NRGO Committee Meeting

STANDING COMMITTEE ON NATURAL RESOURCES AND GOVERNMENT OPERATIONS

COMITÉ PERMANENT DES RESSOURCES NATURELLES ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, May 3, 1999

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[English]

The Chairman (Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)): I have the honour to call to order this Monday, May 3, meeting of the Standing Committee on Natural Resources and Government Operations. We're continuing our study of Bill C-78, the Public Sector Pension Investment Board Act.

We're pleased to welcome to the committee Malcolm Hamilton, actuary, William Mercer and Associates; and Mark S. Fowler, actuary. We're awaiting Julian Leung, who's an actuary with Julian Leung and Associates. He'll just take his place when he arrives.

There he is. Welcome, Mr. Leung.

Mr. Julian Leung (Individual presentation): Thank you.

The Chairman: We'll invite the witnesses to share their thoughts with us for maybe five to ten minutes each, and that will allow time for members to ask questions. So welcome to our committee. We appreciate that you've taken this time to share your insights with us. I think we'll just go in the order in which they're listed on the notice.

Mr. Hamilton, we'll start with you.

Mr. Malcolm Hamilton (Individual Presentation): I've not brought any prepared statement, so I'll just announce that I'm broadly in support of Bill C-78 as I understand it. There are, from an actuarial perspective, I think three issues of significant financial consequence in that bill.

The first is who will benefit from the $30 billion of accumulated surplus, and as I understand the bill it's largely the government and indirectly the taxpayer or the citizen who will benefit. From my perspective, that's the way it should be.

The second issue of some financial significance is how the plan is going to be run going forward. From my perspective, I think it's important going forward that the sharing of cost and the sharing of risk be symmetric. That is, if the members are to benefit from future good investment experience, then the members should be expected to bear a similar proportion of the going forward risk. Risk and reward should be handled symmetrically, and planned governance as well should be done in a way consistent with that sharing of risk and reward.

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The third issue of financial significance is how the pension fund is going to be invested going forward. As I understand it, the bill creates a new plan and a new fund, albeit one that will grow slowly. The assets of that new fund will be invested in the capital markets, much as any other pension plan in Canada is invested in the capital markets. From my perspective, that's a positive development. So on the significant issues, if I'm properly understanding what the bill is proposing, I support what the bill is proposing.

Thank you.

The Chairman: Thank you, Mr. Hamilton.

We'll move to Mr. Fowler. Go ahead, Mr. Fowler.

Mr. Mark S. Fowler (Individual Presentation): Thank you very much, Mr. Chairman.

I do have some prepared remarks, which I have provided to the committee. I also have some other information that I would like to provide to the committee for its deliberation in due course, just in case the issues included in that material aren't raised during this particular session.

I would like to thank the honourable members for the opportunity to appear and make these remarks. I requested to be permitted to appear at the request of the Public Service Alliance of Canada. In order to ensure full disclosure, I wish to record the fact that I am currently in receipt of an annual allowance under the Public Service Superannuation Act, and my spouse is a contingent beneficiary.

My comments will be brief, as I am sure you are most anxious to commence with the questions. I am currently a private consultant specializing in pension regulatory matters. Formerly, I was involved in the administration of the federal Pension Benefits Standards Act, 1985, and in the supervision of life insurance companies, again at the federal level.

In my capacity of pension supervisory officer, I participated in the regular meetings of the Canadian Association of Pension Supervisory Authorities, the national consultative body for provincial superintendents of pensions who administer the various provincial pension benefit standards legislation applicable to private employer-sponsored pension plans.

As are others who have appeared before the committee, I am disturbed that this bill is being treated as a matter of great urgency. I am also disturbed that these amendments are proceeding despite the protests of so many concerned and informed observers. The bill alters the financing provisions of the three major federal employment-related pension plans, and does so in a manner that, as I understand it, will immediately weaken the benefit security of members, pensioners, widows, and other beneficiaries.

I am also most disturbed that the plans are being unilaterally amended by the dominant party to the arrangements. In my opinion, the surplus “dis-funding” standard being incorporated in Bill C-78 is fundamentally flawed. I cannot imagine a scenario under which I could recommend it as a model for treatment of surplus under pension benefits standards legislation.

In fact, I am deeply concerned that this approach to surplus management, and more specifically this approach to amending pension plans, could become the object of lobbying campaigns to amend other pension legislation or provincial pension benefits standards legislation, thereby spreading these approaches further afield. As a result, I will be writing to all provincial pension supervisory officials, alerting them to this potential collateral effect and recommending that they take action to examine the bill and, should they agree, to make their concerns known to this committee and other appropriate government officials.

My principal concerns are the following. First, the bill will require the immediate reduction in surpluses in these plans. In my experience, this is a dangerous activity. I have seen far too many pension plans in financial difficulty to condone the unregulated amortization of surplus out of a pension plan, whether that be done under the guise of a system, a structure, or otherwise, especially over the objections of plan members, pensioners, widows, and other beneficiaries.

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Reducing plan surplus reduces benefit security de facto. It is elementary that prudent funding requires the rapid amortization of unfunded liabilities and the accumulation of surplus, not its destruction.

Second, the bill institutionalizes the income tax provision that, in part, arbitrarily restricts pension plan surplus to 10% of accrued actuarial liabilities. In my opinion, this is most unfortunate. I would have hoped this provision would have been overturned at this opportunity, rather than given greater recognition in this manner. There is no reason in logic I can ascertain why pension plan surplus should be so restricted.

Most pension plans will, at times, enjoy surpluses and at other times may face unfunded liabilities. The record before the committee already documents that. The effect of this provision could be to force contribution holidays. To an extent, that might do violence to the provision of some plans and their trusts. It seems possible that plans might even have to alter their investment policies in order to avoid non-compliance with this provision.

In my opinion, it is more than passing strange that individuals' maxed-out RRSPs can achieve almost unlimited investment gains, without encroaching on the Income Tax Act provisions that either serve to limit the quantum of their assets or force contribution holidays. Why then should registered pension plans have to? In my opinion, this anomaly in public pension policy requires immediate redress, not confirmation in Bill C-78. Here again I will be writing to provincial pension supervisory officials to recommend that they take action to recommend that paragraph 147.2(2)(d) of the Income Tax Act be repealed.

Third, the bill permits the making of regulations to apply the provisions of the Pension Benefits Standards Act, 1985, to the three target plans, but stops short of applying the PBSA, 1985 de facto. The complete application of the PBSA, 1985 would seem to ensure that independent monitoring and oversight of the prudent management of the plans was in place, and members, pensioners, widows, and other beneficiaries were afforded the security of those standards.

Either these standards are deemed by the government to be too weak to serve to protect members of the target plans or they are not. If it's the former, then members of the over 1,000 pension plans to which they apply may not be currently well served. If it's the latter, members of the PSSA, CFSA, and RCMPSA may not be currently served by their non-application. This dichotomy urgently needs to be resolved.

Fourth, the bill includes a provision in proposed subsection 43(3), to be specific, that appears to contemplate that the amounts in the superannuation account may, at some future time, be insufficient to pay all the benefits payable in respect of pensionable service to the credit of a contributor before April 1, 2000. Given the pending removal of surplus from the fund for these benefits, the mere possibility that this eventuality could ever be realized seems to require intense scrutiny by the committee.

Thank you for your attention. I look forward to your questions.

[Translation]

Mr. Benoît Serré (Timiskaming—Cochrane, Lib.): A point of order, Mr. Chairman. I apologize for raising this issue again, but I think it's time people understood that this is a bilingual country and we decided that documents tabled before this committee had to be bilingual.

[English]

The Chairman: Thank you.

[Translation]

Mr. Benoît Serré: I haven't finished, Mr. Chairman. We discussed this several times in this committee and we decided to be as tolerant as possible, etc. but this has happened too often. I don't know if the clerk informed the witnesses that documents have to be tabled in both official languages. It's always the same side that's tolerant. I would like to suggest that, at the next meeting, we table documents in French only. I wonder if the unilingual anglophone members would be as tolerant then as we have been. I propose that we not accept documents that are not in both languages at this committee.

[English]

The Chairman: The clerk followed the rules that were accepted by the committee. It isn't always possible for witnesses, as much as we try, to provide their briefs in both languages. In that case, they are not distributed until they are translated. So Mr. Fowler's document will not be distributed until it's translated. The clerk has already undertaken to do that, but his brief is now in the record of the meeting.

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Your point is well taken, but the existing rules of the committee say if a document for whatever reason—I think in this case maybe time was an issue—could not be given in both official languages, it shall not be distributed to members until it is translated.

Mr. Williams.

Mr. John Williams (St. Albert, Ref.): Let's recognize it was this committee, with its Liberal majority, that last Thursday afternoon decided on the witnesses and asked the clerk to bring these people in. It is now Monday afternoon, and we expect them to have their thoughts and statements on paper in two official languages.

I argued we should have more time to deliberate and give these people time to get the translations done. If that had been followed, I'm sure there wouldn't have been a problem.

The Chairman: Thank you, John. I don't want this to get into a debate.

Is it a point of order, Ghislain?

[Translation]

Mr. Ghislain Lebel (Chambly, BQ): On the same point, I suggest that you be careful. Mr. Chairman. As my friend from the Reform Party said, we decided to call these witnesses last Thursday. Perhaps we should have called them and held the meeting later. Here's what's going to happen. You're going to pressure us to pass a bill when we haven't had a chance to read the reports in a language we understand, like you did a while ago, when your amendments were adopted before the last witnesses were even heard. Mr. Chairman, you should perhaps organize you timetable in a way that we won't always be under pressure. It's always the same ones that are at a disadvantage here.

[English]

The Chairman: We're not going to debate the rules in place at this point. But Mr. Serré's point is taken. The clerk has done his best in the circumstances.

So we're going to proceed to Mr. Leung, please.

Mr. Julian Leung: Thank you, Mr. Chair. I have a few brief comments. My comments are more some technical points on Bill C-78 for the consideration of the committee. My colleagues have covered some of my points, so I can be even briefer.

In reviewing Bill C-78, there are a few issues that should be raised that could be improved. I'm not sure whether the committee is aware that there was a panel reviewing the CPP report. This is different from your report, but there were a couple of recommendations in there that may have an impact on the plan.

The panel of three senior actuaries who reviewed the CPP 17th annual report recommended the establishment of a chief actuary's department, separate from the Office of the Superintendent of Financial Institutions, that would report directly to the minister. It is my opinion that this is a positive move and would also be positive for the superannuation plans.

This three-person panel recommended an advisory panel made up of senior professionals—actuaries, demographers, and economists—assist the chief actuary in the establishment of assumptions for the valuation. In the valuation of superannuation plans, it is critical that they be backed by and reflect as much up-to-date data as possible. I would also suggest the superannuation plans follow along the same lines.

Moving to some of the specifics on Bill C-78 that I noticed, one pertained to the investment board. The terms of reference do not include any requirement for this board to dialogue with the chief actuary. It is imperative that the investment board dialogue with the chief actuary to understand the nature of the liabilities, the duration of the liabilities, and get as much information on the liabilities as possible, so the investments of the plans can be made in a prudent manner.

Bill C-78 addresses funding for PSSA benefits earned after April 1, 2000. There is no mention of the excess benefits. By excess benefits I refer to those benefits that are provided under the special retirement arrangement. For those who aren't familiar with it, a civil servant might receive two pensions. First a pension is paid from the PSSA. For those who have their pensions maxed out or limited by the income tax rules, a second pension is paid from this Special Retirement Arrangements Act. It is my suggestion that the government should also consider funding for this plan.

Finally, I have a message from the generation Xers. These are the 20-year-old actuaries in our firm, and actuaries-in-training. They've had a chance to review Bill C-78 in brief and were disturbed by the latitude allowed by the government in the bill. They are concerned that the surpluses and deficits could be amortized or levelled out in a different fashion. For example, surpluses or gains could be immediately recognized or withdrawn, yet subsequently, when a deficiency or loss occurs, it would be amortized over 15 years. Generation Xers are concerned that the postponement or deferment of costs will impose further burdens on them.

