some members, especially at the lower end of the earnings ladder, will have significantly higher benefits under the CPP, and maybe then it would be appropriate to scale back the benefits under the registered plan, but not in all cases.
    I take your point that there's not an automatic coordination between the Canada Post plan and the CPP, but I think we agree the Canada Post plan was clearly structured the way it is, based on an assumed level of CPP—
     That's certainly true.
    —and if the CPP is now being expanded, that will relieve some of the pressure on the Canada Post plan if it's adjusted in response.
     If it's adjusted. That sudden adjustment would need to be negotiated with the unions, though.

  (1355)  

    Okay. It would. It just strikes me that this is one potential solution to some of the pressures facing the plan.
    Ms. Hemmings, Ms. Ratansi often likes to tell this committee that she's an accountant. I didn't have enough personality to be an accountant so I had to be an economist. Specifically, I was an economist with the Department of Finance so I want to welcome you to this committee. I do want to ask specifically about the possibility of a permanent exemption for the Canada Post pension from solvency requirements.
    You used Air Canada as an example. It's a private company that could go bankrupt. It could have to pay out all its pension obligations at once so solvency valuation might make sense for a private company like Air Canada.
    Given that no one's proposing to privatize Canada Post, and it therefore can't go bankrupt, shouldn't it just be exempt from solvency valuation?
    The intent of the solvency funding requirements is to protect the pension benefits that beneficiaries will receive by ensuring there are sufficient assets to meet the plan's full obligations to pay out a pension.
    All plans—crowns and private sector—are subject to solvency funding. If you eliminate solvency funding from one plan, you're going to end up with an unlevel playing field, and you're going to have many other plans lining up for the same type of treatment. We have 19 crowns, and then as I said, roughly 280 DBs in the private sector.
    Okay, but if for Canada Post and other federal crown corporations for that matter there's no real prospect of going bankrupt and having to pay out all the pension obligations at once, why should they be subject to solvency valuation?
    Again, it's to protect people's pensions in the event the plan is terminated.
    Okay, but if we're confident the plan isn't going to be terminated, then we wouldn't think that's an important benchmark.
    Yes. It's one of the options that was put forward in the report.
    Okay.
     As a basic tenet of the PBSA, solvency funding is there to protect people's pensions. It's true some provinces have backed off from having their crowns fund on a solvency basis. Quebec has eliminated it right across the board. I'm not sure that's such a great thing. Other provinces are reviewing their solvency funding regimes to see what might replace it.
    We're always open to considering new proposals to help federal plans address their funding challenges.
     It just seems to me that there's a pretty fundamental distinction between a crown corporation and a private company like Air Canada.
    Since you mentioned the Ontario situation, I want to go to Ms. Cover and ask her the same question.
    Given that Canada Post has a very large pension plan and given that it's in the public sector, would it not be reasonable to exempt it from solvency evaluation in the same way that your pension has been exempted?
    I think I need to steer clear of opining on what Canada Post can do, but I can reiterate that what is very important about our solvency exemption is that JSPP structure. The employees are at the table, and they make decisions about contribution and benefit levels. They understand that, if our plan were ever to wind up and we were underfunded, they would take a reduction in benefits. They're a part of that decision-making, and that's the important part of our structure.
    Joint trusteeship is certainly something the postal workers have proposed.
    Mr. Whelan, you have seven minutes, please.
    Thank you very much, Mr. Chair.
    Oh, pensions—unlike Mr. Clarke, I love math, so I'm really happy and excited about this discussion.
    I think the elephant in the room that's dogged us around the trail of our discussions is that the largest risk to Canada Post seems to be its ongoing pension liabilities and the changing pension landscape that everyone has to deal with. As I try to juxtapose Canada Post and the level playing field and other government employees, I'm faced with a question similar to the one Mr. Weir has. If the public sector pension plans and the public service pension plan for Canada aren't managed on a solvency basis, why should Canada Post's?
    Maybe this is a question for you, Ms. Hemmings. Is there something particular about the going concern assumptions that don't apply to Canada Post because of its precarious financial position, or could it simply be wound up into the public service pension plan, as observed by the task force?

  (1400)  

    You mentioned something about the going concern assumptions. Is that what's attributing to the Canada Post issue?
    I'm just wondering whether that is a reason. Are going concern assumptions not applicable to—
    Well, they're in a surplus on a going concern basis right now.
    Okay, but is the overall business and cost structure a reason to give us concern about allowing them to manage their pension plan on a going concern basis?
    Obviously, mail volumes are declining. You need to build a healthy business to support your obligations to the pension plan. I think the business model that Canada Post develops going forward is very important and critical to the health of the pension plan over the long term.
    Is there any particular concern that you would have about simply winding the Canada pension plan up into the public service pension plan, as recommended by the task force? This was suggested as a solution that would be highly effective with medium ease of implementation.
    I really don't think it's appropriate for me to comment on that as an option in advance of the minister making any decisions as to how he wants to approach the pension plan issue.
    Okay. Can you comment on its effectiveness? The task force says that it would be an appropriate way to transition the pension plan from its current status into one which allows it to be treated as a going concern and to be paid out accordingly.
    Again, I would have no comment on that.
    Okay.
    Mr. Skinner, do you think it would be effective if we wound the pension plan up into the public service pension plan as a means to avoid this problem in the future, at least for existing pensioners and existing benefits?
     That's an important clarification. It's not immediately clear to me in the report what the intention was. There are a few different variations on that approach on repatriating the Canada Post plan back into the public service plan. One option might be just to bring the assets and liabilities corresponding to retirees, or maybe retirees plus the accrued service of existing actives, or perhaps everyone would participate in the public service plan going forward. It's not clear what's meant there.
     I'd say that the answer would depend somewhat on what's left behind at Canada Post.
    Sure. Of those three examples, do you think it would work just for existing pensioners?
    I think it would be a help in terms of affordability, certainly.
    Do you think it would be helpful and would work in respect of existing benefits for workers who are still in the service and haven't retired?
     I think that financially it's probably of greater effect. I think it's administratively, logistically probably more cumbersome. That's going to be difficult to split their membership between.... We'd have to do a lot more analysis of that option.
    Okay.
    Then in terms of new workers, new benefits going forward, why put Canada Post workers on a different playing field from other Government of Canada workers?
    That's not a question for me. It's a policy question.
    Okay, fair enough.
    I have another line of questioning.
    When I was looking at the historical solvency discount rate for Canada Post and I was trying to find similar numbers for the public service pension plan and other government pension plans, how does this 1.25% compare as a discount rate to the other government plans? Maybe Ms. Hemmings can mention the plans that the Finance department oversees. What discount rate are you operating on and how does a 1.25% discount rate for Canada Post compare?
    If I could jump in, the public service pension plan doesn't report on solvency, so there's no direct comparator rate under the public service plan.
    Okay.
    When you talk about the inflation rate that you're using, one of the other suggestions given by the task force was that we would mark inflation to market rather than use some target inflation level which is higher. Which number is being used here in the chart that you provided for us today? What would be the net result of using a mark to market inflation rate instead?

  (1405)  

    Yes, the solvency inflation assumption that we're using in our calculations is 2% per year, so that is a bit higher than the about 1.5% as an approximate basis, which I think is how they put it in the task force report. I don't have the numbers in front of me, but I remember I did a rough calculation of the number that was in the task force report, and that seemed about appropriate. It seems about right.
    Having said that, I'm not myself very comfortable in reducing the inflation assumption as low as what the task force report would say. I think so-called marking to market is probably more complex than it sounds, and we're really looking at a long-term assumption about inflation. The number of 1.5% is based on a particular read of some bond yields, and I think there are a number of items that can distort that reading.
    How is the Canada Post pension plan doing in terms of returns? How did it do last year?
    It did well last year. I don't recall; I'd have to look it up, and I know you're very tight for time, but they exceeded their assumption for investment returns, so there were gains.
    What was the assumption, then, for investment returns for this year?
    For going concern we were looking for 5.8%.
    You exceeded that.
    We exceeded that, yes.
    Ms. Hemmings, how did the public service pension plan do last year?
    I'm sorry, but I'm not able to respond to that. I only look after the federally regulated pension plans and the public service pension plan is not part of our portfolio.
    Okay.
    In terms of the federally regulated, how did Canada Post do vis-à-vis its competitors?
    In terms of returns, amongst the crowns it was pretty on par.
    Okay.
    If you want more detailed information to compare how it performed vis-à-vis other crown corporations federally, we can provide the committee with that information.
    If you could, that would be helpful. Thank you very much.
    Mr. McCauley for five minutes, please.
    Thanks for joining us today, it's very good information.
    Ms. Hemmings, you mentioned...Ms. Hemmings?
    Oh, sorry.
    Some hon. members: Oh, oh!
    If you don't want to answer, just say no comment.
    It's the earpiece actually.
    You said there are 19 crown corporations. How many of them compete directly with the private sector, like Canada Post does with some of their—?
    There's the Business Development Bank, the Export Development Corporation, and the CPPIB is competing in some respects. Also, CBC is. There are several.
    Okay.
    Have any of them ever received the exemption, like a permanent exemption, that you recall?
    No one has ever received a permanent exemption; however, some of the crown corporations have opted to take a solvency reduction on occasion. Just as Canada Post did from 2011 to 2013, there are some other crowns that have opted to do the same thing.
    Okay.
    Mr. Skinner, I've asked the question before, but if Canada Post was exempted, so to speak, from the solvency, how much of a competitive advantage would it give them over companies like FedEx and UPS? Would it be just marginal, insignificant, or would it be actually...?
     It's difficult for me to say. I don't have any detailed information on what those competitors' benefit plans are like and what kind of cost structure they have, so it's difficult to be precise about that.
    I do know that, to the extent that they have DB pension plans, they would be required to fund them on a solvency basis.
    Right.
    They may not have DB pension plans, though. I'm not sure what their compensation structure is like and how that might compare to what Canada Post is offering.
    You mentioned that some of the Canada Post people have gone over to a defined contribution. We've heard that a very large cohort, something like 35% to 45%, of Canada Post employees will be retiring in the next five years. For the sake of argument, if they retired and a new cohort were brought in on a defined contribution, would that have any effect on the pension issue? Would it be significant?
    I would say that most new groups of employees who are hired at Canada Post would enter the defined contribution, the DC component. A major exception to that would be the CUPW, the Canadian Union of Postal Workers, and they make up about three-quarters of the active membership—
    Right, the majority.
    So, for the most part, the replacement of people who retire will likely still be going into the defined benefit component.
    To the extent that we shift from DB to DC, though, it slows the growth of the defined benefit component. We're not adding more cars to the back of the train.

