Finance Committee on April 23rd, 2009

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

You mentioned the bond market, and your view is that it has performed better than the equity market. Are we talking about corporate bonds? Are we talking about strictly government bonds?

[Phil Benson]

That I'll leave to our actuaries. I imagine they have a blend, but they're doing fine.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

So your view is that corporate bonds would be okay. But what if corporate bonds underperform compared to the types of investments Mr. Valentini is talking about?

[Phil Benson]

Again, we're talking about on a long run on a particular model. I'm not an actuary and I'm not a bond buyer. I do understand a little bit about economics. I would think in the long run, if this particular investment is totally safe and if it's going to guarantee what we have to do, that meets your fiduciary duty, not your best luck. How you do it I'll leave to the experts, but in the long run, our workers want to make sure they have pensions.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

I have one follow-up question, Mr. Chair.

Mr. Benson, do you believe that the Canadian pension regulatory framework should be competitive with other jurisdictions, such as the United States or the United Kingdom, where Canadians compete for jobs?

[Phil Benson]

To keep it short and sweet, we live in Canada, and I think it's important for you to look after Canadians. Yes, we compete in a global market, but that doesn't mean we should be lowering standards. If they have best practices that are better than ours or that can help us, we should of course be looking at them.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Pacetti, please.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

Thank you, witnesses.

It's always interesting to look at this aspect, but it's a troubling area, because I think we're all looking in retrospect at what happened, and we're looking for solutions to make sure this doesn't repeat itself. Some of the things I've heard this morning don't necessarily comfort me. I'm not sure we can reconcile the different points of view between Mr. Benson and perhaps Mr. Valentini, but I'm going to try.

John, it's a pleasure to have you here. I see here in your written submission you say, “In an ideal world, the net contributions that we receive could be invested in Canadian government inflation-linked bonds.” What's wrong with that? Why do you have to diversify? Why don't you just invest in bonds,as Mr. Benson was saying? Do you need to take the risks, and do we have to legislate that and say, “No, you have to stick to bonds”? What is it?

[John Valentini]

I'd like to turn to Pierre.

Would you take that question?

[Pierre Malo, First Vice-President, Asset Allocation Strategies and Research, Public Sector Pension Investment Board]

There are some problems in being invested 100% in real return bonds, or bonds. The first problem is that there are probably not enough of these bonds available right now. If you were to sum up all the pension assets actually being managed in Canada, you would be somewhere in the vicinity of $1.5 trillion. The real return bond market in Canada is only worth $35 billion, so we're talking a multiplier of 60 times. In other words, the amount of money to be managed in Canada by pension plans outside of RRSPs is 45 times bigger than the available real return bonds.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I think being diversified is justifiable. So how do we relieve the pressure and avoid having institutions like yours, Mr. Valentini, go out and get that extra one-quarter point, as the Caisse de dépôt did? That was their rationale, and I think the Banque Nationale used the same rationale. They went for that extra one-quarter point, one-eighth of a per cent on certain of these instruments. It's not worth the risk. I understand you did the analysis, but you relied on experts, and obviously the experts failed.

So I'm having trouble reconciling the fact that we use experts, but the experts have not done their jobs and they get paid anyway. Why not just simplify things and make it easy so that we have funds that are used for what they're supposed to be used for in the future? Do we need to go out and get that extra one-eighth per cent?

It's the same thing when you're going to invest in real estate. I think you're going to have the same problem in the real estate market, if not this year then possibly in the next five years. You're going to come back in four or five years and say, “Ah well, we didn't forecast that there was going to be a recession in the real estate market, but it'll come back.” I know you're an accountant, and you'll be able to flip the numbers and show us that you were great in terms of certain peers and not so good for other peers, so it'll be fine, and things go on. But in the end, it is either the taxpayers who pay or it's the pensioner or the contributor.

How do we avoid that in the future? That's the real question.

[John Valentini]

The way we manage the risk--and it is a very rigorous process--is that we establish a portfolio that we think over the long term, over a period of at least a ten-year horizon.... You don't build portfolios on one year and market timing events. You have to build them on a long-term basis. We build a portfolio in conjunction with our sponsors and the Chief Actuary of Canada in doing his equations. As we manage, assets have to equal the liabilities. We manage the assets and we have to take the liabilities into consideration, and we do work with the Chief Actuary of Canada to build a portfolio that is going to meet that at an optimal level of risk.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Sorry to interrupt, but our time is limited.

So you have a ten-year horizon and you have an asset mix. When do you change that? Or do you say, look, we have a ten-year horizon and we're going to stick to one-third bonds, one-third stock, one-third real estate and 10% cash?

[Pierre Malo]

We have a thorough review on a tri-annual basis at the same time as the tri-annual report from the OCA. But we also do reviews every year and recommend courses of action to the board. So it is reviewed on a very regular basis.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So if we take the last 12 months, and you had decided to invest—I'm not sure what your amount was, but let's say it was one-third in ABCPs. What's going to happen this year when those ABCPs are no longer around?

[A voice]

Thankfully.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Or unthankfully!

[John Valentini]

Again, the portfolio is reviewed annually. ABCP dealt with money markets and money market investments, which are part of the portfolio, and commercial paper was one of them. That was, I think, an unusual event.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

We're going to have “unusual” events with something else in the next little while.

I just want ask one more quick question.

[The Chair, Conservative, James Rajotte]

Sorry, you're going over your time here, Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Just a crime unit—

[The Chair, Conservative, James Rajotte]

There will be another Liberal round.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I just want to know under what department the crime unit is that she was suggesting.

[Diane Urquhart]

It's under Public Safety. It reports to Peter Van Loan and also to the Standing Committee on Public Safety and National Security.

[The Chair, Conservative, James Rajotte]

Thank you, Vice Chair, for respecting my time limit.