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Mr. Chair, those are my comments.

The Chairman: Thank you, Mr. Leung. I appreciate all your comments.

We'll start the questions with John Williams, please.

John, the floor is yours.

Mr. John Williams: Thank you, Mr. Chairman. My appreciation goes to our witnesses, our guests this afternoon, some of whom have come a long way at short notice. We thank them for coming anyway and for the comments they've made this morning.

I think it's quite obvious, Mr. Chairman, that this is not just a cut and dried bill where everything is bright and wonderful. There are some serious questions being raised.

My first question is in a general tone and is to Mr. Leung. The government has taken the $30 billion—the entire actuarial surplus that appears to be in the plan. I'm thinking that from the concept of a progressive employer basis... there are some provincial governments, for example, that say you shouldn't take all the actuarial surplus in case you run into a deficit.

Do you think, from the perspective of a prudent manager for a progressive employer, that we should be leaving a good chunk of the cash, if not all the cash, in the plan?

Mr. Julian Leung: Let me answer how it is in British Columbia, where I'm from. Under our provincial act, a plan must maintain 5% of the actuarial liabilities as a minimum surplus, as a buffer. The remaining 95% is then amortized over five years for utilization in the form of contribution holidays. So in our provincial act, we already have some sort of maintenance-in-reserve of surpluses.

Our advice to our clients in the private sector... most employees are very cautious. They do not like to be hit by surprises. Typically, when the surprises occur, they are usually in an economic downturn and they're not doing as financially well. So in terms of minimizing the drain or the pension expenses during downturns, they do maintain a buffer, part of the surplus, in their pension plans to protect against future adverse experience.

So I would say yes, progressive and prudent employers would maintain a surplus buffer.

Mr. John Williams: I was also glad to see that you are talking on behalf of generation X. We hear so little about their opinions around this place; I'm glad you're bringing it up. It seems they are not too happy with this bill.

One item you point out is that this bill allows the government to withdraw the surplus over a 15-year period, but it doesn't set out a formula. For example, they could take it all this year and then nothing for the next 14 years. Whereas if there is a deficit, it's a straight-line contribution, it's a deficit divided by 15, and they make their annual contributions each and every year.

Do you feel that type of latitude in the legislation is beneficial for the pension plan?

Mr. Julian Leung: Well, I think I spoke on behalf of generation Xers who would like to see consistent rules between the two. If you had a rule that the deficits are amortized equally over 15 years, then perhaps surpluses should be amortized equally over 15 years and not be given discretion. By the way, John, there is discretion also in the deficit side for the minister to amortize over a shorter period if he wanted to. But the generation Xers were skeptical that would happen.

Mr. John Williams: Maybe a healthy amount of skepticism is the way it is, Mr. Chairman.

Mr. Fowler, I noticed in your concerns you said immediate reduction is dangerous and it reduces benefit security. Now the government has gone to great lengths to tell us they are absorbing all the risk. Would you like to comment on reduced benefit security and the fact that the government says there is no risk because they have absorbed it all?

Mr. Mark Fowler: The remark is made in the context of general pension plan management. I think it's pretty generally accepted that benefit security measures the ratio of assets to liabilities, so if the assets exceed liabilities, there is a surplus. If you reduce the assets, that ratio goes down; therefore, de facto the benefit security measurement is diminished. It becomes a matter of debate whether the diminishment is material or not.

Mr. John Williams: But you feel there definitely is some risk there in some way, shape, or form.

Mr. Mark Fowler: I'd like to make an additional comment, if I might, about that particular point. In my opinion, the bill immediately reduces surplus, and it may continue to do so until the surplus is exhausted. Thus, in my opinion, an erosion in the confidence of the system is inevitable. The fact that it appears to be subject to structured management may be of little solace to defenceless widows, pensioners, and other beneficiaries. They may well distrust the appearance of structured management and actuarial wizardry. There is no limit on the reduction of surplus and no limit on the growth of deficits. This is hardly a recipe for confidence.

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As mentioned, with regard to the appearance of symmetry in the bill, the actual wording of the bill, as Mr. Leung's generation Xers have intimated, does not specify that pure symmetry be practised, as there is discretion to be asymmetrical in handling surpluses and deficits. This will promote the belief that the plan's sponsor is completely indifferent to surpluses or deficits, again, hardly a recipe for inspiring confidence.

I urge the committee to obtain the views of the Canadian Association of Pension Supervisory Authorities and the Canadian Institute of Actuaries, as well as other concerned groups.

Mr. John Williams: Thank you. I like your terminology, that the “dis-funding” standard is flawed. I presume you mean by the way in which the government is going to be withdrawing this actuarial surplus.

It's my opinion, for what it's worth, that the $30 billion surplus today—as opposed to the $13 billion deficit back in 1987 that the government had to put into the plan—is basically being caused not by a lack of contributions by the members and the government but by the higher rate of return on investments, the wage freeze that held back civil service salaries and hence impacted on the pensions they would therefore receive, and the fact that basically we're now in a non-inflationary environment. The surplus is an actuarial surplus, but if circumstances were to change, it could be a deficit.

Do you feel that the government unilaterally taking this money out is beneficial to the plan, or should they leave most of it, all of it, or some of it in there to cover potential deficits and to protect the taxpayer from being taxed in the future should there be a deficit?

Mr. Mark Fowler: I have several comments in response to that question. If any member of the committee wishes to analyse the sources and losses of surplus over the years, the reports prepared by the chief actuary for the last 50 years, or whatever it is, always include a table that shows exactly how the surplus has increased or decreased. The last report, for example, indicates that the surplus was reduced due to data corrections and methodology adjustments, and $206 million went; the interest on the initial surplus created $2.6 billion; the downsizing of the public service cost $485 million of surplus; NAV CAN privatization cost $148 million of surplus; changes to the provisions of the plan cost $502 billion of surplus; and other experienced gains and losses, which perhaps is a bit of a grab bag item, created $676 million of surplus. So, obviously, the record is clear that surplus ebbs and flows. Given that surplus ebbs and flows, how is it possible that all of a sudden there has been a eureka that now tells all of us how we are to go about actually managing it?

Mr. John Williams: That's my point precisely.

You're disturbed about the urgency with which the government appears to be putting the bill through the House of Commons. Here we are just a week or so since we started debate on the second reading; we're already into committee and you as witnesses haven't even had time to translate your reports into the other language.

You mentioned two institutions that you feel should be talking to this committee before we move any further. Do you feel this unilateral action by the government and the employer is beneficial to the employee-employer relationship in the management of the fund and the plan on an ongoing basis?

[Translation]

Mr. Mark Fowler: Let me apologize for not having this paper translated. It wasn't possible, given the short time available. Please excuse me.

[English]

I have very little to say about the impact of this bill on labour-management relations because that's simply not my field.

Mr. John Williams: Okay.

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Mr. Mark Fowler: I think everybody can make up their own minds about that.

It would be difficult for me as an ordinary person and as an employee to feel thrilled about the fact that the surplus in my pension plan is going down without my consent.

Mr. John Williams: You mentioned that if one is an astute investor, not a prudent investor, you can make tremendous gains in your RRSPs with no implications whatsoever. You can enhance your retirement income by virtue of the fact that you're a very astute investor. However, that is not allowable as the pension surplus is now being taken away to prevent enhanced benefits being paid out to pensioners. That's an interesting parallel you've drawn there. Do you have any further comments on that?

Mr. Mark Fowler: Yes, I have a couple of comments.

The Chairman: Thank you, John. We'll come back to you afterwards.

Mr. Fowler, please go ahead.

Mr. Mark Fowler: Thank you. I'm not personally convinced that one need be necessarily an astute investor to have achieved very significant gains in an RRSP over the past several years. It's well within the rules, as many of us know, to have 100% of one's RRSP in an S&P 500 indexed fund that is managed on a derivatives basis, which would have returned probably in the area of 25% per annum over the last three years.

The Chairman: Thank you, Mr. Fowler.

I'll put you back on the list for later, John, if you'd like.

Next is Roy Cullen, followed by Ghislain. Roy.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Thank you, gentlemen. I have a question for Mr. Fowler and one for Mr. Leung.

Mr. Fowler, you talked about concerns you have about amortizing the surplus, in other words, taking the surplus out of the plan, and you said it weakens the plan. Is it not so that the benefits are guaranteed? They're guaranteed by the Government of Canada, and the Government of Canada is on the hook to deliver those benefits. Are you not mixing up a benefit-type plan with a plan that is driven by whatever is available in the plan in terms of surpluses or... I can't understand why it weakens the plan if the government is guaranteeing those benefits. Do you have some concern about the solvency or the liquidity of the Government of Canada?

Mr. Mark Fowler: If I may comment, I wasn't addressing the concept of the risk to the member arising out of the nature of the plan's sponsor. I was simply expressing a well-accepted and well-established fact that a common measure of benefit security is the ratio of assets to liabilities. If assets go down, the benefit security goes down. That has nothing to do with whether it is this particular company standing behind the pension promise, the Government of Canada, or any other plan sponsors.

Mr. Roy Cullen: We have an analogy in insurance where a company would insure through the market or self-insure. In the case of the Government of Canada it's largely self-insurance, but it's backed by the huge economic power of the Government of Canada. So aren't we perhaps mixing apples and oranges?

Mr. Mark Fowler: There's the issue of the measurement of the benefit security ratio, and conventionally—I think this is what you're alluding to—that measurement does not necessarily reflect the creditworthiness of the plan sponsor. I would agree with that.

Mr. Roy Cullen: Particularly if it's a benefit guaranteed plan.

Mr. Mark Fowler: I would agree with that.

Mr. Roy Cullen: Okay. Thank you.

Mr. Leung, you spoke on behalf of the generation Xers, and they talk about the rate of amortization of surpluses and deficits. There seemed to be a concern about the accounting and that the amortization—and I don't mean to minimize that—should be consistent, if I understood them correctly. But there was no comment about who would contribute to a deficit if there were one. Is it strictly a concern over the accounting treatment and consistency of the amortization rate of any surplus or any deficit? If there were a deficit, would the unions be prepared to participate in eliminating that deficit as well?

Mr. Julian Leung: That was not what the generation Xers asked me to bring to your attention. The point had more to do with the impact on the cost to future generations and the taxation issues. That was something they have faced to date, and they are frustrated by it, to use their term.

Mr. Roy Cullen: There was a question, then, about the consistency in the rate of amortization of any surpluses and deficits. But they didn't deal with the question as to who would participate in the deficit. What's your view? Shouldn't the unions that are saying they have a claim on the surplus also be prepared to participate in amortizing any deficits?

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Mr. Julian Leung: It depends on the terms as outlined for a pension plan. There are some plan sponsors out there who have set up arrangements where they are on the hook completely for the deficits, and they have also given the surplus to employees. That's not as common. More common traditionally has been where plan sponsors are on the hook for deficits; they own the surplus and feel they have a right to use the surplus as they please.

Mr. Roy Cullen: Wouldn't the case before us today be more the latter? The Government of Canada has carried the deficits in the past. Are the people of Canada or the Government of Canada not entitled to the surpluses?

Mr. Julian Leung: I am not aware of all the legal issues, and I cannot provide an opinion on it.

Mr. Roy Cullen: Okay, thank you.

The Chairman: Thank you, Roy.

Ghislain, please.

[Translation]

Mr. Ghislain Lebel: Monsieur Fowler, I've heard it said that the federal government doesn't process employee pensions the same way private employers do. Private employers write a cheque on the 15th of the month and send it to the pension plan managers. I've been told that the federal government makes accounting entries, but doesn't pay into a special fund. Is that still true?

Mr. Mark Fowler: As far as the civil service pension plan goes, until now, the government has published actuarial reports every three years showing liabilities in the same way private employers do. The only difference is in the nature of the assets. That's the only difference. Apart from that, the pension fund is the same as all other pension funds.

Mr. Ghislain Lebel: I want to understand you correctly. In reality, the government recognizes that it has a debt towards its employees, to their pension plan, but it doesn't pay any money into the fund. It makes an accounting entry. Is that how it works?