  (1410)  

    Ernest & Young mentioned as well that the liability for the pension is very large compared to the revenues. To your knowledge, is anyone else in a similar position? We have this huge outstanding pension liability, but our revenues have been—
    Pretty flat.
    They haven't been flat, but—
    Close.
    What's happened that ours has grown so much?
    Figures 3 and 4 show a couple of different measures of size versus revenue, and you can see that we have tried to compare it to a selection from the TSX Composite, which are private sector of course. There's the issue of private and public, but Canada Post competes in the private sector, and compared to comparable firms, Canada Post's pension plan obligation and contributions are quite a bit higher.
    Okay, you mentioned life expectancy assumptions. Are they in line with other similar pensions?
    Yes.
    Okay.
    What's the biggest risk you see. You say you have a lot in equities right now. What would happen if we get a market shock of 10% or 20%? That seems to happen to my stocks all the time.
    Well, we have solvency funding still in place. If we were to see another crash like in 2008, where I think the plan made something like negative 19%, as did most pension plans—
    Or even a zero to 5% drop.
    —then we're looking at very large contribution requirements rolling in over the next few years. The averaging mechanism in the solvency funding does moderate the volatility somewhat, but it wouldn't take long before that rolls in. Even on a going concern basis, a shock of that size would be felt.
    Thank you.
    Madam Ratansi.
     Ms. Hemmings, who is managing the Canada Post pension plan at the moment?
    The plan administrator is.
    Who is the administrator?
    Canada Post has a team that manages it, with the money held in trust.
    That's fair enough. Do they receive a level of compensation for managing the plan?
    That's a question I would put to Canada Post.
    That's fair enough, not a problem.
    When we're looking at the history of Canada Post and its insolvency issue, it's solvent at the moment, but what if it were ever to go insolvent? If the plan is being managed by CP itself, does Canada Post have the management capacity to manage pension plans, like Mercer or the Ontario Teachers' pension plan do? Does it have the core competencies to do it?
    Anybody can give me their answer.
    Competition, I need to know.
    Well, there's a huge market of providers to help all sorts of clients, so if they do not have the expertise internally, they can buy it from outside providers.
    If they can buy it from outside, why is Canada Post facing such a problem? From an insolvency perspective, if we are projecting, we know that because it's part of their charter they have to think of insolvency. Do you think Canada Post is facing a problem? We are discussing it here, so pension liability is a problem.
     The problem the Canada Post plan is facing is frankly no different from what most defined benefit plans, not cost-shared plans or joint governance plans, are facing. There is a problem with the level of the interest rate. With a low interest rate, as it now has, frankly, I'm not sure defined benefit plans are sustainable.
     I would recommend that one thing you could do is to make that interest rate higher.
    Voices: Oh, oh!
    Why are you looking at me?
    Well, you're the chair.
    We agree. In a market where there is so much volatility, how have you guys managed your constituents' pension plans so that they are not risk averse but are able to mitigate market risk?
     Ms. Cover, maybe you can tell us.
    We have been doing quite a lot in terms of looking at our asset mix, as an example, and moving over into more liability-driven investments, but really conditional inflation protection has been our strongest funding lever.
    A few valuations ago our conditional inflation protection dropped to 60% of inflation protection, and that has had a very strong impact. That's really the core of our success story for managing the markets over the last few years.

  (1415)  

    Mr. Skinner.
     I would echo Ms. Cover's words. The one important lever that can help to address risk is the ability to vary benefits when needed. Inflation seems to be the one that is the most often targeted for that, but it's quite effective.
    When the Canada pension plan was underfunded and it was in its doldrums, the then finance minister, Paul Martin, decided to create the Canada Pension Plan Investment Board. Would going that way be an option for Canada Post?
    Maybe, Ms. Hemmings, you have some ideas.
    CPPIB was created for very different reasons. The governance structure is entirely different, such that you have provincial stewards. I'm not sure how you would transplant that model onto Canada Post.
    I think if you want to involve all the parties with representation from the unions and the employees and the employer, the proposed target benefit plan, which allows the benefits and contributions to be adjusted up or down as the plan performs is probably a better model than is the CPPIB model.
    Thank you.
    Mr. Clarke.

[Translation]

    My next question is for Ms. Hemmings.
    Do you confirm the conclusions of the working group concerning the general deficit of Canada Post, or is this question completely outside your field?
    I would in any case like to know your point of view.

[English]

    Are you just asking for the actual deficit? That is now at $8.1 billion.

[Translation]

    Yes, I should have been more specific. I was talking about the overall Canada Post deficit.

[English]

    Is it the solvency deficit?

[Translation]

    I am talking about the report that was prepared by the working group. This was the first phase of the study on Canada Post. I would simply like to know, generally speaking, if the Department of Finance agreed with the deficit as it was set out.

[English]

    I think any questions about the deficit and whether we feel it is accurate are better put to Mercer, the external actuary.
     There are a couple of kinds of deficits in the report. One is the solvency deficit for the pension plan specifically, and that comes from our valuation report. We certainly agree with the task force on that and that's a matter of record in the past. It has been reviewed by the regulator as well.
    They also speak of an operating deficit in terms of revenue versus expenses projected into the future. If that's the type of deficit that you're asking about, it's a very different type and it's outside of my area of expertise. I can't speak to that.

[Translation]

    I have another question for you, Mr. Skinner and Mr. St-Germain.
    Representatives of the Canadian Union of Postal Workers have repeatedly told us that in their opinion the pension plan is not necessarily in deficit.
    In your opinion, are they playing politics, or are they basing their opinion on actuarial studies conducted by some of your colleagues?
    When they say that their pension plan is not in deficit, is that statement based on facts?

[English]

     It's certainly in a deficit situation on a solvency basis. It is currently in a surplus on a going concern basis. That may be the statement you're referring to.
    The argument they're putting forth, I believe—I don't want to speak for them—is that the solvency basis is not appropriate and therefore not important. I think that's a legitimate discussion to have, and we're having it today. That's the source of that discrepancy.
    Thank you very much.
    Kelly.
    Mr. Skinner, you discussed shared risk pensions. From what I've read, that seems mostly about the indexing of the pensions and taking the shared risk on indexing. Is that mostly correct?

  (1420)  

     That's probably the most common thing we see, although there are other things that can be done.
    What other large pensions out there would be doing this right now? At Teachers', you sound like you have a tiny bit of that, but not a pure shared risk.
    Yes, Teachers' does. HOOPP, the hospitals of Ontario pension plan, does have a shared risk on indexation.
    Do you know of any private sector unions doing that, or is it more in the public sector?
    Ms. Mary Cover: I'm sorry?
    Mr. Kelly McCauley: Do you know if there are any in the private sector doing that or is it mostly public?
     CN has some conditional indexing as well.
    CN does. Is that a stronger way forward than looking at other changes to the pension, do you think?
     I think it's a very effective way to address risk so that it gets spread out more over time. It will affect the provision of benefits to some degree. That's the point—
    Yes, but it protects the base pension. It's just the indexing.
     Right.
    Okay.
    Ms. Cover, do you share the same opinion that this is perhaps a strong alternative?
    Extremely strong, and it gets more powerful every single year from the line in the sand that you choose. In our case, it was 01-01-2010, and only six years later we're already seeing a very large impact in terms of the ability to reduce deficits by lowering inflation protection.
    Thank you very much.
    Madam Shanahan, please, for five minutes.
    It's very worrisome this testimony we've been hearing, and certainly what we know. In fact, if we were not talking about Canada Post as a going concern business, we also would be very concerned about the pension itself.
    Can we wrap this up a bit? Can the panel tell us what are the elements of a well-run pension plan? What would be the elements that we would need to have in place to see this as a going concern going forward, to see this as a viable pension plan going forward?
    I'll start with Mr. Skinner.
     I would say that some of the things we've talked about would be very helpful.
     If I can put it this way, one thing that's difficult for a traditional plan like the one in place today is the lack of flexibility around benefits. In terms of all the benefits, first, they're generous in the marketplace—they're essentially exactly like what's in the public service pension plan—and fully guaranteed. That level of guarantee and that level of benefit are expensive to provide.
     If, when times are bad, there is a safety valve, if I can put it that way, to scale back on those benefits, even temporarily until things recover, then you can restore them, and that kind of flexibility has a huge impact on the risk sharing and on the sustainability—that, combined with sound investment practices. Also, I think joint governance does help, because it can remove some of what can be an adversarial approach to pensions and get all the parties pulling in the same direction.
    Monsieur St-Germain or Madam Cover.
    I agree with my colleague.
    Yes, of course.
    Ms. Hemmings or Ms. Pezzack, especially in the realm of crown corporations, along that line.
    It's difficult for me to speak to what I think would be the key things that would make a pension plan a success without giving away some of the considerations that we would take into account in developing options. It's not appropriate for me to get into too much detail on that.
    Okay, I understand.
    What would be the way forward if we were to look at something? It strikes me that it's the tail wagging the dog here. If we were to decouple, to separate the pension plan entirely from the plan administrator at this point, the current sponsor, what would that look like?
     What would that involve? Are we talking about insurmountable hurdles or can we anticipate...? These are very turbulent times, to use one of those old clichés, but it is true in the pension world that things are not as they were. In fact, they never really were for very long, and all of us here are old enough to remember very different times as well.
     Is that possible? Can you see management and unions getting together and making this work?

  (1425)  

     [Inaudible—Editor] comment on the labour management issue here, but I will say two things on whether or not joint governance can be the solution for Canada Post. The first is alignment of interest. The various stakeholders need to have interest that is possible to align. The second one is there has to be cost sharing between the stakeholders, and I'm willing to say between all stakeholders, including retirees.
    These two issues are a major challenge. I do not want you to think they're easy to achieve.
    Okay, thank you.
     Briefly, would someone like to comment on what came up fairly recently about Canada Post retirees taking the commuted value of their pension and going outside to buy annuities? Mr. Skinner?
    It looks like it's a fairly recent decision from the Office of the Superintendent of Financial Institutions that is allowing Canada Post retirees to actually remove their commuted value.
     I don't think that's true. I'd have to see the comment to put it in context, but I believe that it's not possible under the current rules for a retiree to commute his future benefit into a lump sum. It is possible when somebody terminates employment—in certain age ranges—that they could take a lump sum.
    Okay, thank you very much.
    Mr. Weir, for three minutes.
    I thought it was very interesting when government members asked about the solvency valuation of the federal public service pension plan. Of course, the answer is that there isn't one. It wouldn't make sense to assume that the federal government would have to wind up its pension plan and pay out all the benefits at once.
    I guess my question would be, why is Canada Post different from that? Why are we treating Canada Post as a private company rather than like it's part of the federal public service?
    I wasn't around back in 2000.
    There was a review, I believe, in the late 1990s—and I may be getting my facts mixed up—where the government of the day was looking for cost savings. They looked at various crown pension plans that were under the PSPP, did a review, and made the decision to move it out from under the PSPP into the PBSA. There may have been some rationale, some consideration, given to the fact that mail services were not part of core government and therefore it should be spun off.
    During the 1990s, the period you referenced, the federal government was also privatizing a number of crown corporations. Certainly if the government were in that mode, it would need to get their pensions on a solvency valuation, which would appropriately be required in the private sector. Given that no one is actually proposing to privatize Canada Post, I wonder whether it might make sense to treat it more like the rest of the federal public service.
    I'd welcome views from Mercer on this as well. I asked similar questions to the other witnesses in the last round, but certainly if folks from Mercer have any views, I'd welcome them.
    I would say it's an issue of policy, about how much of a distinction you want to make in the rules between public sector and private sector pension plans.
    Ms. Hemmings made the point earlier about a level playing field. To the extent that especially if a crown corporation is competing in the private sector, there could be an argument that it's unfair competition.
    I don't think the private courier companies have defined benefit pensions, so that's a fairly hypothetical argument. However, I take the point.
    Thank you very much, Mr. Weir.
     I want to thank all of our witnesses for being here.
    I have one quick question for Ms. Cover.
     I'm curious about the joint governance structure that you have in your pension plan. I know the Ontario pension plan has made many investments over the years. The one I'm most familiar with recently is that in the last two or three years you purchased the Assiniboia Farm Credit Corporation. Would those investment decisions be made in a joint governance structure as well?

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     Yes, our board actually has oversight. Because of the structure, our board is tasked with the investments, so the plan sponsors do not have direct influence over the investments that we choose to make.
    To all of you, thank you once again. Your testimony has been very well received, very helpful to us. Some of our committee members may have additional questions they want to pose to you, and I hope you would invite them to do that directly. Conversely, if you have any additional information that you think would benefit us, please send it to our clerk.
    We will suspend for a couple of minutes while we wait for our next witnesses to come to the table.

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    Colleagues and witnesses, we'll commence once again.
    Thank you to our witnesses for being here. Once again, I'll make an assumption that you understand the process. After your opening statements, we'll follow with questions from all of our committee members.
    Mr. Irwin, I have you first up for your presentation. Is it a five-minute or a 10-minute opening statement?
    Please proceed, sir, when you are ready.
     Thank you, Mr. Chair and committee members.
    My name is Tony Irwin, and I'm president of the Canadian Consumer Finance Association, formerly known as the Canadian Payday Loan Association. We appreciate the opportunity to speak to the House of Commons Standing Committee on Government Operations and Estimates regarding the discussion paper “Canada Post in the digital age”.
    Our association represents financial service businesses that provide payday loans to Canadians, as well as a range of other financial products including installment loans, cheque cashing, wire transfer services, bill payment services, and currency exchange. The CCFA has 18 member companies that hold the lender licences for approximately 960 stores and online lending platforms. This represents 69% of the payday loan industry across Canada.
    A payday loan is typically a loan in an amount of $400 to $500 that is repayable on the borrower's next payday. The legal definition of a payday loan is a loan not to exceed $1,500 for a term of not more than 62 days. In 2008, the federal government transferred jurisdiction to the provinces to regulate this product. The provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, and Prince Edward Island have now licensed the product, and the Province of New Brunswick is currently finalizing its regulations.
    To operate in these provinces, a payday lender must apply for and obtain a lending licence, which requires payday paying annual licensing fees, and often filing transaction data, or financial statements, on an annual basis. Each province sets maximum fees that can be charged for loans, and all aspects of the operation of the business are strictly regulated, including disclosure of information, standard contract terms, right to rescind by borrowers, limits on default fees, advertising, sale of ancillary products, and collection practices, among other things.
    There are many misconceptions and much misinformation about the industry. Some opponents have labelled our industry as predatory, but the industry grew in response to consumer demand. Many Canadians have a need for a small loan for a short period that they can obtain quickly, and for those who do not have good credit or an established banking relationship, the need was not being served by banks or credit unions. A survey of payday loan borrowers that was just published by the Financial Consumer Agency of Canada on October 25, 2016, found that 45% of respondents typically used payday loans for unexpected necessary expenses, and 41% typically used payday loans for expected necessary expenses. Borrowers will tell you our members provide a needed and valuable service, and provincial governments understood this when they chose to regulate the industry in a manner that protects consumers but allows for a viable industry.
    There is a perception that payday lending is a rapidly growing industry, and lenders are making excessive profits. This is not correct. At the time regulation came into effect in most provinces, in 2009, there were approximately 1,452 payday loan outlets across the country. Today, there are approximately 1,426 licensed online or store outlets. The return on investment of payday lenders is far lower than that of the banks. If the industry were highly profitable, the industry would have grown in the last five years, rather than contracted.
    As the Canada Post discussion paper states, despite the high rates, the payday loan industry has low margins. The cost of credit is expensive because it's costly to provide. Costs are high not just because of higher default rates, as the consultation document notes, but also a high cost of operation. Unlike banks and credit unions, payday lenders do not hold deposits or offer large secured loans to help cover the cost of operations. In addition, our industry serves a large sector of borrowers with thin credit files, and lenders have to employ complex and expensive technology and systems to manage their product offerings, risk assessments, and regulatory compliance.
    Many payday lenders offer the service of cheque cashing, which is referred to in the discussion paper. Cheque cashing is a competitive business, and a typical fee for cashing a cheque is 2.9% of the face amount, plus an item fee of $3 on average. On a $300 cheque, that would equate to $11.70. While the government indemnifies banks, credit unions, and trust companies for loss due to fraud resulting from cashing cheques up to $1,500, no such indemnity is provided to financial service businesses. They must bear the risk.
    It is important to note that over the past decade, the use of cheques has dropped dramatically, and this trend is continuing as more and more businesses are making payments electronically. As a result, cheque cashing is becoming an ancillary and increasingly more marginal business.
    The Canada Post discussion paper increasingly notes payday loan-type businesses are moving online. This is very true. Five years ago, getting an online loan was not common. Today there are any number of apps you can download on your phone to provide you with a loan. A survey of our members who are primarily bricks-and-mortar operators found that the amount lent by their online divisions from 2010 to 2014 increased over 520%.