Mr. Mark Fowler: That's what I'm saying. It's the nature of the assets.

Mr. Ghislain Lebel: It's the nature of the assets. So, we understand each other. With the proposed board, will the government pay, in one great lump sum, billions of dollars into an independently managed fund?

Mr. Mark Fowler: No. At the moment, there is no fund administered by a trustee like there is for other retirement plans.

Mr. Ghislain Lebel: Independent.

Mr. Mark Fowler: No, not at the moment.

Mr. Ghislain Lebel: So the proposed investment board will invest State pensioners' or potential pensioners' assets. Where will they get the money to do that, since the government only makes accounting entries?

Mr. Mark Fowler: Under the bill, the managers will use employee and employer contributions that will be paid in after the date stipulated in the bill. Perhaps I don't understand all the details of what is going to happen in the case of certain transfers from the old assets they talk about in the bill.

Mr. Ghislain Lebel: Under the bill, will the managers be independent from Treasury Board or the government in the sense that decisions will come from only them, or are you afraid that the government will always be there? Are you afraid that the government will be a coach with a lot to say about the fund, but very little money to put into it? Don't you think there's a risk it will influence the managers?

Mr. Mark Fowler: As far as I know, the bill tries to avoid conflicts of interest. Certain groups of people are excluded. They can't become managers. However, I'm not a lawyer and I can't say whether anybody who has already been involved in the government in one way or another, for example somebody appointed by an Order in Council, would be allowed to act as a manager.

That's a very interesting question, and I recommend that the committee look into it further.

Mr. Ghislain Lebel: Thank you Mr. Fowler.

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I have another question and it's for the three witnesses. I have before me three very serious actuaries, and I thank them for coming. However, I notice they don't all have the same concerns. Mr. Hamilton, who spoke first, tells that the surplus will go to the people and the government, and he's happy about that. However, we've just been told that government participation was only on paper. In reality, it's theoretical. Don't you think that the surplus that's in the fund now came from employee contributions which are not theoretical, but hard, cold cash?

[English]

Mr. Malcolm Hamilton: There are many defined benefit plans in the private sector, and the normal arrangement for such a plan is that the party who bears the risk, that being the employer, benefits from good investment experience and suffers if the experience is poor.

The experience for the plan wasn't always good. I'm old enough to remember the late 1970s when the plan was indexed. It wasn't very well funded at that time. There was a lot of money that needed to be contributed. I don't remember the members coming forward and volunteering to take 40% or 50% of the cost. I don't remember the volunteers coming forward and saying, we want to take the investment risk, put it in the markets, and if it does badly we will bail it out.

What I see is a group coming along after the fact when, much to everybody's surprise, a big surplus has arisen, not a surplus anybody expected, and all of a sudden everyone wants to claim credit for it. I remember who took the risk and who put the money in, and it wasn't the members of the plan.

[Translation]

Mr. Ghislain Lebel: I'm going to ask a last question about that, Mr. Hamilton. It has always been the government who has owed its contribution to the employee pension fund. It signs notes but never puts any money into the pot. The assets of state pension funds have always served the interests of the government until now. It has used them. If there was a deficit, it perhaps didn't pay the rate of interest it would normally have had to pay into the fund. Don't you think that it too has perhaps also benefitted from the deficit.

[English]

Mr. Malcolm Hamilton: No, I don't. It's a good question, and it could have turned out that way, but it didn't.

The fact is, again, much to everybody's surprise, the pension fund did quite well. It was invested in the equivalent of 20-year government bonds, largely at a point in time when interest rates were very high. So quite by accident, one of the reasons we have this big surplus is because this plan locked in high interest rates—and these interest rates, I'll remind you, were paid by the taxpayers in Canada, not by the public servants—at a time when interest rates were high, and then as interest rates came down... There is a 20-year lag here, and we have all this money that was put aside 10, 15, or 20 years ago still earning very high interest rates.

It's quite informative if you look at the public accounts for the plan. If you look at the rate of interest that the government pays for the amounts owing to the superannuation plan and you compare it to the rate of interest the government is paying other entities from whom it borrowed money, the interest rate here is 2% or 3% higher than the interest rate being paid on the rest of the debt. So this fund did well by accident.

I'm very much supportive of going forward and trying to treat it more like a normal plan with real money and real assets, because then you won't have these endless debates about whether the government has or hasn't profited from the investment of the fund. But if I look at what has happened to date, the plan's investments did better than anybody had any right to expect.

The Chairman: Ask one very short question, and I'll put you back on for later.

• 1615

[Translation]

Mr. Ghislain Lebel: What you just said is fundamental. We are not investment experts and certainly not actuaries, but, if I understand correctly, when I'm a public service employee, you're my employer and I'm the policeman. Me, I put a dollar of my pay into the pot. You don't put any dollar in. You sign a note and put that into the pot. You manage my dollar that's in the pot, it produces more dollars, and now you tell me that the surplus belongs to the taxpayers.

[English]

The Chairman: I'll put you back in a minute. Thank you.

Mr. Hamilton.

Mr. Malcolm Hamilton: I don't think it's accurate to say that the government didn't contribute. The employee contributions went into a superannuation account. The government contributions went into a superannuation account. The superannuation account notionally invested in 20-year government bonds, and interest was credited not just on the employee contribution but also on the government contribution. All of the interest the government paid in and all of the amounts the government contributed were reported as public expenditure and recorded as part of the national debt. So it's really not very different.

If you take any pension plan in Canada, one of the assets of the pension plan is debt of the Government of Canada, federal government bonds. This is like a plan with $130 billion of federal bonds. It's accounted for like that. So from my perspective, the government did contribute large amounts, and contributed large amounts of interest, and from my perspective that's the source of the surplus.

The Chairman: Thank you, Mr. Hamilton.

We're going to go back to John Williams.

Gerald, I'll put you on the list. John, you're next.

Mr. John Williams: Thank you, Mr. Chairman.

Mr. Hamilton, I'm not sure if I agree with you that the high rate of return is an accident. We went through a period of high inflation and they paid high interest rates on the bonds, and now we're into a period of lower inflation. This bill is going to split; it has the pre-2000 plans, which are going to continue on as they currently are, and new contributions are going to new plans.

If we go through a period of 20 years of low inflation and all these old bonds mature and they're going to be reinvested at 3% and 4% and 5%, and we enter into a period of high inflation, the pre-2000 plan is going to run into a big deficit. Would you agree with that?

Mr. Malcolm Hamilton: If we lock in low interest rates and inflation pushes up, the old plan is going to have a deficit, yes.

Mr. John Williams: And Mr. Fowler and Mr. Leung, would you both agree with that?

There's something that concerns me. I think it was you, Mr. Fowler, who said, and I think you quoted subclause 43(3), which deals with... if there's not enough cash in the plan... Here we have this pre-2000 plan, potentially, and I use the word “potentially”; I don't know what's going to happen in the year 2015 and 2020, but these plans are still going to be around. If inflation comes back, they could be out of cash.

The other thing is I look back to 1993, the end of the Tory regime and just before the new regime took over, when we were as a country, as a federal government, in a quite serious financial predicament. To say that the federal government can backstop anything really wasn't too appropriate a thing to say in 1993. So here we have a plan that could be actuarially unsound, having no more contributions, contributions are stopped as of next year, running into a deficit, totally dependent upon the federal government to bail them out for these old widows and pensioners, and a government that potentially is in a difficult scenario. Don't you think there's a high risk here?

Mr. Fowler could answer, and then we'll get Mr. Hamilton and Mr. Leung.

Mr. Mark Fowler: I certainly wouldn't want to speculate on the risk that the employer in this particular case would or would not at some particular future point in time be unable or unwilling to stand behind this arrangement or any other arrangement. That's certainly not something in which I have any expertise. All I can say is that as a former pension regulator, the future is a dangerous place about which to speculate. It's always best to be careful with surpluses. They come and go. They may be large now, but 20 years from now there are all kinds of ways in which they could have long gone.

The Chairman: Thank you.

Mr. Hamilton.

Mr. Malcolm Hamilton: One thing I find odd about this is I don't remember all this mountain of concern every time the plan's been improved. I don't remember the hearings about whether what also causes a deterioration in the funding position of the plan is somehow dangerous to the plan's future health. So is there a risk that it can happen? Yes, there is a risk. Is it a risk that's unique to this plan? No, it isn't. Every single pension plan in Canada invests in Government of Canada bonds, and if we got into a situation where the Government of Canada couldn't honour its bonds, virtually every pension plan in Canada would have a problem, including this one.

• 1620

But you can't plan for the future; you can't prepare for the future by doing everything to deal with the worst-case scenario. For every scenario that puts this plan in trouble there's another scenario that leaves it just fine. And when the actuary does the valuation and says in the actuary's opinion there's $30 billion too much money—and I know these actuaries, they're pretty conservative guys—I like their chances of being right.

Mr. John Williams: Mr. Leung.

Mr. Julian Leung: I echo Mr. Malcolm's comments here. We do not know what's going to transpire in the future, and therefore there's no certainty that there aren't going to be unfunded liabilities.

However, if we do maintain some surplus cushions or not use up all the surplus right away by withdrawing it, there is a better likelihood that we can buffer some of these bad experiences in the future. So if we were to somehow amortize it or phase it in, have some systematic way of dealing with the surplus as opposed to a sudden withdrawal, it does better the government's chance of facing adverse experience.

Mr. John Williams: And the way this legislation is worded, it allows the government... they say take it over 15 years, but if they hit a little bump in the road, they could take it all right now.

Mr. Julian Leung: The wording in there is 15 years or a shorter period, at the minister's discretion—words to that effect.

Mr. Malcolm Hamilton: Can I make a distinction for a second? You have to distinguish the contributions to the plan from what's recorded in the national accounts. The government for many years now has been doing its financial statements charging other than the contributions to the plan. And unless I'm confused or mistaken, this concern about having immediate access to surplus is just a funding issue; it's a contribution issue. My understanding in regard to how much the Government of Canada will expend for this plan and how much will be put into the national accounts as the cost of the plan is that surpluses and deficits will be amortized symmetrically, as is required by accounting convention.

So if I'm mistaken about that, somebody jump up and correct me—

Mr. John Williams: I think you're mistaken.

Some hon. members: Oh, oh!

The Chairman: Mr. Fowler, do you have a comment on the same point?

Mr. Mark Fowler: I have a comment with respect to the symmetry. It's my reading of the bill that there is symmetry in language in that surpluses may be amortized over up to 15 years and deficits may be amortized over up to 15 years. So there is symmetry in language, but whether or not there will be symmetry in practice I think is the concern.

Mr. John Williams: I believe that on the deficits they have to be repaid, amortized on a straight-line basis over 15 years, whereas the surpluses can be taken out over a period of 15 years without the straight line being in there, which allows the government to maybe fudge the numbers a little bit. It's not that we would ever suggest they would, but it's one of those little things that just creep in there.

Mr. Leung, I think you mentioned the concern you had about the investment board not being required under the legislation to consult with the actuarial community, and to ensure that they're aware of potential liability from an actuarial point of view as they are managing their investment portfolio. Do you have comments on that?

Mr. Julian Leung: My comment was more specific. My comment was that the investment board should be dealing with the chief actuary of the plan. The chief actuary of the plan, or the actuary of the superannuation programs, is very well aware of what's transpiring with the plan and has a good handle on the duration of the liabilities with the liquidity needs of the plan. There is nothing in Bill C-78 that states the board must consult, and if they were to operate in isolation of the actuary, they may be making investments or going in a direction that is not consistent with how the liabilities are merging.

Mr. John Williams: And this dialogue between the investment committee or managers and the actuarial manager is an accepted thing for other pension plans?

Mr. Julian Leung: It is now a common practice in the private sector.

The Chairman: I'll put you back on the list John. I have Tony, then Gerald, then Ghislain.

Tony, please.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Thank you very much for coming on such short notice.

Mr. Fowler, I guess you represent PSAC.

Mr. Mark Fowler: I requested to be present at the request of PSAC.