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    In the past there was typically a delay of up to 24 hours between the time a customer applied online for a loan from the lender and the time funds were deposited into the borrower's bank account. With recent updates in technology, lenders can now deposit funds into a borrower's bank account instantly. Removal of this time delay will result in greater and more rapid growth of the online business in Canada.
    A recent study commissioned by the Consumers Council of Canada noted that in the United Kingdom more than 80% of transactions are done online. In the U.S. and Australia online lending comprises one-third of all payday loan transactions. We expect this will be the Canadian experience as well. In the future as most customers are reached electronically, the need for physical premises to transact and advance a loan are less important.
    Access to credit for all Canadians is important. The Canadian Consumer Finance Association believes that the more options consumers have to meet their credit needs, the better. However, anyone considering entering the marketplace should be aware that this is a highly regulated and competitive market. Margins are small and even at the maximum fees permitted in each province, only the most efficient operators will succeed.
    Thank you.
    Thank you very much.
    Mr. Hannah, do you have a five-minute or a 10-minute presentation? You have a five-minute one.
    Thank you, sir. You're on.
     Thank you for inviting me to be here with you this afternoon to contribute to your review of Canada Post.
    My name is Darren Hannah, and I am the vice-president of finance, risk and prudential policy, at the Canadian Bankers Association.
    The CBA represents 59 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada.
    As the committee is likely aware, the CBA was an active participant in the first phase of the review process led by the Canada Post review task force. The banking industry's interest in the review is limited, and it relates specifically to the proposals that Canada Post engage in the business of banking across the country. Our concern is that such proposals are not guided by a clear public policy need. They overlook that Canada benefits from a highly competitive and accessible financial services sector, and that banking is one of the most heavily regulated and supervised sectors across the country.
    Canada has a highly competitive financial services sector. There are currently 80 banks operating in Canada, with more than 40 offering financial products and services to Canadian consumers. Canada has more large banks actively competing against each other for customers than practically any country in Europe, including the U.K., which has almost double the population of Canada. There are also non-bank providers of financial services that actively compete with the banking industry, including over 1,000 credit unions and caisses populaires.
    With so many financial service providers available to consumers, Canadians are actively taking advantage of the choices available and shopping around for the options that are best suited to their needs. Nearly 60% of Canadians have switched accounts to reduce their service fees, and 32% have switched banks entirely. Additionally, 65% of Canadians deal with more than one financial institution, and of those, 34% deal with three or more. With so many bank and non-bank providers of financial products and services actively competing across the country, consumers continue to be well served by Canada's competitive financial marketplace.
    Some proponents of postal banking have asserted that banking services have become inaccessible in Canada. Contrary to these claims, banking is more accessible than ever. According to the World Bank, 99% of Canadian adults have an account with a financial institution, and Canadians can now bank virtually any time from anywhere using a number of different options that reflect the growing expectations of Canadians for greater ease and convenience when banking.
    Online is emerging as the preferred means of banking for the majority of Canadians of all age groups. Banking has continually evolved, and customers value innovation and convenience as they access their banking outside of traditional business hours. Now 55% of Canadians use online as their preferred means of banking, which is up from only 8% in 2000. Additionally, 48% of Canadians use online as their primary method of bill payment. Furthermore, the number of transactions taking place online keeps growing, with nearly 615 million Internet banking transactions being completed in 2015.
    With more and more Canadians carrying mobile devices, banks offer mobile banking services and apps that allow customers to carry out a variety of day-to-day transactions through their mobile devices. Over a few short years, the number of Canadians who use these applications has grown dramatically, with 31% of Canadians using mobile banking last year, which is up from 5% in 2010.
    Branches remain an integral part of banking in Canada. While only 13% of Canadians visit branches for their daily banking, banks have maintained their extensive branch network for those clients who choose to access financial services and advice they need in person when making important life decisions like purchasing a home, making investments, or planning for retirement.
    To argue that postal banking is needed so that Canadians can have access to banking services does not reflect the continuing innovations and growing convenience of banking across the country.
    A healthy financial sector is a key component to a well-functioning economy. Canada's banking system is widely recognized as being one of the strongest and soundest in the world. This strength was clearly demonstrated through the global financial crisis, as the Canadian banking sector continued to perform and did not require government-funded bailouts, which stands in sharp contrast to the challenges faced in other countries. Canada's prudent banks, combined with effective regulation and supervision, form a model of stability in the global financial system.
    Given the strength of Canada's financial system and its critical importance to the health and stability of the broader national economy, proposals for Canada Post to become involved in retail financial services should not be taken lightly. The cost of regulatory compliance is high, and it's critically important for all financial service providers to have appropriate expertise, processes, systems, and robust risk management practices in place to protect Canada's financial system. Canada Post is a crown corporation, and taxpayers ultimately bear the risk of its operations.

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     Canadians benefit from more choice, convenience, and access in banking services than ever before. Canadians are well served by Canada’s competitive, prudently regulated, and effectively managed banking system. We agree with the task force members, who concluded that Canada already benefits from a well-established market for financial services. We believe there is no public policy objective or existing gap in the marketplace that would necessitate the Government of Canada entering into the business of retail banking through Canada Post.
    Thank you, again, for the opportunity to present our views. I look forward to your questions.
    Thank you, Mr. Hannah.
    Mr. Martin, do you have a five-minute opening statement?
    All right. Proceed, please.
     Good afternoon. My name is Rob Martin, and I'm a senior policy adviser at the Canadian Credit Union Association. Looking around the table, I think that some of you know who we are.
    The Canadian Credit Union Association is the national trade association for credit unions outside of Quebec. Desjardins is our co-operative partner, but it's mostly within Quebec. CCUA represents 293 credit unions including the first federal credit union, which is called the UNI Financial Cooperation, which came out of New Brunswick.
    Credit unions are banking institutions owned by their members and their customers. This means we're 100% Canadian-owned competitors to the big banks. Currently 5.6 million Canadians trust the local credit union for their day-to-day banking needs. Collectively we employ more than 27,000 people and manage over $196 billion in assets. This makes us bigger collectively than National Bank.
    In terms of market share, credit unions have about 6.3% of the assets held by deposit-taking institutions in Canada, but we have large market shares in two key segments, small business and agriculture, with 11.5% of the market and 10.4% of the market respectively. As co-operatives, credit unions are different. We are not motivated by profit maximization but rather focus on the benefit of our members and our community. This translates into our having preferential rates, providing patronage dividends for credit union members, and keeping branches and service outlets in underserved areas.
    In fact, credit unions are the only banking service provider in 380 communities across Canada. In other instances we see credit unions like Vancity providing alternatives to payday loans, such as Vancity's fair and fast loan or First Calgary Financial's cash crunch loan, to help individuals get out of a payday loan debt. Servus Credit Union in northern Alberta is working on a similar offering as is the Ontario system.
    While credit unions are users of the mail and parcel services offered by Canada Post, the reason we are presenting today is to address the debate concerning Canada Post's potential entry into the financial services industry. We know that CUPW is promoting the entry of Canada Post into banking as a means of increasing revenues, offsetting losses, and maintaining jobs. Other advocates emphasize delivering financial services to under-banked rural remote regions and indigenous communities. Of course, given our history and our orientation, concerns about the financially excluded have considerable resonance with credit unions, and we are always open to dialogue with the government on these issues. That being said, CCUA is not supportive of establishing a stand-alone postal bank in Canada. Our reasoning behind this position aligns well with the report of the task force for the Canada Post review.
    Specifically we believe that the business case for such an enterprise is weak, and the entry of Canada Post into the banking field could result in negative unintended consequences in the market. Regarding our first point, given the rapidly evolving financial services sector, we are certain a postal bank would face a challenging time establishing itself in a crowded and well-served market. On the supply side, the market is served by nearly 80 chartered banks—ATB in Alberta, Desjardins, and 293 credit unions across Canada. These institutions offer remote cheque capture, eliminating the need to access an ATM or branch, and most allow customers or members to conduct all their transactions—everything from applying for a loan to transferring funds—from the convenience of their home. Not surprisingly then, credit unions are seeing a steady decline in traffic in their branches.
    On top of this, Canadians also have offerings from the Business Development Bank of Canada, Farm Credit Canada, and Export Development Canada. On the demand side, as my colleague here mentioned, World Bank research suggests that unmet demand for financial services is limited. The World Bank research indicates that 99% of adult Canadians age 15 or over have some form of bank account. Other research from the Canadian Centre for Policy Alternatives indicates that only 3% of all Canadian adults have no bank account at all. Admittedly this number rises to 8% for low-income Canadians. This is a fact that merits attention from policy-makers. CCUA is open to a dialogue with government on how these issues might be addressed. We do not, however, believe that this situation justifies the establishment of a stand-alone postal bank in Canada.
    Now to our second point. A concerted push to establish a postal bank in Canada could produce unintended consequences and crowding-out effects in the financial services market. Banks and credit unions could find themselves in competition with a postal bank that benefits from difficult-to-match state-granted privileges and advantages. One of these advantages would be a lower cost of funds. C.D. Howe Institute research has noted that crown financial institutions enjoy a comparatively low cost of capital because they can issue debt that is backed by the federal government and can borrow directly from the government itself at preferential rates.

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     The institute estimated that crown borrowing costs are 30 to 50 basis points lower than those available to private sector competitors like credit unions. This can rise to 300 basis points in times of stress. This funding advantage can tilt the playing field in favour of the crown by granting it pricing advantages. If a postal bank were to lean on these advantages, it might produce perverse outcomes with banks and credit unions possibly pulling back from markets where margins are thin.
    Also, a postal bank would enjoy a pre-established outlet network. A postal bank could also enjoy an advantage over competitors as a result of its outlet network, which I think is approximately 6,400 locations across Canada. This outlet network was developed with Government of Canada investment over many decades in the service of its mail mandate. From the get-go, a postal bank would face fewer costs associated with establishing and administering a financial network as do other financial institutions.
    The scope of that network will be difficult to match and could undermine the economic rationale for some bank and credit union branches in regions with a limited economic base or thin operating margins. I can elaborate on that further in questions.
    My final point is there would be a lighter regulatory touch. If history is any guide, it's possible that a postal bank would face fewer regulatory pressures in comparison to those faced by banks and credit unions. For example, Farm Credit Canada, the BDC, and EDC are not answerable to a prudential regulator. Furthermore, they often face fewer statutory restrictions on their business powers and activities than crowns do. This is in contrast to credit unions and banks that face significant restrictions on their business practices and are therefore subject to ongoing prudential onsite guidance.
    Before I conclude, I would like to flag the fact that at the moment, there are two concurrent federal ongoing efforts to research competition and financial inclusion in the Canadian banking sector. The first announced in the 2016 budget consists of the decision to push off the five-year 2017 financial services review by two years to 2019 and to provide $4.2 million in funding for that effort. It's to look at competition and service in the market. The second, as recently announced by the Competition Bureau, is looking at how technology-led innovation in the Canadian financial services sector is affecting the way consumers use financial services and products.
    From a policy perspective, it would be ill advised for the Government of Canada to move toward establishing a postal bank in advance of these studies being completed and their recommendations known by the Canadian public.
    To conclude, the Canadian Credit Union Association thanks the committee for this opportunity to contribute. While the CCUA is not supportive of the establishment of a postal bank in Canada, we appreciate the need to expand the availability of banking services in some targeted areas. CCUA is open to engaging with the government on how that might best be achieved through collaborative approaches involving both public and private sectors.
    We'd be happy to respond to any questions you have.
    Thank you.

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    Thank you very much.
    We'll go directly to questions. Mr. Whalen, you have seven minutes.
    Thank you all for coming. We've heard a lot of testimony across the country not just from CUPW members but also from other members of the community about the desire for postal banking services and the additional revenues that could be used to help fund the operations of Canada Post.
    We've also heard some commentary that the banks and various lobbying groups are speaking out of both sides of their mouths and they say, first of all, that there's plenty of competition and then that they couldn't handle competition from Canada Post were it to enter the market.
    With respect to online banking services, Mr. Hannah, as someone representing the banks, do you see that Canadian banks have the lion's share of online banking services in Canada or do foreign competitors like PayPal or other foreign offerers of these services hold the majority of the online transactional market in Canada?
    Let me separate online banking from payment services providers. Online banking is in effect a suite of products that provide you with online access to be able to conduct your financial affairs on your account. You can make a deposit through remote deposit capture; you can make a payment; you can make a bill payment; you can transfer funds; you can execute a remittance. Almost anything you can do in a branch you can do online. A service like PayPal does one thing and one thing only. It moves money from you to somebody else. So they are two more than slightly different things.
    To your point, one thing we have been very strongly supportive of is providing a robust regulatory framework to capture all those financial services providers and payment services providers like PayPal to ensure that Canadians who use any product or service can do so with certainty that there's a robust regulatory framework that sets minimum standards for safety and security.
     From your experience, approximately how many different offerers or suppliers of the back-end IT infrastructure that is needed to start your own online bank or to service one of the Canadian online banks are there in the market? Is this something readily available for a large number of international suppliers, or is this something that every individual bank needs to create in-house?
    It is no small undertaking to build the technological capacity to operate a full-service bank in today's environment. To give you a sense of scale, last year alone, Canadian banks spent $10 billion on technology investments. It gives you a sense of what's involved in trying to build out the capacity that Canadians have demanded, in order to give them the service they want, to be competitive in this business.
    Well, I'm sure we could find some better things to do with $10 billion than to develop our own in-house bank.
    In terms of leveraging the existing banking network, the task force and some of the external analysis that was done suggested that maybe something in the order of $10 million could be generated per year, if the big banks co-operated with Canada Post to provide some type of rural offering, but at a great cost.
    From your perspective, do you think there would be an appetite among the competitors that are part of your organization to participate in such a nation-building exercise, to partner with Canada Post and reach out to rural Canada, to make sure they have the services they need to bank in the 21st century?

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    I'll start by saying that partnerships are the sorts of things that would need to be evaluated on a case-by-case basis. The challenge in this particular question though is what partnership means in that context. Partnership can mean any number of things, with any number of degrees of complexity and interaction, so it's hard for me to generalize.
    Mr. Martin, it's over to you then. Would the credit unions be open to this? One assumption was that, even the minor or minimally profitable models that were explored by the task force would require some type of partnership with an existing financial institution. Would credit unions be open to partner with Canada Post to service communities where Canada Post has sufficient physical resources and there is sufficient population density, despite the fact that it's rural? Would you be open to it?
    The short answer is yes. We have heard from some of our credit unions already that there is some interest in partnering, though we have some concerns. Historically, many crowns seek out partners through a tender process and it often goes to the largest and highest bidder. That would be our concern, and if there's any process around moving to a partnership model, that it be open to smaller institutions to participate and it not be done on an exclusive basis with one institution or two.
    Mr. Martin, does your organization offer a full suite of online banking tools for customers of the various credit unions across the country?
    Yes, we do.
    Are you spending tens of billions of dollars a year to develop that internally?
    We're spending a lot. I don't have an exact figure, but it's quite expensive. One issue we face is that our members want us to be available in branch; they want us to be available by telephone, by Internet, all kinds of different...and the number of channels requested seems to proliferate. We're trying to keep on top of that, though we are seeing some decline in branch activities.
    We do spend a lot.
    Okay. That's fair enough.
    Overall, would you consider that your market share for credit unions is growing or is it staying about the same?
    It depends on the area. I would say that overall, just in terms of assets, we're steady. We are growing in the small to medium-sized enterprise market. We're almost as big as BMO right now in terms of what we do as a collective of individual credit unions. In ag we've grown. Probably until two years ago, we were steadily growing and then there's been some slowdown.
    One thing identified by the task force was the strong brand value associated with Canada Post. Do you think the Canada Post brand, associated with banking, would allow your organization to attract and retain customers you wouldn't ordinarily be able to attract and retain? Would your organization pay a premium to be part of such a...?
    I think we might look at it the other way, that in some regions, in terms of the attactiveness of banking institutions, the credit unions would have some attractiveness, say, if you were living in northern Alberta and you know Servus Credit Union. If there were a joint branding exercise with Canada Post, then I could see there could be some synergies. Once again, it all depends on the terms of a contract with Canada Post and how that's modelled. Once again, we want it to be an open process.
    Thank you very much.
    Mr. McCauley, you have seven minutes, please.
     Welcome, gentlemen.
    Mr. Irwin, thanks for being here today. I appreciate your comments. We have heard a lot across the country about the predatory...I don't want to say “spin”, but the predatory narrative that's been spread around. To my understanding, most of the payday loan outlets are within a block or two of an existing bank. Is that generally correct?
    I don't have specific information on that, but it would not surprise me if that were the case.
    Most of your customers, I understand, actually do have bank accounts. They just do not have the ability to put in their paycheque and access the money immediately.
    Right. Banking is not the issue. They do have accounts. The issue is obtaining credit. They have had trouble doing that in other places.
    Right.
    Money Mart, I guess, is the largest player in town. How big would their collections office be? We heard from someone in Edmonton that they had about a 20% default rate on their cheques, but they had about 500 people in their collection department.
    I ask this because the question came up earlier about whether or not Canada Post would do their own collections.

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    Yes. I read some of those transcripts in advance preparation for today.
    I don't know how many people Money Mart employs for collections, but they do have a significant operation for that action in Victoria. They have a full team there.
    I think there are a few important points to note about that in terms of some of the testimony I read. From the collections standpoint, they don't generally seek redress through the court system. These are small loans.
    What I'm getting at is that it's not a simple procedure, is it?
    No, it is not, sir. In terms of trying to work with their customers, trying to work out some sort of payment plans, a lot of times they do that before the loan is even due if the customer has indicated they can't repay it on time. Our members do try a number of ways to work with their customers to obtain repayment of the loans.
    Right.
    Mr. Hannah, I asked another witness earlier today about this. The postal bank has been presented by some parties as a panacea to cure all that ails you financially with Canada Post. What would it cost to capitalize Canada Post as a full bank across the country?
    That's a good question. Actually, the regulator would be in a better position to answer that than I would. There's a minimum capital requirement, but then there is, beyond the statutory minimum, whatever it would take to satisfy the regulator that the enterprise has sufficient capital strength to carry itself forward and has put in place sufficient operational and managerial capacity so that they are fit and proper and know what they're doing.
    Well into the billions?
    It would be enormous.
    Yes. This is what we came across in Alberta. The ATB had switched over to a new accounting system with SAP. I think they spent $500 million just on training for the new system. It boggles the mind what it would take to do this across the country with individual outlets.
    One of the other issues we're hearing about is the amount of bank closures and credit union closures in small towns, but I saw a report where it was actually less than 100 planned over a five-year period. Is that generally correct? The quote for the Bank of Montreal was “several” across the entire country.
    Again, I ask this just to counter the narrative of this dystopian future where banks are shutting everywhere, leaving them without services.
    As I said in my opening remarks, branches still matter. They still are a feature of the banking system. There are over 6,300 bank branches in Canada right now. The number has actually gone up a little bit in the last few years. It's also worthwhile noting that this number is roughly twice the number of Canada Post corporate outlets.
    Right.
    If you add in the credit unions, I think it would be up to 3:1. The footprint is large and substantial.
    So it's actually growing.
    Mr. Martin, we heard from some of your colleagues at Desjardins about doing training sessions for seniors for online banking and mobile banking in Saskatchewan. Do you see that and similar initiatives growing with the credit unions, to reach out to the rural areas that might be looking for—
    In general, individual credit unions would have their own individual financial literacy programs, in the past. Now what's happened is that Vancity has elaborated a very sophisticated financial literacy program, called Each One, Teach One. They have just given that to the system gratis. They are rolling it out across the country. Individual credit unions are now incorporating Vancity's model of financial literacy. That will be an ongoing project for us for many years. It eliminates the duplication we used to have in our financial literacy models.
    So yes, we're doing that in a big way.
    Mr. Hannah, maybe you, or actually even Mr. Martin, can answer. We were in New Brunswick, where we heard from a local mayor who was doing a phenomenal job in his town but they had lost their bank and they had even gone as far as offering basically free rent to attract a bank, with no takers.
    One of the recommendations that came out of one of the reports when they talked about banks teaming up to go with Canada Post, I think was mostly just renting space within an existing Canada Post. Is that viable? If we have a town that's doing well but if they can't even get a bank with free rent, is it viable to think that banks will team up to rent in areas where it may not be financially viable?