Mr. Tony Ianno: Do you deal with them at all?

Mr. Mark Fowler: I have recently, yes.

Mr. Tony Ianno: And were you part of their negotiating team with the government?

• 1625

Mr. Mark Fowler: No, I was not.

Mr. Tony Ianno: You weren't at all. Do you know the person who was involved with their team before?

Mr. Mark Fowler: If I know them, it wouldn't be because I know that they are part of the negotiating team.

Mr. Tony Ianno: I see.

So this is the first time you're seeing the bill, pretty much? Is this the first time you're seeing the bill and knowing about the government...

Mr. Mark Fowler: I received this copy of the bill I think it was just over a week ago.

Mr. Tony Ianno: I see. And have you had an opportunity to look at it in terms of...

Mr. Mark Fowler: I've had an opportunity to look at it to some degree, yes.

Mr. Tony Ianno: Were you surprised with anything in it, other than what you've been reading the last year?

Mr. Mark Fowler: I haven't been reading anything in particular over the last year.

Mr. Tony Ianno: About the pensions and about the—

Mr. Mark Fowler: Well, I've been aware of the issue involved in the negotiations, but just by reading the newspapers.

Mr. Tony Ianno: Right.

Mr. Mark Fowler: I haven't dealt with them at less than arm's length.

Mr. Tony Ianno: So any information that you've seen there—is it different from the information you've been reading in the last year?

Mr. Mark Fowler: I think it's much more detailed. Obviously, the bill has detail that didn't come out in any of the reports I saw.

Mr. Tony Ianno: But is there any difference in terms of the $30 billion in the surplus and the debate about the government or the employer having the rights to the surplus, considering there was no shared risk management?

Mr. Mark Fowler: Well, of course the bill is very specific, but it doesn't deal with quanta; it doesn't mention numbers.

Mr. Tony Ianno: So you weren't aware in the last year of your readings about the issue of the $30 billion surplus and the union wanting to share in that surplus, even though they didn't risk any—

Mr. Mark Fowler: I was aware that the plans were running surpluses. I've been aware of that for some time.

Mr. Tony Ianno: In your reading—

Mr. Mark Fowler: But in a general way, not in a detailed way in terms of examining the actuarial reports, that sort of thing. But I can recall some of the numbers in the papers, yes.

Mr. Tony Ianno: In the articles you read, you weren't aware that the union wanted to have control of the surplus or a share in the surplus?

Mr. Mark Fowler: Oh, I think that was coming out in the press.

Mr. Tony Ianno: So you were aware of it then.

Mr. Mark Fowler: In a sort of general way, yes.

Mr. Tony Ianno: But not necessarily... just in a general way, you thought it might be a consideration.

Mr. Mark Fowler: Well, it seemed a reasonable thing that they would be interested in what was going on with the surplus. I was aware of that.

Mr. Tony Ianno: So the articles you read never stated that, right? Or you don't recall reading that, correct?

Mr. Mark Fowler: Recall reading what?

Mr. Gerry Byrne (Humber—St. Barbe—Baie Verte, Lib.): Is there a point to these questions?

Mr. Tony Ianno: I want to know where he's coming from in terms of... because if he read the information—

The Chairman: Don't talk across the table, okay?

Mr. Tony Ianno: Right.

The Chairman: His questions are in order, Gerry, as far as I'm concerned.

Mr. Mark Fowler: I was aware of the press reports indicating that the union was in a struggle with respect to the surplus. I think anybody who read the papers would have had that conclusion, surely.

Mr. Tony Ianno: I see. So that's not different from what you just stated. In other words, you were aware that the issue was the $30 billion surplus and the unions wanting a share of it, even though they didn't risk in the management.

Mr. Mark Fowler: Well, there were allegations in the press as to who had entitlement to surplus and all that sort of thing, yes.

Mr. Tony Ianno: Oh, I see, allegations, but not in terms of who actually had responsibility.

Mr. Mark Fowler: I don't recall seeing anything in the press that was conclusive with respect to who owned what, no.

Mr. Tony Ianno: Mr. Fowler, I've got where you're coming from. I understand totally and it's not a problem. And you know what? You're a very good witness in the sense that you don't like to answer the questions. But that's fine; if I can't get that... Let me move on then.

The Chairman: Tony, be careful.

Mr. Tony Ianno: On?

The Chairman: On comments about the witness, okay? Just get on with your questions, please.

Mr. Tony Ianno: If you want to get transcripts, Mr. Chairman, you'll see that the same questions were answered two different ways, if you want to deal with that.

The Chairman: We'll look at the transcripts.

Mr. Tony Ianno: Okay, Mr. Chairman.

Are you aware, Mr. Fowler, of any legislated plans where the employer assumes all the risk and yet the employee is able to share in the surplus?

Mr. Mark Fowler: Any legislated plans?

Mr. Tony Ianno: Right.

Mr. Mark Fowler: No, I couldn't name one.

Mr. Tony Ianno: Do you think this should be the first?

Mr. Mark Fowler: I would prefer to see a different approach to it.

Mr. Tony Ianno: Meaning?

Mr. Mark Fowler: I would have preferred to see some sort of an understanding, a settlement, with respect to who has responsibilities and who is going to manage. If I understand correctly, for example, there were reports in the press—and I don't know whether they've been substantiated or not; I haven't seen any retractions—that the pension plan for the Central Mortgage and Housing Corporation is in a situation of having a significant surplus. And there were efforts being made by the plan sponsor to arrive at some sort of resolution of that.

Mr. Tony Ianno: But you're not aware of any—

Mr. Mark Fowler: That seemed to me to be a sort of reasonable type of exercise.

Mr. Tony Ianno: Right. But you're not aware of any legislated plan where the employees share in the surplus but do not assume any of the risks.

• 1630

Mr. Mark Fowler: My memory certainly isn't that good. There are thousands and thousands of pension plans out there and I can't say what's in them.

Mr. Tony Ianno: This would be the first, if your recommendation—

Mr. Mark Fowler: I don't know that it would be the first. I couldn't say that.

Mr. Tony Ianno: Mr. Hamilton, are you aware of any?

Mr. Malcolm Hamilton: Ontario Hydro had close to that. It was an exception. There was a court decision saying that Ontario Hydro could not take a contribution holiday, even though there was a surplus and even though, when the plan had deficits, Ontario Hydro was liable for the deficits. That's the only one I know of. The Province of Ontario recently changed the legislation governing Ontario Hydro, so that is no longer the case. So as of today, I'm not aware of another public sector plan that has one party responsible for all the deficits and then a sharing of surpluses.

Mr. Tony Ianno: Thank you.

Mr. Leung?

Mr. Julien Leung: No, sir, I'm not aware of any. I don't believe the issue has come up, and I think you are probably the first that this issue has come up on.

Mr. Tony Ianno: Okay. Thank you.

Mr. Fowler, you were talking about the confidence of the widows, etc., in terms of the future of the plan and their susceptibility in terms of the future, in terms of their pensions. Did I understand you correctly? Is that what you were referring to?

Mr. Mark Fowler: Well, I would think, with respect, that it might be difficult to explain to people why they should have increased confidence in their pension arrangement when the surplus ratio is going down.

Mr. Tony Ianno: I see. But do you agree or believe that the government will guarantee, regardless of the circumstances you were referring to in terms of the ratio, that in effect their pensions are guaranteed as long as they live?

Mr. Mark Fowler: I can't see anything in this bill that indicates that the government would suspend payment of pensions depending on what the state of the fund might be at any particular point in time.

Mr. Tony Ianno: Right.

Mr. Mark Fowler: However, I would point out that none of us have any guarantee as to the nature of a future government or the decisions a future government might take.

Mr. Tony Ianno: I agree totally, and the Reform Party might change its view, as compared to what it has today or this moment, but that's beside the point.

I guess the question is, could we tell our constituents, widows and others that you referred to, that in effect, as far as we know, this bill doesn't change anything to guarantee them what they rightly deserve?

Mr. Mark Fowler: I already said what I think they should be told.

Mr. Tony Ianno: But would you agree that their payments will not be changed according to this bill?

Mr. Mark Fowler: I would agree that's the case, yes.

Mr. Tony Ianno: Thank you very much.

The Chairman: Thank you, Tony.

Gerald, then Ghislain, then John.

Mr. Gerald Keddy (South Shore, PC): Thank you, Mr. Chairman. There are a couple of questions. One is just coming out of Mr. Ianno's statement on widows. It's a general statement and anyone who knows the information can answer it.

My understanding through the pension plan as it exists now is that I don't think the widows are covered. They get 50% of the superannuate's pension, and that's regardless if that person retires with a 27-year or a 25-year or a 30-year pension plan and may have put $100,000, $150,000, or $200,000 into that plan. If you looked at it and if they put that investment into a private plan and you wanted to graph the two of them along, there's absolutely nothing there for that person to recoup the investment they've made. If there's no survivor, the moneys go back into the plan.

Here's an opportunity where we have a surplus in the plan and issues like that—spouses' benefits, survivors' benefits, moneys going back to the estate—certainly should have been looked at. Maybe you can shed some light on it.

Mr. Malcolm Hamilton: The way these plans are set up and funded and costed, there's an assumption that a certain percentage of the people who retire will have spouses and there's a provision made for the cost of their pensions. There's an assumption that a certain number of people will retire without spouses and when they die their pension dies with them. All of that is factored into the cost of the plan.

You get some people who live longer than expected and some people have spouses that live longer than expected and other people don't live very long and other people have spouses who don't live long.

Mr. Gerald Keddy: I guess my question was more specific than that, that the survivor for the benefit only receives 50% of the benefit.

Mr. Malcolm Hamilton: Which is not uncommon in pension plans.

• 1635

Mr. Mark Fowler: I would just point out that it's my recollection that there is what you would call a modified cash refund annuity feature associated with all of these payments. So if a person becomes a pensioner and dies and does not leave a surviving spouse, I believe there's a provision for a refund of the excess of the contributions that were made by that person over the benefits that had been made to date. Similarly, I believe that passes to a surviving spouse in the sense that the same sort of calculation would be made with respect to the surviving spouse at the surviving spouse's death.

Mr. Gerald Keddy: This is a one-time payment to the estate?

Mr. Mark Fowler: I believe so.

Mr. Gerald Keddy: Thank you.

The other issue that I think puzzles most of us is this. I'm certain that all members here are receiving calls from superannuates and anyone being provided with a public sector or public service pension at this time. I know there are 1,300 superannuates who live in the riding I represent, and they're extremely concerned about this legislation and they do not look at this as somehow being government money. They look at it as being $30 billion surplus in the pension plan that maybe there's some potential to split up.

My question is, was there another way to do this instead of just taking the surplus or looking at the surplus as belonging to one group? Does it legitimately belong to maybe two groups or three groups? Is there a possibility of looking at that, understanding that at least a good portion of the surplus is due to the seven-year wage freeze on public servants and on some good interest rates in the last little while? How do we do that? How can we be fair about that? How do we return those dollars? Was there another way?

Mr. Malcolm Hamilton: Well, clearly there are other ways.

The other half of that question is, if you had bad luck and you were sitting around here today with a deficit in the plan, would anybody seriously be considering going to those 1,300 pensioners and saying, isn't there another way to share this loss? My guess is that nobody would think about that for two seconds, nor do those pensioners want anybody thinking about that for two seconds.

Mr. Gerald Keddy: Would anybody think about it for two seconds if the government said this? We have x number of dollars invested here. We want our return on those dollars. This is the total amount that it is. It's not the full $30 billion and we're going to take that portion of it out.

Mr. Malcolm Hamilton: I'm not sure I understood the comment.

Mr. Gerald Keddy: Well, quite simply, the $30 billion doesn't belong to one entity. It belongs probably to at least two entities. Could it have been divided a different way?

Mr. Malcolm Hamilton: It could have been, but I think it's being divided properly.

Mr. Gerald Keddy: Obviously, and I appreciate the answer.

The high returns, the seven-year wage freeze, the problems with parliamentarians and Canadians in general of four hours in Parliament, a 200-page bill and some type of an artificial deadline being set for May 11, the inadequacy of time for you people to draw all your material together and appear before a hearing and travel and everything else that's involved—it makes it difficult for parliamentarians to try to get every single issue, get all the witnesses available, and simply trust the legislation as we've been told to do.

I want some verification here, because what we're hearing is for the first time the government will have the power to change premiums, and benefits as well, without seeking parliamentary approval, if Bill C-78 goes through. Is that the way you see this as well?

Mr. Malcolm Hamilton: I don't really have any strong opinion on the procedural aspect of it. I see that power is vested in the government. I assume what it means is that there will be collective bargaining on a lot of these issues. Whether it would work better if it went through Parliament or not, I don't know. If I look at private sector plans, some companies require all these changes to go through boards of directors. Other companies brief the board of directors. It's sort of a high level of what was collectively bargained and then they delegate the actual implementing of it down to another level.

I'm not an expert in governance and I'll leave that to others.

The Chairman: Thank you. Okay, Gerald?

Mr. Gerald Keddy: I'll come back next round.

The Chairman: Okay.

John Williams, please.

Mr. John Williams: Thank you, Mr. Chairman.

• 1640

Gentlemen, you're all actuaries, which means you crunch numbers until they're fine powder, and who around the table would even understand what you're doing? But one of the thing you do when you're making your actuarial assessments is you take life expectancy into consideration, and so on and so forth, and a whole bunch of other things. This bill now contemplates two potential survivors, because it recognizes the fact that divorce is more common in our society and that people can be married to one person for a while and then leave that relationship and enter into another relationship. Therefore, the bill recognizes that quite possibly there could be two survivors rather than one, which has been the historic norm, shall we say.

When you as actuaries would be doing your evaluations of the potential liability, now that there are more survivors, is that going to in essence increase the liability of the plan? Would you have to factor that in when you're trying to determine how much cash should be in the plan to meet future liabilities? Now that there are more survivors, do we have to have more money in the plan?

Let's start with Mr. Fowler, and then we'll go to Mr. Hamilton and Mr. Leung.

Mr. Mark Fowler: Just off the top of my head, that would seem to be pretty self-evident.

Mr. John Williams: Mr. Hamilton, do you agree with that?

Mr. Malcolm Hamilton: I'd need some clarification. What two survivors are we talking about? Are we talking about one man with two wives?

Mr. John Williams: It's two conjugal relationships, the way the act is working right now.

Mr. Malcolm Hamilton: Are they going on simultaneously?

Mr. John Williams: No, these are what I call “serial monogamy” types of relationships.

Mr. Malcolm Hamilton: All right. So the way it works is you retire, you have one spouse, your marriage breaks down, you remarry, and then you die and your second spouse gets a survivor pension?

Mr. John Williams: No, the act says if you're married for 20 years... Let's say you marry young and were married from age 20 to age 40. Then you abandon that relationship and enter into another one for 25 years. You retire at 65. The act recognizes two survivors. If you die, they will both receive a portion of the pension.

Mr. Malcolm Hamilton: No, I don't think that will affect the liabilities in any material way.

Mr. John Williams: Mr. Leung.

Mr. Julian Leung: I don't think it will. The provisions of Bill C-78 call for an apportionment of the pension should there be more than one spouse. So there is some prorating going on, and in my estimation the effects of this will be minimal on the cost of the plan.

Mr. John Williams: But there is an effect?

Mr. Julian Leung: Hardly. They will probably balance out overall in the end.

Mr. John Williams: One of you mentioned the fact that the act now gives great sweeping power to the President of the Treasury Board, including the capacity to set contribution rates. You've expressed concern about this being done through a regulation rather than legislation.

I have a concern, and perhaps you as actuaries can clarify or shed some light on the issue. There are three sources of revenue in the plan: contributions by the employer, contributions by the employee, and return on investment.

If there is a deficit in the plan and the President of the Treasury Board decides that it requires an increase in contribution rates, how would he be able to determine that it requires more contribution because the contributions are too low and not that the return on investments was too low, hence the deficit?

Mr. Malcolm Hamilton: On a reading of it, it's my understanding that while the individual—wasn't he the President of the Treasury Board?

Mr. John Williams: Yes, the President of the Treasury Board.

Mr. Malcolm Hamilton: While the President of the Treasury Board has this authority, my reading of the intent was that on the cost sharing, because of the way Canada Pension Plan contributions were tied into member contributions, the members' share had dropped from 40% to 30%. This was giving the President of the Treasury Board some authority to move back up towards the members picking up 40% of the cost and to do so starting in 2003. I didn't read into it that it was something the President of the Treasury Board was to use if there were investment losses, but maybe he's unconstrained in how he uses it.

Mr. John Williams: That's not my question. My question is, how will he be able to determine that the deficit is caused by a lack of contributions and not by a lack of return on investments?

Remember, he is stating quite specifically that the employees will not share in the risk at all, in any way, shape, or form. Then if he decides to increase rates, how can he know that it is because of lack of contributions and not lack of return on investment?

• 1645

Mr. Malcolm Hamilton: If the members aren't taking any risk, then what he does should be uninfluenced by whether there's a deficit or not. He shouldn't be looking at the deficit. He shouldn't care where it came from. It's strictly a question of what the cost sharing is supposed to be on the benefits being earned in future years, with no attention paid to the funding position of the plan at the time he makes the decision.

Mr. John Williams: Mr. Leung, can he do this? Can he factor out the return on investment to determine what the contribution rate should actually be? Is that a possibility? It seems rather strange to me.

Mr. Julian Leung: Doing an overall evaluation of a plan and actuarial costing, it is possible to ignore some of the other aspects and focus strictly on looking forward and trying to do a cost sharing. I would say it is possible to do that.

Mr. John Williams: Because we have this pot that has three sources of revenue, how do you tell which one isn't contributing enough if there's a deficit? Is it that the rate of return on investment is too low, or is it that the contribution by the employee and employer is too low? I don't know how you differentiate between them.

Mr. Julian Leung: I think you can only tell that looking back at what has transpired. Going forward, we're making our best estimate as to what the future events will be and using our actuarial formulas to allocate the cost between the employer and employees.

Mr. John Williams: Here we are looking forward, and we're saying, gee, I have $30 billion in the plan that I don't need. But maybe with hindsight we'll turn around and say, gee, maybe we needed that after all. Is that possible? Do you agree?

Mr. Julian Leung: Yes.

Mr. Malcolm Hamilton: That's possible, but, with respect, I don't think that's the issue here. When an actuary does evaluations, there are two distinct calculations done. One is what the funding position is of the plan today, and the issue there is how much money you have and what the cost is of all the benefits earned to date. That's sort of a closed-book issue.

The second calculation is the benefits being earned in the plan next year and in future years, when money hasn't even gone in yet and with no investment gains and losses—how much they cost and how you divide that cost between the members and the employer.

My understanding is that it's that second calculation, that going forward calculation on how to divide the cost between the employer and the employee that's going to factor into future contribution rates, and there shouldn't be any need to look at whether the plan has a deficit or surplus at the time and how it arose, if it does.

Mr. John Williams: I certainly defer to the knowledge that you gentlemen have, and maybe my ignorance is being demonstrated. You mentioned past contributions, historical, defined, determinable, quantifiable, but because this is a fully indexed pension plan, you can only make estimates and assumptions about the costs you will have to pay out based on past contributions where the money has already been paid in. We've already recognized that there can be a difference in the rate of return on investment in high inflationary times and low inflationary times and the amount of money that's going to be required to be paid out if inflation goes up or down. I'm trying to understand why, when the future is so unpredictable—the past is determined—and we have this money sitting in the plan, we wouldn't think it prudent to leave, if not all of it, then most of it where it is because of potential swings in cost of benefits, even on existing contributions.

Mr. Fowler, what would you say?

A voice: Thank you for that, John.

Mr. John Williams: You're welcome. I hope it was edifying.

Mr. Fowler.

Mr. Mark Fowler: It's my understanding that when evaluation is done, it is possible and often necessary to do a complete gain and loss analysis. The gain and loss analysis should indicate the sources and “dissources”, if you will, of surplus. It would also indicate the sources and dissources of fluctuations in the normal cost of the plan. All those facts can be ascertained.

It's my understanding of the bill that fluctuations in the experience under the post-2000 benefits will only result in changes in the normal cost if there accumulates a so-called non-permitted surplus and if the minister, at the minister's discretion, decides to reduce the contributions payable under section 5.

• 1650

The Chairman: Are there any other comments on that same point? Thank you, John.

Tony, then I guess you had a short one, Joe.

Mr. Tony Ianno: Thank you.

It's interesting to see the continuation, I guess, of the Reform Party not wanting to see the Canadian taxpayer receive what's duly theirs, especially in the $30-billion range.

But having noted that, if you're aware of the bill, the rates do not go up. The first potential time it can go up is the year 2004, and at the maximum of 0.4% increase. So in terms of the surplus/deficit, if you take this $4 billion a year roughly that is required for the plan... When the honourable member talked about high inflation, he did not define what high inflation meant in order for that surplus, even if it stayed in the plan, to disappear over a number of years. Do you have a rough idea of how high the inflation would have to be in order for the surplus, even if it existed as is, to disappear, and what number of years it would take? That's if the contribution remained the same.

Mr. Malcolm Hamilton: My understanding of this is that the contributions, in any event, are going to another fund, and so it doesn't really depend on the contributions. You're going to have $100 billion or $130 billion of asset opposite all of these old obligations, and the chief actuary is saying he thinks you have $30 billion more than you need. But no actuary can foresee the future, so there is a chance that he'll be wrong.

Now, my guess is inflation would have to move up a good amount to eat up the whole $30 billion, but it's not inconceivable it could eat up $10 billion of the $30 billion without too much trouble.

On the other hand, all of these statements are really assuming that the money stays invested in the same way as it is today. If the government and the members have a concern that inflation might move up in the future and that this will expose that frozen part of the plan, then what any thinking person would do is say let's get it out of 20-year bonds, which are the worst possible investment if you think inflation is going to move up; let's move it to something more appropriate for an indexed pension plan. If that were done—and believe me, if this were any kind of private sector plan, that would be done, it wouldn't be sitting there all in 20-year bonds—then I think the risk could be managed far more successfully.

Mr. Tony Ianno: But do you have a rough number of what would be... The inflation over the last five years or so being roughly just under 2%, do you have any idea of what—

Mr. Malcolm Hamilton: I don't. I don't.

Mr. Tony Ianno: Thank you.

The Chairman: Thank you, Tony.

I'd like to express our gratitude to all of our witnesses today. Members know that we're going to take a short recess in a couple of minutes. We have legal counsel from Department of Justice and Treasury Board to assist us. So on our behalf, may I thank Mr. Fowler, Mr. Hamilton, and Mr. Leung for taking the time to be with us.

I would invite Micheline Langlois, Ross Hornby, Joan Arnold, and Diane Labelle to come to the table, please.

We'll take just a three-minute recess.

• 1654

• 1659

The Chairman: We didn't adjourn so I'm not calling to order, but I'm welcoming folks back to the second part of this afternoon's meeting.

We have with us today officials from the Department of Justice: Micheline Langlois, senior counsel; and Ross Hornby, senior general counsel. From Treasury Board, we have Joan Arnold and Diane Labelle. We welcome you.

• 1700

We did not ask these witnesses to prepare a presentation, because they were invited at the request of the committee to address some of the legal questions that came up in our business meeting. I think a couple of those questions came from your side of the table, John. So would you like to start us off?

Mr. John Williams: Thank you, Mr. Chairman.

The government has put great emphasis on the fact that the employees do not share risk in any way, shape, or form regarding this plan. As I said earlier, there are three sources of income to the plan: the return on investment, the contributions by the employer, and the contributions by the employees. If there are insufficient funds in the plan and the President of the Treasury Board decides that the contribution rate has to be increased, hence the employees' contribution rate has to be increased, how do you say they're not sharing and participating in the risk?

The Chairman: Are there any volunteers among our witnesses?