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    You've put your finger on it. As you said in the last statement, there's the financial viability. The rent of the location is but one factor that goes into financial viability. You have to look at the size of the market. You have to look at foot traffic. You have to look at economic circumstances. Ultimately, the business decision to close a branch is not one that anybody takes lightly. Ultimately, these are customers you want and these are your clients, and you are part of the community. There is a robust process that banks go through to ensure that there is community involvement and they have a consultation and talk about alternatives.
    But at the end of the day, you're correct, in that it has to be driven by viability and a number of factors go into assessing viability.
    Thank you very much.
    Mr. Weir, for seven minutes, please.
    Mr. Irwin, you suggested that many people might perceive the payday loan industry as not meeting a real need. I would suggest that in fact we see it as a big market and think maybe there is an opportunity for Canada Post to participate in it.
    You made the point that one of the reasons payday lending is sometimes not very profitable is that there are a lot of defaults. In your business, I wonder, if it were possible to just get the Canada Revenue Agency to collect money from those who default, would that help to make it more profitable?
    I never thought about that, to be honest with you. Certainly our position is that the industry does meet a very real need. That's why it exists.
    Yes, we have defaults—student loans do go into default—but that's an idea that maybe I should take back to our members. I haven't thought about that before.
    Yes, if only there were a federal government agency involved in payday loans.... Perhaps it could happen.
    I have a question for Mr. Hannah.
     I want to thank you for a very succinct presentation, but to make it even shorter, it seems to me that you were arguing that Canada has a well-developed banking sector and therefore does not need postal banking.
    Another country that's had a well-developed banking sector for a long time is Switzerland, yet the Swiss post office has gotten into banking in a very successful way. I wonder if you have any reaction to that.
    Sure, there are some countries around the world that have a banking element to their post office, but typically where they do that has been a part of the postal system since its inception and the banking system effectively grew up around it, so it already occupied a part of the market.
    I'm not aware of any instances in a developed banking market with effectively universal access to banking and universal ownership of accounts of a post office being able to interject itself successfully in that market and do so in a sustainable manner.
    You don't see Switzerland as such a case? Your argument would be that postal banking existed before the rest of the banking system?
    My argument would be that in that instance, as with most others, the postal banking system grew up with the banking system so everything grew around it. I'm not aware of many instances where you have had successful entry into a developed banking market by a post office.
    Okay.
     Mr. Martin, you're dealing with a committee that has a chair and a vice-chair from Saskatchewan so we certainly appreciate the importance of credit unions. Would you also acknowledge that there are many parts of Canada where credit unions do not have a great presence?
    Yes, I would.
    We have been predominant west of the Ontario border historically, especially in B.C., Saskatchewan, and Manitoba. We've been growing in Alberta but we do face ATB there.
    In Ontario, if you live in Toronto or if you live in Ottawa, you might be misled even in terms of the scope of the credit union system because you might not see that many. My dad was a member of the Ontario Educational Credit Union and we used to have to drive up to this little box of a building. I always wondered what he did there and then I realized it was a credit union. So that was not in my experience growing up.
    But if you now go into London, Ontario, or Guelph, or Kawartha, you're seeing credit unions growing all over. I think that part of the dynamic is our competitors at the banks changing their positioning in the market and our being able to take up some of that.
    Once again, we have a lower penetration in the Atlantic market but the banks have been there historically right from the beginning of Confederation so it's been a struggle.

  (1515)  

     I guess my point is that I don't think anyone who's advocating postal banking wants to put credit unions out of business. I wonder if there might be some compromise whereby Canada Post could provide banking services in areas where credit unions don't have much of a presence. Perhaps credit unions could offer some services out of post offices in regions where they do have strong networks.
    Of course, in theory, that would make sense. We see that there are opportunities. There are credit unions that are interested in those kinds of models.
    I have to put a little history around what I'm saying. You're saying there's nobody who's going to think that Canada Post should come in and put credit unions out of business. Our historical experience with some crowns has been that we faced extremely competitive lending, both in terms and in price in the past. I don't want to dig up old history, but Farm Credit Canada was one in particular that was a very big challenge for our system. It moved from almost 14% to 15% of the market in 1993. Then it got a mandate to compete directly, and it moved up to 32% of the market. We struggled to maintain our market share at around 10% to 11%. Part of my job was to take the phone calls from credit unions that were saying, “Here's the term sheet from FCC that we can't match; there's no way.”
    Sure. I don't know how much time we have to get into that debate about FCC, but I appreciate the analogy.
    I have to close on that, because I do want to recognize that our relationship with the FCC is much better than it used to be.
    Okay.
     It took a good long six or seven years of dialogue with them to get into a better space, with the backing of minister Ritz.
    Maybe it could work out well with Canada Post then.
    It's possible, but we want to be certain that if we go into this, it's done in a way that's open to all parties to participate in and it's not done on an exclusive basis with, say, one or two large banks that they white label.
    On that note, I do have another question for Mr. Hannah.
    Some of your members are certainly contemplating closing some branches in less profitable or slower growing locations. Instead of closing those branches altogether, what if your members were able to offer some banking services out of the postal outlets that are continuing? What I'm saying is that Canada Post wouldn't necessarily get into banking itself, but it would collaborate with your members to provide a venue for their services.
    The short answer to that, I think, is tied in with the earlier question. The physical location is only one aspect of viability. It ultimately has to be economically viable for the bank and also for Canada Post, frankly.
    Mr. Ayoub, you have seven minutes, please.

[Translation]

    Thank you, Mr. Chair.
    I thank the representatives of the Canadian Bankers Association and of the Canadian Credit Union Association for being with us today.
    We are at the end of our consultation process. We have heard a lot about postal banking. We were told that it could be a viable solution in certain cases. This was the opinion of the members of the union, among others.
    I listened to you. I would have been surprised had you said the opposite of what you said to us. I have never heard any person or industry speak in favour of the arrival of a new competitor on the market. I did not expect you to say anything else. This does not detract from you in any way; it is nothing personal.
    However, I heard Mr. Martin say some interesting things. The cooperatives have a greater interest in the needs of members. They have a concern that has been raised on many occasions throughout Canada. In remote areas, there are fewer services. In certain cases, even the cooperatives are closing. That is unfortunate given that in certain cases, they are the last financial institutions in the regions.
    That said, there is still worse. Often, the people who live in these regions do not have access to quality Internet services. When you leave large urban centres, you are caught in a vice.
    As you confirmed, Mr. Martin, 1% of the population does not have a bank account, and these are mostly low-income people, people who have particular needs and cannot get access to credit easily.
    As people say, banks are interested in the bottom line. Mr. Hannah, you said that there was a rigorous process that precedes the decision to close a branch. Nevertheless, if you are making money, you will never close it. If you are not making money, you will close it rather quickly. To my mind, it is that simple.
    Can things be seen in a different way, and could we take advantage of this opportunity? In fact, it is an opportunity. We were talking initially about Canada Post, but we came to talk about a postal banking service. This has highlighted a gap in the Canadian banking and credit union system. There are improvements that could be made. There may be an opportunity with Canada Post, or perhaps not.
    I would like to hear how we could cooperate—Mr. Martin will be happy—in order to offer new services that may not be offered currently to Canadians who need them, so that we may become a world leader in banking and credit union services, in cooperation with Canada Post.
    I used three minutes of my speaking time for this long introduction.
    Mr. Martin, could you answer me first?

  (1520)  

[English]

     It's a fact that a number of our credit unions have expressed interest in co-operating with Canada Post, if it is done on terms that are fair in terms of the bidding process or the participation process. As I mentioned, our concern is that if it turns into a bidding process that is exclusive, they may end up not being able to participate as a small institution. You have to keep in mind that many of our institutions are below, say, $1 billion in assets, which is fairly small. It might be difficult to participate, so there would have to be an open process. As I said, there are credit unions that are interested.
    We do agree that in the north, for example, in rural and remote regions, there are definite challenges. To pick up on the point made by Darren, if you are running a credit union and you are looking at a need, say, in the north, you have to make sure that the branch has some kind of financial viability, or what ends up happening is that your members are actually subsidizing that branch. Part of our job is that we have a responsibility to our members to manage their funds effectively and make investments that work. That said, we are looking at other models that do not necessarily involve branches. We are moving to micro-branches, ones that are a sort of more elaborate ATMs.
    We are open to the discussion—I made that point a couple of times in my presentation—but it all depends on what form the dialogue would take.
    I just want to pick up on another point, because I've heard it said twice, that credit unions are closing branches. While it may be true that some are closing, the number of branches in our system has been steady—uptick or downtick by one or two—historically for many, many years. It's not like we are shutting down branches wholesale. In fact, Mr. Hannah might think we are over-branched, given our asset size relative to the banks.

[Translation]

    I'd like to go back to the cooperation aspect and to the training Canada Post employees would have to receive.
    How do you view the fact that Canada Post employees would have to become financial advisors? What type of training would these people have to receive? How can we teach employees who have not worked in the financial sector to offer services of that type?
    When you recruit your employees, what type of qualifications do you look for? What links could there be between those qualifications and those of the people who have experience at Canada Post?
    Mr. Hannah, what is your answer?