Let me just say to our witnesses that if you find that a question is outside, shall we say, the technical aspects of the bill, I think our committee members would agree that you could just tell us that, and the questioner would have to accept that. You're here to provide the best advice you can, and if it's outside your sphere, just tell us and we'll respect that as well.

Mr. John Williams: I thought they were here to give us a detailed explanation, Mr. Chairman.

The Chairman: They're to answer legal questions. She had a couple of legal questions that came up.

Mr. John Williams: I thought that was a legal question. I don't know what their expertise is, or which one is expert in which field, so I'll leave it to them—

The Chairman: Let me just ask the witnesses. Is there anybody willing to take that question as it was phrased?

Mr. Tony Ianno: On a point of order, when we decided to have the legal people here, it wasn't on the basis of trying to determine all the political issues that Mr. Williams is referring to. The reason we suggested the legal people come was to ensure... When Mr. Williams was concerned about certain aspects of the bill, he wanted to have a legal interpretation. Now, if that has changed and he's now satisfied from the legal perspective, then I would recommend... I mean, we just had the actuaries, and he was able to ask the question about shared risk or management, or contributions; we just did that in the last hour. So now to have the legal persons answer on the basis of opinion, it's more political as compared to legal.

The Chairman: Maybe I can resolve it, John, by simply saying—

Mr. John Williams: I'm asking for—

The Chairman: Okay, phrase your question as a legal question, and we'll see.

Mr. John Williams: Well, let me rephrase it from a legal point of view, a legal perspective.

Again, I reiterate the fact that the President of the Treasury Board has said the employees do not share in the risk in any way, shape or form. I gave you what I felt was that they were participating in risk, and I was looking for some legal statement, or a statement of some legal point, saying I'm wrong. It seems to me they're absorbing part of the risk, and I'm looking for somebody to say that I'm wrong.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Ref.): Mr. Chairman, I'll add a supplementary to that. We would like to hear from you what is the law in that area. There must be previously decided cases, a lot of litigation around those kinds of points. You should know what the law is in that regard, and tell us. Have we any landmark cases in the area, or is it new territory?

Mr. John Williams: That's what I'm asking.

Mr. Paul Forseth: Tell us what the law is.

Mr. John Williams: Tell us what the law is. Give us a legal opinion as to why there is no risk on the employees' part.

The Chairman: Any takers for that?

Ms. Joan Arnold (Director, Pension Legislation Development, Treasury Board of Canada): I wouldn't give a legal opinion on that. My answer would be that if the current cost goes up, then there would be a possible increase in the cost to the contribution rate for employees. But I don't share the view that this would necessarily mean an increase in risk, or that they're sharing the risk.

Mr. John Williams: Is there a legal precedent to support your position or the converse?

Ms. Joan Arnold: In terms of legal precedent, no. The law just says that the contribution rates could be increased—employer contribution rates or employee contribution rates.

• 1705

Mr. John Williams: If a rate is increased, it means you're obviously picking up a larger share of the costs, and by taking on a larger share of the costs it means you're picking up risk. Am I right from a legal point of view? Am I out to lunch here or is somebody out to lunch? The President of the Treasury Board perhaps?

Ms. Joan Arnold: I would just like to repeat that I don't think it is an increase in the risk.

Mr. John Williams: Okay, I'll change the issue to the conjugal relationships. How do you recommend the plan police the application of conjugal relationships?

Mr. Ross Hornby (Senior General Counsel, Legal Services Branch, Department of Justice): Thank you, Mr. Chairman. I'll try to answer that question.

Essentially the new scheme will, as you say, police or verify conjugal relationships in the same way it currently verifies common-law relationships.

Mr. John Williams: And how is that?

Mr. Ross Hornby: Applicants will have to provide some kind of evidence that they are living in a conjugal relationship. That might be affidavit evidence, for example, that states they have been meeting the requirements of the act. They must have been living in a relationship for a year and hold themselves out to be in a conjugal relationship in the community. Sometimes, where there might be contestation about this point, they may provide an affidavit from friends or neighbours commenting on the fact that they are living in a common-law relationship. I expect there would be no change in that verification from the current situation with respect to common-law relationships.

Mr. John Williams: What about the situation where the contributor is deceased and someone is claiming survivorship? You're not going to get an affidavit from the contributor.

Mr. Ross Hornby: Again, the person claiming the survivor benefit will have to provide some kind of evidence, as they do now, that there was a conjugal relationship. Sometimes these cases go to the courts and there's a dispute over whether or not there was such a relationship.

The Chairman: That should be a good answer there, John.

Mr. John Williams: I'm not sure I'm clear about that. I heard what he said, but in the absence of all this evidence, I'm not sure what kind of evidence would be provided to the courts. But I will leave it to people's ingenuity, shall we say.

Why is it so important to bring conjugal relationships into the definition of survivor? Why can't you use something else?

Mr. Ross Hornby: The government has made a policy choice to use that term. As you know, this is the first time in legislation we are extending benefits to same-sex partners.

Mr. John Williams: It's the first time in legislation.

Mr. Ross Hornby: They are essentially employee benefits that have been extended up to now, and they haven't required legislative change.

I imagine the government had a number of options before it, but in the Rosenberg decision of the Ontario Court of Appeal, which the minister referred to in his testimony before the committee, the court provided some guidance on how this might be done. Essentially they were considering a provision in the Income Tax Act that refers to conjugal relationships. This particular provision is modelled in part on that. The government is extending the benefits to persons in a conjugal relationship, regardless of their sexual orientation.

Mr. John Williams: I didn't ask about sexual orientation. I asked why this conjugal relationship seems to be so central to the issue of survivorship benefits. There are many situations with—

The Chairman: The chair is trying to do his best here, not being a lawyer.

Mr. John Williams: I'm not a lawyer.

The Chairman: Let him finish the question.

Mr. Tony Ianno: Yes, but you can tell by how the question is proceeding that it's already off the track.

• 1710

The Chairman: Let him finish the question, and before we ask the witness, if the witness is to respond, we'll do our best to see whether we're talking about a legal question here. So I ask for your patience.

This is another unique forum we're having here. I think we want to get the best value for our time here with our witnesses.

John, they may not be able to answer that question, but finish the question and we'll go from there.

Mr. John Williams: Thank you, Mr. Chair.

I'm not a lawyer and I'm asking the lawyers to give me the benefit of their legal experience and opinions here. I'm trying to understand on what basis the conjugal relationship becomes so central to the notion of survivor benefits, when we are obviously broadening the definition of survivor. We can now have two survivors to one contributor. We can have same-sex or different sex relationships. I'm trying to understand why—presumably legal people drafted this bill—the legal team chose a conjugal relationship as the central tenet to define the survivor benefit concept.

The Chairman: It may be a question for the politicians—

Mr. John Williams: Is there some other definition or terminology they could use?

The Chairman: In my view, you're off the hook if you don't want to answer it, but is any one of the witnesses willing to say something about that?

We'll try to be flexible here, colleagues.

Mr. Ross Hornby: I would just comment that it is a policy question, not a legal question. In the bill there's a distinction between married survivors and other survivors. There was a desire by the government to place some limit on survivorship for that other category. It chose to use the word “conjugal” to place those limits, because otherwise you might be sweeping in a broader class of persons than the government was prepared to include at that point.

The Chairman: Thank you, Mr. Hornby. We can put you back on the list, John, if you so desire.

Gerry Byrne, please.

Mr. Gerry Byrne: Thank you very much for appearing before our committee.

The bill before us would amend the Public Service Superannuation Act, the RCMP Superannuation Act, and the Department of National Defence Superannuation Act. One of the legal issues surrounds the question of who has the capability of taking the surpluses from the pension fund, should it be deemed that were possible.

I want to zero in specifically on the RCMP Superannuation Act. The employer in this particular case is not as rigidly defined as it is for the public service or the Department of National Defence. In fact, the employer in some instances would be contractual between the federal government and provincial governments and the federal government and municipal governments. So the employer could be various levels of governments.

In the case of the RCMP Superannuation Act, for example, if the federal government took a decision to recoup any surpluses, could the other levels of government legitimately claim they had a right of access to a portion of those surpluses as well? Are there any constitutional issues surrounding that, or is it just cut and dried that the federal government has the responsibility and the opportunity?

Mr. Ross Hornby: I had better let one of my colleagues answer your question, just to confirm what I think is the answer, that the employer is not those other levels of government. The RCMP, for example, has a contractual relationship with various provinces or municipalities to provide police services, but the RCMP remains the employer. As far as the surplus is concerned, with respect to that particular fund, I'm going to ask my colleague, Maître Langlois to help me with that.

• 1715

Ms. Micheline Langlois (Senior Counsel, Legal Services Branch, Department of Justice): I think the benefits and the accounting, the surplus, and the funding under the RCMP Superannuation Act are regulated by that act and the rules are found there. I think it's within the jurisdiction of Parliament to do that; it's a federal jurisdiction. Who the employer is exactly does not necessarily determine it. The provisions of the RCMP Superannuation Act determine it. In the case of the RCMP Superannuation Act, as in the other cases, it doesn't deal with the surplus. Now whether there are other contractual obligations that apply—you seem to imply that—I don't know. But under the superannuation act, no one has a right to the surplus from another government or...

Mr. Gerry Byrne: That's fine.

The Chairman: Is that okay, Gerry?

Ghislain, please.

[Translation]

Mr. Ghislain Lebel: I have a question for Ms. Labelle or Ms. Langlois. There was a story in the papers about a recent court decision. Let's take the case of an 85-year old senator who falls madly in love with a young lady aged 22. Unfortunately, the years have taken their toll and the senator dies shortly thereafter. Keeping in mind that judgement, is there any provision in the law that prevents young people from collecting the pension they would normally be entitled to under the Canada Pension Plan? Has any amendment been made or will one be made?

Ms. Micheline Langlois: Is the senator still sitting?

Mr. Ghislain Lebel: No, he's retired. He's 85 years old.

Ms. Micheline Langlois: Ah, he's a retiree.

Ms. Diane Labelle (Senior Legislation Officer, Pension Legislation Development, Treasury Board of Canada): In the example you gave us, they couldn't give survivor benefits to the young lady, simply because the rule says that a person must be married to or living common law with the parliamentarian while he is still sitting.

Mr. Ghislain Lebel: Let's suppose the senator marries a little while before retiring at age 75, so his wife could get half of his pension when he dies, and that he dies a few months later. That's not what the decision was about. I think it's a Supreme Court of Canada decision that said that the wife was able to earn her own living, that she was still young and could rebuild her life, and so she was excluded from the plan. That's not how it works in the Canada Pension Plan, is it?

Ms. Diane Labelle: You're talking about the Canada Pension Plan. The rules governing that plan are different from the rules in our laws. You're talking about the Law v. Canada case. The Supreme Court decision in that case has no bearing on our rules. The rules haven't been changed.

[Editor's note: Inaudible]

Ms. Micheline Langlois: —

Mr. Ghislain Lebel: I turned it up so everybody would understand. That's all.

The Chairman: Thank you, Ghislain.

[English]

Paul Forseth, please.

Mr. Paul Forseth: Thank you very much.

I'm wondering if you can tell us what the law is, if there are some decided cases or maybe even some current litigation in which a private sector employer wants to take a pension fund in somewhat the same action. Let's think of the rationale that was given that the government is never going to go broke. Well, let's think about General Motors. What would be the law if General Motors decided to proceed?

Some say that General Motors is on a better fiscal basis than this country, especially if I believe the Prime Minister and the finance minister. Quite frequently they rise in the House of Commons and tell us of how close we were to the edge in 1993, and then I observe how haphazardly the current government is managing the public trust. So I go back and make that comparison and say, well, what would the law be in that regard? Is there any direction we can take?

Now I understand there's a difference between the public sector and government and a private corporation. But I was making a comparison concerning the fiscal viability, because that's part of the underlying rationale that's been given. Can you cite what the legal parameters of that are?

Mr. Ross Hornby: Well, I'm not an expert on private pension plans, but first and foremost, I would say you have to look at the terms of the plan. The terms usually, or frequently, will have a provision that sets out as a matter of contract between the employer and the employees what will happen to the pension plan when it's dissolved and what will happen to a surplus. Or it might provide that the employer may take, for example, a contribution holiday. That's quite a frequent element in private plans.

• 1720

Foremost it's a matter of contract. It's a matter of the terms of the plan itself. You gave the example of General Motors. I'm presuming—I don't know—that it would be a plan that would be subject to provincial pension benefits legislation, and that legislation may actually provide for what happens in the case of a dispute over the disposition of the surplus. As I said, first and foremost, the terms of the plan prevail and then any pension benefits standards legislation that might exist that's applicable to that private plan.

Mr. Paul Forseth: Okay. In some respect, you've made my point in that you talked about a contractual relationship. We've heard quite a lot in the Commons that all the surplus belongs to the taxpayer. But as soon as the government acts as an employer, there's a change in the relationship there. It's now a contract between an employer and an employee, and it's no longer the government per se over there. So the rationale of saying it belongs to the taxpayer doesn't wash any more, because now the government is acting as an employer, and there's a contractual relationship there. I wonder if you can comment on that.

Mr. Ross Hornby: Well, we're dealing here with a legislative plan, so there is no contract. There is no contractual relationship or contractual entitlement to a pension. It's a legislated benefit that Parliament has conferred upon public servants.

Mr. Paul Forseth: Do you know if, say within Canada or within our legal heritage, that point has ever been litigated, if for example public employees in England or in the States have ever brought that issue to court and fought over it? You're saying it's in essence the benevolent goodness of a government that's bestowing something on an employee. But once something has been given, there's a relationship that's established and cannot be taken away capriciously. So that gets to be an arguable point. I'm wondering if you can tell us of any cases where that issue has been fought over in court. I'm not asking you to give your opinion of it, but can you just cite some of the law on that?

Mr. Ross Hornby: I'm afraid I have to fall back on the fact that this is not a plan the government has given to employees; it's a plan that Parliament has enacted. If Parliament has enacted the plan, the current proposal is for Parliament to amend it and to change the terms and conditions of the plan. But there's no element of contract involved in it or any contractual rights that flow from it.

The Chairman: I think there's a fine point in there, but I think he has answered your question, hasn't he?

Mr. Paul Forseth: Parliament is not the government. The government comes to Parliament to get its legislation passed and get permission to tax and spend the people's money. Parliament is separate and independent. But the government has its legislation and the government acts as an employer. Parliament is a separate employer for its people on Parliament Hill, which has nothing to do with the government whatsoever.

For instance, we're talking about the RCMP. The RCMP are not the employees of Parliament at all. They're employees of the government. And Parliament is not the government. You know the difference, so—

Mr. Ross Hornby: No, I understand. The distinctions you're making now are correct. We're not here dealing with the employees of Parliament, which is a separate employer. What we're dealing with are the employees of the Government of Canada, but it is Parliament that is determining what their benefits will be. It isn't the government itself. It's setting up a legislated scheme of defined benefits, and under that scheme the government has certain obligations and rights. But again, the reason there's no contractual element involved in it is simply because Parliament is determining what will happen with the surplus that is currently in the fund, and it is disposing of it if this legislation is enacted.

• 1725

Mr. Paul Forseth: Okay. My final question is, are you aware of any court rulings on that issue where public employees have gone into a court case over that relationship of what is or isn't in a plan, whether it's a provincial government employee or a state employee in the U.S., anywhere that we have our British jurisprudence?

Mr. Ross Hornby: I'm not aware of any case on employees claiming some kind of right to a pension surplus in a public-defined benefit plan.

Mr. Paul Forseth: Okay, but it has to do with the content of the plan, because the surplus is just one of the elements in there. It has to do with the free hand of a government, whether it's provincial or state government, or whatever, to do whatever, because it has entered into a relationship as an employer to its employees. Are you saying you're unaware if in all of our British jurisprudence, whether it's England, Australia, or whatever, those kinds of things have ever been litigated?

Mr. Ross Hornby: Well, there's litigation on pension entitlements all the time, but that litigation refers to whether or not the government, in administering the plan that has been enacted, has acted within its rights or has respected the entitlements that Parliament has conferred upon employees. But again, that litigation would be similar to any other litigation over a parliamentary scheme that confers benefits.

Mr. Paul Forseth: That's the interpretation of the existing statute.

Mr. Ross Hornby: Yes.

Mr. Paul Forseth: Of course, those cases are going on all the time, but I'm talking about an interpretation of simply taking out little sections and saying that shall no longer be available.

Mr. Ross Hornby: Well, unless Parliament is breaching the Constitution, it is sovereign and it has the right to dispose of it as it sees fit.

Mr. Paul Forseth: And you don't know of any cases around that kind of issue.

Mr. Ross Hornby: No.

The Chairman: I can come back to you after, Paul.

Mr. Paul Forseth: Yes, okay. We may not get the answer today, but maybe you'll come back to the committee with at least some kind of survey of that point.

Mr. Ross Hornby: We could provide a written answer if we find something.

Mr. Paul Forseth: Okay, thank you.

The Chairman: Thank you, Paul. We can always come back to you.

I have Marlene, then Gerald, and then John.

Marlene Catterall, please.

Ms. Marlene Catterall (Ottawa West—Nepean, Lib.): Yes, I have one question. I understand there are now a couple of cases before the courts with respect to the public service pension plan, or at least they're proceeding to court. Can you tell me how those cases, however they turn out, might affect the piece of legislation the committee is dealing with?

The Chairman: Do you have examples? Can you describe the case, Marlene?

Ms. Marlene Catterall: No. I'm just told there are two cases currently proceeding.

Ms. Micheline Langlois: On the issue of the amortization accounts?

Ms. Marlene Catterall: I presume Justice would know what they are.

Ms. Micheline Langlois: Well, there are two judicial review cases, one that was filed last year and one that was filed this year, relating to the provision in the public accounts of the amortization accounts related to the superannuation accounts. They're called Krause v. Canada, and essentially they are challenging the use of those accounts pursuant to the Financial Administration Act.

The superannuation accounts still show the surplus, and the President of the Treasury Board meets his legal obligations by putting the current service costs in it.

Both sides have put in their affidavits, and we should be going to l'interrogatoire sur l'affidavit, the discovery, soon—

Mr. Ross Hornby: The cross-examination on affidavits.

Ms. Micheline Langlois: We'll be going to cross-examination on affidavits soon.

Ms. Marlene Catterall: The question was, what are the implications for this legislation on the possible outcomes of these cases?

Ms. Micheline Langlois: In my view, they have more to do with the establishment of the public accounts and the use of that mechanism pursuant to the Financial Administration Act. Consequently, they don't touch upon the provisions of the Public Service Superannuation Act as such. So I don't think they would have an impact on this proposal.

• 1730

Ms. Marlene Catterall: So in other words, it has no implications for the pension plan.

Ms. Micheline Langlois: Yes.

Mr. Ross Hornby: It relates to how the surplus or the deficit has been dealt with in the Public Accounts of Canada, which is a separate issue from the superannuation account set up under the Public Service Superannuation Act. It's really a dispute about accounting, and what the government did a few years ago was it started, after pressure from the Auditor General and from the actuarial interests in the country, to amortize the surplus more quickly, thereby reducing the amounts that were shown in the public accounts. But it's really a matter of accounting. It doesn't really affect this legislation, which is changing how the pension plan is funded and administered.

A voice: The money is still there.

Mr. Ross Hornby: Yes. The money was never taken out. It was simply reported differently in the Public Accounts of Canada. And I find the accountants can be even more arcane than lawyers—

Ms. Marlene Catterall: Given that it's imaginary money anyway.

Mr. Ross Hornby: There's no disputing that.

Ms. Marlene Catterall: Thank you.

The Chairman: Thank you, Marlene.

Gerald, please.

Mr. Gerald Keddy: Thank you, Mr. Chairman. I have two questions, Mr. Chairman—

The Chairman: Legal ones, I assume.

Mr. Gerald Keddy: Oh, they would definitely be legal, yes.

I'm looking for some clarification, and quite frankly I'm a little bit confused on the discussion between government and Parliament. It's left me somewhere outside. I want to ask again your exact statement. You said the terms of the plan should state disposal of deficit, and if Parliament enacted the plan there is no element of government.

If it's a parliamentary plan rather than a government plan, and I would think it would be a government plan, but if it's a parliamentary plan, then how can the government somehow take this plan over, decide what to do with the surplus in it, and turn around and be able to change the plan, have the power to change premiums, the power to change the benefits, without Parliament's approval, which this bill will allow?

Mr. Ross Hornby: Well, sir, that is the answer, that this bill will allow the government to do that. It is providing the government with the legislative authority to administer the plan in a different manner than Parliament has currently provided for. This plan, as I mentioned, is a program of legislated benefits that is similar to any other program of legislated benefits that the government administers, but it's Parliament that establishes and enacts the plan.

Mr. Gerald Keddy: Formally.

Mr. Ross Hornby: Well, legally.

Mr. Gerald Keddy: Legally, thank you.

The other question is on this whole issue of risk. There's been a lot of discussion on the fact that there was no shared risk management—that the employer assumed all the risk in the original plan, and the employees share the benefits but not the risk, and I would question that. I would think that the employees certainly made contributions to the plan—now that was a shared contribution between the employer and the employee, but certainly they made contributions—and surely with any plan there is some risk.

The government may have said they would cover that risk, but governments rise and fall, there is civil unrest, there are all kinds of things that could happen. So there is some element of risk. Would you agree with that?

Mr. Ross Hornby: Under the current plan, and under the plan as it will be amended if Parliament adopts this bill, the employees will be paid their benefits regardless of what is in the account.

Mr. Gerald Keddy: If the government—

Mr. Ross Hornby: And if the government does not pay those benefits, it will be in violation of the law.

Mr. Gerald Keddy: That's assuming that the government is stable, and the country doesn't fall and all of those things. But it—

The Chairman: That is not related to the bill; at least we hope this doesn't make the country collapse.

Mr. Gerald Keddy: All of the above, but I would expect in the conversation, which has been very legalese, that question is not untoward.

• 1735

I want to get back to the risk. I've asked that question, so let's talk now about disposal of deficit and the fact that I still think there's an argument that there was some risk on behalf of the employees. The employees have been making these contributions. They certainly weren't allowed to put those into a separate or an independent plan. They weren't able to go out and find a broker or invest that on their own.

There's the disposal of the surplus. There should be an entitlement to a part of that surplus—at least a part of that surplus. You could argue one-third or one-half, but a part of that surplus should belong to the employees, because they certainly put money into the plan to begin with, whether they assumed risk or not.

The Chairman: I'm not sure if you're asking for a policy—

Mr. Gerald Keddy: No, I'm asking for a legal definition on who actually has right and access to that surplus; that's what I think I'm asking.

The Chairman: Okay. Do our witnesses feel capable to address that particular question?

Mr. Ross Hornby: I can tell you what the current situation is and what the situation will be under the bill. The current situation is that the act does not deal with the issue of ownership of the surplus. Under the bill, if enacted, the President of the Treasury Board will be entitled to reduce the amounts in the account. It doesn't deal with any other issue of entitlement or who ought to own it. Those are policy concerns or considerations. The act will give this power to the president.

Mr. Gerald Keddy: Just a short question, Mr. Chairman, and it will be my final question.

So it does certainly leave the door open to a legal challenge. It's not a parliamentary challenge if the bill goes through, but a legal challenge from the unions.

Mr. Ross Hornby: We live in a very litigious society and anyone can challenge anything. Whether they have a good case or not is another matter.

Mr. Gerald Keddy: Okay.

Mr. Ross Hornby: I'm not able to comment on whether that would be a good challenge or not.

Mr. Gerald Keddy: Thank you.