[English]

     Sure. There are a couple of questions embedded in there. I'll separate them out and take the last one first.
    What sort of background do people have who work in the banking sector? Typically they come from a financial services environment. They may have a degree in business. Depending on the financial product they're selling, they will have different licensing requirements. If you are involved in securities, you'll have securities licensing; you'll have to deal with mutual funds. It really depends on what exactly you're doing.
    Another key point to consider—and I just want to raise it here in this context because I think it's an important one—is to recognize that embedded in all of this is an assumption that a transaction in a bank branch looks in some way like a transaction at a Canada Post outlet. Maybe 40 years ago that might have been closer to being correct. The challenge now is that most of the transactional part of a banking relationship has moved outside of the branch. If I'm doing a regular banking transaction, then chances are I'm doing it online, or I'm doing it on an ABM, or I'm doing it with some other mechanism. What's happening in the branch is typically a more involved transaction. It is likely financial advice, such as the negotiation of a sale of a complex financial product.
    All of this is to say that interaction takes longer now than it would have some time ago.
    The question you have to think about is what the implications are of moving that into a Canada Post operation that's then trying to, at the same time, efficiently deliver the mail.

  (1525)  

    We will go to Monsieur Clarke.

[Translation]

    You have five minutes.
    Thank you, Mr. Chair.
    Good afternoon, everyone. Thank you for being with us this afternoon.
    I am going to continue with you, Mr. Hannah, on the issue you have just raised. In Canada, at this time, what is the proportion of applications coming from students who are looking for work, as compared to the number of positions on offer in the banking sector? Are there any data on this?
    I'm going to word the question in another way.
    How many applications do you receive from people looking for work in the banking sector, as compared to the number of positions available?

[English]

    I don't have data on that. I don't know how many applications a bank would typically get, and I don't know how many openings they would have at any given time.

[Translation]

    Fine.
    Mr. Irwin, if I'm not mistaken, your association is more or less in favour of a postal banking service, correct?

[English]

    We don't really have a position, per se. My role in coming here today was to explain a bit about our industry and about the products we offer. We welcome competition, and certainly I think if that's the direction in which anyone wants to go, then it's better for consumers to have more choice.

[Translation]

    Fine.
    You were saying that one of the objectives set out by those who are in favour of the creation of a postal banking service is to broaden access to credit.
    Do you think that if Canada Post offered banking services, Canadians would have greater access to credit in all of its forms?

[English]

    I guess that would really be more a question of how postal banking would be run and what their risk appetite would be. I don't know what type of lending they would do, so it would be difficult for me to answer that.

[Translation]

    Fine.
    My question is for you once again, Mr. Hannah.
    In your document you present figures that indicate that thanks to the Internet and online services, Canadians have more access than ever to banking services. However, while travelling throughout Canada in the course of these 22 public consultation meetings we have held, our committee has observed that Canadians have trouble accessing the Internet because they live in very rural regions, or very remote areas in the North. Also, some bank branches are closing.
    I think it would be good to know what you are saying to those Canadians. Personally, I hate cell phones, even though you saw me using one. In fact, I don't have a choice. I do prefer going to my bank in Beauport, where I live, to do my transactions. I function in a somewhat archaic way. I am conservative, after all.
    As a representative of the Canadian Bankers Association, what do you have to say to these Canadians, whether they are seniors or people who live in rural areas, who have indicated that they have less access to banking services than they used to?

[English]

     Let me start with a few facts. I've said them before, but I think they're important to mention.
    There are over 6,300 bank branches in this country. There's a very substantial network of bank branches. Ninety-nine per cent of Canadians have a bank account, and everyone can get a bank account if they want one. Access is out there.
    More than half of Canadians prefer to do their banking online. I'm certain if you aren't comfortable with it, if you go into your bank, they will be happy to walk you through the process and you will feel great by the time you're done.

  (1530)  

[Translation]

    Thank you.
    I'd like to talk about another aspect my colleague mentioned, that is the amount of money Canada Post would have to have access to, from the outset. My colleague asked you what sort of money Canada Post would need to have on hand. He spoke of billions of dollars and you smiled, and said that it would be an enormous amount.
    Generally speaking, what are the liquidities of Canadian bank branches? For instance, how much money does a regular National Bank branch, located on the side of the road in my riding, have in its coffers?

[English]

    The cash on hand in the branch is not what determines, from the regulator's perspective, whether you're sufficiently well capitalized.
    Okay.
    It's the amount of investment that goes into the institution to backstop it so that the regulator can have confidence that the institution is able to manage itself properly and safely.

[Translation]

    I understand.
    Thank you.

[English]

    Thank you. I was a little concerned you might be breaking out a hoodie or something like that.
    Voices: Oh, oh!
    The Chair: We will now go to Ms. Shanahan, for five minutes, please.
    Full disclosure, I am a former banker. I certainly saw many changes, from the very intense branch activity back in the eighties, and then in the nineties when there was considerable downsizing, and branch closures in fact, and then the advent, of course, of technology that we're grappling with today as to what that will mean going forward.
    With regard to commercial banking, though, we've talked a lot about retail customers and what they need. However, we've heard a lot of testimony about growing opportunities for small sellers, micro-business. We heard from one fellow when we were on the road who is selling $15 million in mukluks, and he's selling them all over Canada and internationally. There are very interesting opportunities, and that is very much of concern to us.
    Now, I get it: banks are there to maximize shareholder value and to take advantage of whatever opportunities are there. However, Mr. Hannah, in the banking community today, have you looked at those opportunities in rural and remote areas, and are you looking at that? How do you serve those clients?
    That's a great question. I'm glad you raised it.
    With respect to commercial lending, what you see a lot, and you'll especially see it in agriculture, in small business, is that increasingly you will see the lender going out to the client. They'll be mobilized. They'll be operating outside of the branch structure to make it easier for you, the borrower, the entrepreneur, to be able to engage directly with the banker on your own terms.
     Okay, but in a situation where the banker cannot physically go out.... We're talking about microcredit opportunities here, but it's still very interesting on an aggregate basis.
    Well, in that case, you start getting back into technology: how can I interact with you on an effective basis to give you the kind of robust relationship you're looking for, that experience, while trying to overcome the geography that you're talking about? The geography is always there and has always been there. What the technology allows you to do now is find ways to overcome that meaningfully.
    That's, of course, another challenge that we have, that we are not completely connected from coast to coast to coast. That's certainly something we're grappling with as a government, as a country, to ensure that all citizens have equal access. However, I'm just trying to get my head around where there could be a synergy, where there could be opportunity for the banking community to be working with what we are seeing as emerging opportunities, and very exciting ones.
    Mr. Martin.
    We're heavily involved in what you might call microcredit in the first place. The Canadian Federation of Independent Business just came out with a research study. Every few years they rate the bankers in terms of the quality of service, and credit unions came out on top for lending to microcredit, which is basically defined as institutions of five individuals or less. We're doing pretty well in that space.
    If you're talking about remote areas, maybe in the Northwest Territories, Nunavut, or Yukon, I'll tell you frankly, we're not there because we don't have credit unions incorporated in the north. However, coming to Darren's point, there may be an opportunity, based on technology, to deliver in some of those areas. We have had discussions with Arctic Co-operatives Limited in the past. I think they were having discussions with Desjardins also, as well as some of the banks, and we were invited in to participate.
    We have been interested historically in doing that, but we haven't been successful moving up there.

  (1535)  

    Okay, but if we're now thinking outside the box, what would that look like? You mentioned that some of your members are interested in partnering with Canada Post. Of course, it's the parcel business that is doing well now, and it will have some challenges going forward, but certainly there seems to be some synergy between Canada Post and these small sellers who don't have easy access to private couriers.
    What does that look like to you?
    I'm going to be very brief because I'm not sure. I don't design the business models, so I feel as though I'm getting into an area where I don't feel comfortable speaking to it.
    Okay, thank you.
    Thank you very much.
    Monsieur Clarke and Mr. McCauley, you have five minutes.

[Translation]

    Mr. Hannah, my question is for you once again.
    You are certainly aware that Canada Post once had a banking service system. This was before 1968. You undoubtedly know how this system functioned. Could you talk to us about it briefly? Did it offer the same type of banking services as a traditional bank?

[English]

    I can't speak to what Canada Post looked like in 1968. That would have been before I was born. However, I can also say with a lot of certainty that the way a banking interaction would have worked in 1968 and what you would have experienced when you went into a bank branch would look very little like what you have today.
    The way Canadians bank has changed so profoundly. I think this ties in with my earlier point, that what a transaction would look like in a branch today and the type of transaction you would do there on an in-person basis would be very different from what it would have looked like at that time.

[Translation]

    Yes, but history books exist. That is why I was asking you.
    How did the banking sector do at the time, since Canada Post was an additional competitor? That is what I would like to know. What was the competition exactly? Did the Canada Post Corporation function well in that environment? Did it suspend its banking services because they were not profitable, perhaps? That was what I was trying to get at with my question.

[English]

    I want to answer your question, but I want to address a point in there that I think is implicit but needs to be understood. The way you framed it, it's as though banks as a group compete with credit unions as a group, which compete with caisses populaires as a group, which compete with crown financials as a group. It doesn't work that way. Each individual institution competes with each other institution.
    What did the world look like in 1968? Well, there would have been banks that wouldn't have necessarily been exactly the same ones as you see now, competing with credit unions that wouldn't have necessarily been exactly the same ones as you see now, competing with government agencies that wouldn't have been exactly the same ones as you see now. So how Canada Post's operation would have fit into that is hard to say because the environment has evolved broadly.
     Okay, I get it. Thank you very much.
    Kelly.
    Great. We don't have much time.
    Gentlemen, witnesses who have appeared before us who are proponents of postal banking, when asked about the difficulties of how they are going to repossess granny's house if the loans aren't paid—I guess Revenue Canada would come after them—but when confronted with the difficulties of everything with banking, their fallback was that they'll make a lot of money doing cheque cashing.
    Mr. Irwin, we've heard that even companies with the same infrastructure and expertise as Money Mart have very, very slim margins. Do you think Canada Post could make money by offering their banking services in the relatively small rural areas that aren't served by banks?