The Chairman: If my colleagues will allow me a short question, following up Gerald's, if you don't mind... You mentioned, Mr. Hornby, that the President of the Treasury Board, if legislation is passed, will have, within the confines of the government, the authority to deal with the surplus. I presume, then, that the unions involved, as part of the negotiations they would have every so many years, could theoretically have some impact on that as well. They still have a voice, do they not? The government, in considering this position of surplus, could choose to deal with some of those questions in the context of negotiations with workers. That would still be...

Mr. Ross Hornby: Again, that's a policy issue.

The Chairman: Guilty.

Mr. Ross Hornby: I'm with public service staff relations.

The Chairman: I'm out of order. I cut myself off.

John, please.

Mr. John Williams: Thank you, Mr. Chairman.

The Charter of Rights and Freedoms is something that's changed the face of society here in Canada in the better part of the last 20 years. Everybody has rights these days—

An hon. member: It's a terrible thing, isn't it?

Mr. John Williams: But not everybody, and this legislation contemplates... I've used the term “serial monogamy” because you can have one relationship and you can end that. Then you can enter into a second relationship. But the act does not tolerate a third relationship because it only recognizes two for survivor benefits. If someone has three relationships in series, would a third relationship have a challenge under the charter saying these two have a right, why don't I?

The Chairman: Any volunteers?

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Ms. Diane Labelle: If I may make a stab at this one, actually it's the structure of the present statute, and it will also be reflected in the changes, that you have to be the spouse at the time the contributor died and also at the time the contributor retired. If you're speaking about a legally married spouse but separated—and that's why we still recognize that—if you're still that legally separated spouse at the time of death, then that spouse will be recognized and will receive a proportion of the survivor benefit.

With respect to a common-law spouse or a common-law relationship, that's a more difficult issue, because for that particular relationship to be recognized, that person has to be living with the contributor at the time the contributor retired or at the time the contributor died, which is why it would not recognize two separate common-law relationships.

Mr. John Williams: So you're saying that if someone has married quite young, has a short marriage that doesn't end in divorce but just remains in separation, they live common-law with someone else or in a different conjugal relationship with someone else, and that continues on for, let's say, 50 years and it separates just prior to the death of the contributor, that person who has that long-term relationship gets nothing?

Ms. Diane Labelle: If that relationship ends prior to the contributor's death, that's correct, and that's the present state of affairs as well. That exists today.

Mr. John Williams: So then they're out to lunch.

Ms. Diane Labelle: That's correct.

Mr. John Williams: So perhaps we don't have as many rights as we thought. Now we have to worry about these conjugal relationships and people in nursing homes. It does concern me, the fact that the definition is this conjugal relationship. You have said it's a matter of policy, but I'm trying to understand from a legal perspective who has the rights of survival. I am serious when I say that a retiree who is confined to a nursing home, obviously, is not capable of doing very much. Can the conjugal relationship be disputed? What happens in a situation such as that?

Ms. Diane Labelle: If I may, historically when you're looking at common-law relationships when the couple is perhaps not living in the same house for reasons such as you describe, because one of the two in the couple is in hospital, that does not go to the conjugality of the relationship. In other words, the courts have looked at these issues and have understood the justifications for these types of separations that do occur.

Mr. John Williams: So an old couple in a nursing home where they are separated is still perceived by the courts to be in a conjugal relationship?

Ms. Diane Labelle: As long as they are—

Mr. John Williams: In cohabitation?

Ms. Diane Labelle: Yes. As long as they meet all the other aspects of the criteria, which is financial and how they represent their relationship, and so on.

Mr. John Williams: From a legal point of view, where is the line between what does constitute the conjugal relationship even though it isn't and what is not a conjugal relationship? Any precedents on this? What do the courts say on that?

Ms. Diane Labelle: To the best of my knowledge, it would be an evidentiary problem, the problem of what kind of evidence can be submitted at the time to make the claim.

Mr. John Williams: But you were telling me that people who are not living in a conjugal relationship by virtue of circumstances are considered to be in a conjugal relationship, and there are others where perhaps the conjugal relationship is terminated and therefore it's open to dispute as to whether it is deemed to be a conjugal relationship, because in either case it doesn't happen... Is there any case law to determine where the line is?

Ms. Diane Labelle: That again, I think, is a question of evidence, how well you can make your claim.

Mr. John Williams: Well, it seems to me it's a roll of the dice, put up your money and take your chances, if it's that type of situation. We've gotten away from “spouse” and clear dependency into “conjugal relationship” and “cohabitation”. Those are the two fundamental single things. You said it's a matter of policy; it's not a matter of legal interpretation that the government has chosen this definition of survivorship. They could have chosen something else, obviously, because you say it's not a legal problem; it's a policy issue that they have chosen this. I'm trying to figure out why one would want to choose this policy, but also where people stand.

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I use the term “serial monogamy”, but we also have “parallel relationships”. They exist in this country and this world nowadays too, and someone is going to qualify and another person isn't. How would you determine who qualifies on the basis of a parallel relationship?

Mr. Ross Hornby: Well, that happens today as well.

Mr. John Williams: But here we have this Bill C-78 that clearly recognizes the potential for more than one beneficiary. That is a given. If a person is in a parallel relationship, has two relationships going at the same time, which one takes precedence?

Ms. Joan Arnold: Are you referring to two common-law relationships?

Mr. John Williams: No, I'm talking about two conjugal relationships.

The Chairman: “Common-law” or “conjugal”?

Mr. John Williams: I'm just saying “conjugal” because that's what the law says. The law says “conjugal” and “cohabitation” are the two—

Ms. Joan Arnold: No, if I may, one of them is married and one of them is not. Are you talking about a situation where the plan member has two relationships and is not married to either of the individuals?

Mr. John Williams: Try that one and I'll come back and try the different scenarios. For example, the plan member is married to one and the other one is common-law.

Ms. Joan Arnold: That situation is contemplated under the present act, and we have what we call apportionment, so that the benefit would be apportioned between the two claimants.

Mr. John Williams: That's based on—

Ms. Joan Arnold: The years of cohabitation.

Mr. John Williams: But I talk about parallel relationships; they're both going on at the same time.

Ms. Joan Arnold: The normal situation would be that there would be a separation from the married spouse.

Mr. John Williams: There isn't much that's normal these days.

I think of members of Parliament. Members of Parliament have a home in a constituency and many of them have a home in Ottawa. If a parallel relationship is going on, who gets the benefits?

Ms. Joan Arnold: In a situation where the individual is married to one of the claimants, there would be an apportionment.

Mr. John Williams: But I understand that apportionment is basically a simple formula: the total number of years by which the member has contributed, with so many years apportioned to the percentage of the time spent with one of the spouses and the percentage of time spent within a common-law relationship. It adds up to not exceed 100%. But if you have a parallel relationship going on for a significant period of time, if you're going to have apportionment on that formula, it will add up to more than 100%. So who gets it?

The Chairman: Thank you, Mr. Williams.

Mr. John Williams: I still don't have the answer, Mr. Chairman. They've scuttled around the issue, but they haven't given me an answer, and I thought they were the legal people.

The Chairman: Ms. Labelle.

Ms. Diane Labelle: If I may, we've not encountered these hypothetical situations to date—

Mr. John Williams: I'm not sure it's too hypothetical.

Ms. Diane Labelle: —and because the act contemplates cohabitation in a conjugal relationship, it does imply monogamy as well. So we would have to look at the facts of the case as they arose at that point in time.

Mr. John Williams: So you're saying the act contemplates only monogamy, serial monogamy; it does not consider parallel relationships where there are two or more going on at any one time.

Ms. Diane Labelle: That's correct.

Mr. John Williams: What would the charter say if one person claimed to have rights that the law, Bill C-78, denied? If one person is entitled to the benefits and the other person is denied, what would the charter say? Would it split it down the middle?

The Chairman: Thank you, Mr. Williams.

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Mr. Ross Hornby: To return for one second to the comment Diane made, the act requires you to be in a conjugal relationship or to be married. To be in a conjugal relationship, it's similar to a common-law relationship, and you can't be in more than one at one time. These are relationships that are established and recognized in the statutory regime. So the hypothetical situation you are positing cannot exist under this particular benefit scheme.

It would not allow you to pay benefits to two persons at one time. You have to have a single survivor or you have to have an apportionment between survivors, between, for example, in the classic situation, a married spouse from whom you are separated and then you have another common-law relationship or a conjugal relationship with another person. It doesn't recognize the situation that you are hypothesizing of parallel relationships. There would be no benefit in that situation. It doesn't pay a benefit, for example, to a lover. It pays a benefit to someone you're holding out as either your married spouse, because you're legally married to that person, or the person with whom you're in a conjugal relationship. And the Ontario—

Mr. John Williams: If I may interrupt you, I'm not getting the answer I'm looking for. I'm looking for a legal issue as far as the charter is concerned. I gave the example of an MP with two residences—

The Chairman: May I suggest, with great respect, that the question you're asking is well outside this bill.

Mr. John Williams: We're talking about survivor benefits, Mr. Chair.

The Chairman: I'm going to go to Tony, and then I can come back to you after. The issue you're raising is a problem right now. It's not a problem created by the new legislation.

First, Diane, and then I'll go to you, Tony.

Ms. Diane Labelle: I speak to what Bill C-78 intends on doing. It intends on answering issues raised by the charter at present, and that is the extent to which it deals with the charter.

The Chairman: Tony.

Mr. Tony Ianno: Mr. Chairman, I think part of the issue here is that what I sense Mr. Williams is dealing with is more bigamy or more than one pronounced marriage, I gather. So whether it's common-law and legally married, whether that person is actually married to two people at the same time the way we understand it—is that the issue?

Mr. John Williams: No. Mr. Chairman, we're getting pretty fuzzy and loose with the word “marriage”, but marriage is a formal, legal contract. We all recognize that. Common-law is an informal relationship that appears to have legitimacy, and we're now into conjugal relationships undefined. But let's leave that issue alone for the moment.

The point I'm trying to say is that it's quite possible for a person to have more than one, perceived to be, legitimate relationship. One may be married and one may be something else. It's quite easy today with the way people travel. I use the example of members of Parliament, who have two residences and basically two lives, whereby they could have parallel relationships, both being perceived in their locale to be legitimate. My question is, under the Charter of Rights and Freedoms, who gets the benefits?

Ms. Diane Labelle: The opinion is expressed that the married spouse would have the benefit because there is no separation where we can determine an apportionment and the beginning of a common-law relationship.

Mr. John Williams: Even though there were affidavits and everything else put forward to support it? What if there were witnesses and friends and so on who say it was perceived to be that way?

Ms. Diane Labelle: Again, I will come back to what I've answered previously. These are issues that come up on a case-by-case basis. They're not issues that we've had to deal with in the past. As they do arise, if they do arise, then it will be a question of evidence.

Mr. John Williams: It's a weak answer, Mr. Chairman, a weak answer.

The Chairman: It's the best that could be given under the circumstances.

We'll finish with Paul Forseth.

Mr. Paul Forseth: We understand that the bill is breaking new ground from the previous legislation. So we're getting into that area Mr. Williams is getting at, the area of uncertainty. If you enter an area of uncertainty, it could certainly open grounds for litigation. In the past, Parliament has not been particularly wise in passing legislation that...

[Editor's Note: Technical Difficulty]

• 1755

A witness: ...possible it is not under income security and entitled to anything. In other words, the new spouse or partner, or whatever, is entitled to 100% of the pension. Is it the same with this law? It's not.

A witness: I believe what you're referring to is that if there isn't a negotiated agreement, or if there isn't something that allows for the division of the pension, then that person, when they're no longer in that married relationship, loses their entitlement based on someone else coming afterward, such as a common-law. This is what Bill C-78 tries to address, and that is how the statute reads presently. It is that rather than displacing one spouse in favour of another relationship, we respect the co-existence in the sense that there was a previous relationship and then recognize that person's entitlement.

An hon. member: I suspect then that the proportion you are talking about is in number of months, if not years.

A witness: Correct.

The Chairman: If I may, on behalf of my colleagues, I would like to thank our officials from Treasury Board and Justice for being with us this afternoon. These are difficult questions and you've very capably helped us out.

Thank you. It's 9.30 tomorrow morning, colleagues. We're adjourned.