  (1540)  

    The short answer is I don't know whether they could or they couldn't. I think it's important, though, to note that—
    Would you invest your own money in that?
    I will beg your forgiveness not to answer that.
    Voices: Oh, oh!
    Mr. Tony Irwin: I guess so. I mean, I think it's important to note that—
    I'm asking, is it practical?
    Right. Perhaps in some remote areas that don't have services today, maybe it would be. But from our perspective, in terms of what our industry does, it is complicated. There are a lot of moving parts to it—technology, collections—as you've spoken about, not to mention risk and other things. I think all areas would have to be really considered.
    Okay. That's my time, thanks.
    Ms. Mendès, welcome to our committee, you have five minutes.
    Thank you very much, Mr. Chair.

[Translation]

    Thank you very much to all of you.
    I am very happy to be here with you today.
    We organized consultations in our ridings on Canada Post services. I represent a suburban riding, the riding of Brossard—St-Lambert, close to Montreal. We aren't exactly in the wilderness. Forty minutes from my riding there is a well-known ski resort, in Bromont. Right next to it, there is no access to either the Internet or a cell phone network. And I repeat: this is 40 minutes from Montreal. There are all sorts of constraints that prevent citizens from having access to the Internet.
    That is why we need to consider whether Canada Post could offer banking services. Several regions in this country that are not so remote do not have broadband access. People thus cannot do their banking transactions online, as many other Canadians can. I am myself a big consumer of Internet products. I love doing all my transactions online. I have no problem with that.
    Some credit unions in Quebec are closing. Many of them are in remote areas and citizens can no longer cash cheques. Making a remote deposit with an image capture won't work if you don't have Internet. How do you do that? If you can't go to a bank machine or a credit union to deposit a cheque, what do you do? These are some of the constraints linked to the geography of our country and the challenges it poses.
    I have not heard the banks talk about participating in the implementation of a broadband network in our country. That could be one national initiative to further develop access for everyone. I think those are options that could be looked at if we are to solve the accessibility problem for people who live outside large urban centres.
    I would like to hear your thoughts on accessibility.

[English]

    Again, I'll start by saying that 99% of Canadians have an account, so access to—
    But that's not the question. It's not about having the account.
    I understand that, and I'm getting to the answer.
    There's a couple of points in here that need to be brought out because I think they're important.
    First , I'll start with one disclaimer. We don't represent the caisses populaires. That's a different group. Setting that aside, a number of issues were raised there, and I want to pull them apart.
     In terms of things like cashing cheques, the biggest and best solution from our perspective is making sure that people, to the extent they can, sign up for direct deposit of anything. If they do that, they get funds put directly into their account. They don't pay a fee. They don't—
    I agree, but that isn't always possible. A farmer who is getting paid for selling his feed or his stock, whatever, he cannot necessarily get that directly deposited into his account. How does he or she solve that?
     Then, having looked at that, I come back to the fact that at the end of the day, while banks have a large footprint across the country, every branch still has to be financially viable. Are there instances where a community cannot be served by a full service branch? Absolutely. This happens. Where that happens, do banks try to find alternatives to the extent that they can? Yes, but alternatives don't always present themselves.
    Certainly, when a branch closes, there is a well laid out process that a bank has to go through. There's a notice requirement with a certain amount of time involved, depending on proximity to another branch. There's a consultation requirement, whereby the institution has a consultation with the community. There's a discussion involved about what the bank might be able to do in the alternative, but can every community be served by an in-person presence? There will be instances where it can't happen, so the alternative—

  (1545)  

    On the second part of the question about banks maybe thinking of eventually partnering with government for the broadband investments that are needed in this country, would that be something you would consider?
    I can't speak about partnering with government, but I will say generally that I think the point is well taken. I'll quote Wayne Gretzky, since it's always a good thing for a Canadian to quote Wayne Gretzky—
    Voices: Oh, oh!
    Mr. Darren Hannah: —and say to skate where the puck is going, not where it is.
     If people are moving to it and have expressed a desire to interact and transact online, and if the limiting factor is in some cases that online isn't available, then, from a public policy perspective, it's certainly something that I'd encourage the government to look at.
    We're looking at it, but—
    Thank you, Ms. Mendès.
    Mr. Weir, please, for three minutes.
    Mr. Hannah, you described the Canadian banking sector as very competitive. I think conventional economic theory would tell us that competition tends to pull down profits, yet the Canadian banking sector is exceptionally profitable year after year. I wonder how you'd explain that.
    I would explain it because we have strong banks and we have good management, but what we also have is very competitive pricing. I'll give you an example on accounts—
    For these five or six institutions, each one is exceptionally well managed year after year, decade after decade. Is that your explanation of Canadian bank profits?
    I can tell you that Canadian banks made it through the financial crisis without the need of a government bailout and in fact increased business over that time. Almost no other developed country can say that, so are Canadian banks better managed than those in other countries? I think the proof says yes.
    I think part of the reason that Canadian banks survived the financial crisis is that they're an oligopoly. That might be a source of strength in resisting the financial crisis, but it's not the same thing as saying they're competitive in serving consumers.
    The structure of the Canadian banking sector, actually, as I noted in my opening remarks, has more large banks in its geography than what you'll see in most of Europe likewise.
    You can look at who Canadian banks compete with, in addition to competing vigorously with each other. There are, as I said, 40 in the marketplace that provide individual products and services. They compete very vigorously and get very vigorous competition from other deposit-taking institutions, from credit unions, the caisses populaires, and trust companies all across the country. It's a highly competitive market, with a lot of players.
    There are obviously federal restrictions on foreign ownership of banks. I think there are arguably some very good public policy reasons for that. Would you see banking as a protected sector in the Canadian economy?
    We have a number of foreign banks in this country, and a number of very large and successful ones. HSBC has a very large presence here.
    But American banks can't just come in and open branches wherever they want and fully compete with Canadian banks.
    As long as they have a retail licence, they can come and open branches if they want, and some of them have opened branches here.
    You don't think the foreign ownership restrictions for Canadian banks are of any real effect in terms of competition? You don't think they limit competition in any way?
    I think we have a highly competitive sector, and I think we've had a lot of foreign banks enter Canada very successfully and do very well.
    Okay. You don't see the limits on foreign competition as putting banking in a different category than other industries in terms of competition.
    No. I want to take issue with the premise of your question. Foreign banks can and do enter the Canadian marketplace.
    Thank you.
    Colleagues, before we go into our next round, I want to get a sense of whether we have a full complement of questioners.
    Ms. Yasmin Ratansi: Yes.
    The Chair: Okay. At some point in time, if we have a spare moment, I would like to go over the schedule for the rest of the week for about five minutes in camera with the committee.
    That said, Madam Ratansi, you're up for another seven minutes.

  (1550)  

    Thank you all for coming. It's a pity we do not have the Kiwibank guys or other postal banking people.
    We have been travelling across Canada, and you talked about 99% of the people having a bank account. When we look at the reality in the remote and rural areas, I've just had some statistics from the Canadian Centre for Policy Alternatives. For example, 84% of the communities in Newfoundland do not have either a bank or a credit union. When we went to Bathurst, New Brunswick, there was a community, Chipman. The mayor was saying the bank was closing, and if the bank closes, then the businesses actually do not want to take the trouble to go 40 kilometres away. We're trying to resolve an issue where we're asking how we help, how we work synergistically to ensure that we have a robust rural population and a robust urban population. What if postal banking were to come in and be a form of fringe financial services? Those people are saying that's what they want. The people who sell the mukluks do not have access to banks. If they want to do a deposit or take money out, what would be advantageous to the banks to participate with them? They have the infrastructure, they have the logistical network, and they have the last mile ability. All they need is probably a thinking banker. Would that work?
    It's hard to generalize, because relationships can look different and it depends on what one is talking about. Relationships can be scoped out large or scoped out small. Are partnerships available, and do they happen? Periodically they will, but they are evaluated on a case-by-case basis and they're usually done on a commercial basis, so it's hard for me to say with certainty whether something would work or not. It would really depend on the circumstances at the time and in the locations.
    I'm taking different communities and then averaging it out, but 45% of Canadians don't have access to any banking, and the fringe services—the report says the fringe financial services, payday loans, money grams, etc.—are sometimes not available either. I'm looking to banks to be socially responsible. You know the best example one can look at is the Tata group. It has huge corporate social responsibility. Can we look at corporate social responsibility? If you don't have an answer just now, it doesn't matter. Could you just throw back some suggestions to us as to what would work, in your assessment? How can we take the whole logistical network, all the assets Canada Post has at the moment, and instead of dismantling it and throwing it away, capitalize on it? How can we leverage it? You guys are good at leveraging.
    I'll take what you said. I don't have an answer right now. It is not simple. I don't know what the answer would be. I do wonder if the answer lies somewhere outside of financial services. It's something I'd ask the committee to look at, to consider whether or not there are alternatives in other areas, where physical presence and physical delivery are key. But I don't really have a strong answer for you right now in the context of your specific question.
    Okay, it's not a problem.
    Mr. Irwin, do you know if pawnbrokers and cash-for-gold people are regulated?
    Pawnbrokers, I believe, do need a business licence, but I don't believe there are robust regulations like those that exist for our industry.
    So they could charge any interest they want.
    I can't speak to it directly because—
    I'm just asking the question. I'm just trying to get my sense about it.
    In the 600 indigenous communities, Mr. Martin, there are only 56 credit unions or people that serve them. Do you have any idea whether the post office structure might help the credit unions expand their service?