Public Accounts Committee on June 4th, 2014

[John Valentini]

Indeed, a 2% surplus for 10 years would be considerable. Our real target is 4.1% given the risk level we assume in our portfolio. And if we do better than that, well that's great.

By the way, on the subject of the existing deficits, I should say that the most recent actuarial valuations are a few years old. Markets have been very kind over the past two years. Our actuarial valuations reflect numerous assumptions and factors, but if we take into account only the investment assumption, keeping all the others static, so at the level they were at two years ago, the deficit should virtually disappear. We estimate that our portfolio investment strategy should allow us to achieve a rate of return of 4.1%.

As for the $150 billion in unfunded obligations, it is our view that that will prove favourable. But that's not for PSP Investments to decide.

It's a policy issue.

As a corporation, we have the resources to manage those funds in the event the government decides to transfer them.

[The Chair, NDP, David Christopherson]

Thank you.

Time has expired.

Before I go to our next speaker, I do want to ensure that we have it on the record that all of our guests and witnesses are the same, with the exception of Major-General David Millar from the Department of National Defence. He could not make it, so in his stead we have Commodore Lynn Bisson, the assistant chief of military personnel.

Welcome, and thank you for filling in for the Major-General.

[Cmdre Lynn L. Bisson, Assistant Chief of Military Personnel, Department of National Defence]

Thank you very much, sir.

[The Chair, NDP, David Christopherson]

It's my understanding that Mr. Aspin and Mr. Carmichael would like to split their time.

Mr. Aspin, you have the floor.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Welcome to our guests.

In the past couple of years, our government has made some changes to the public sector pension plans, for example, raising the eligibility for full benefits from 55 to 60, and evening out the contributions at fifty-fifty.

Ms. Cheng, after reviewing the administration of these pension plans, would you say the government's changes would have a positive effect for taxpayers?

[Nancy Cheng, Assistant Auditor General, Office of the Auditor General of Canada]

Mr. Chair, the exercise we undertook was to see whether there has been an assessment of the sustainability of the public sector pension plans, including all three plans: the public sector, the RCMP, and the DND.

What was shown to us was the result of what came out from the analysis that supported the two measures the member has mentioned. They both have a positive impact on the liability moving forward. They alone, though, do not support the fact that there has been a full assessment of sustainability.

That was the observation we made in the chapter, along with the recommendation to suggest that a regular assessment be undertaken periodically.

[Jay Aspin, Conservative, Nipissing—Timiskaming, ON]

Thank you.

[The Chair, NDP, David Christopherson]

Mr. Carmichael.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you.

Welcome back to our witnesses.

Ms. Cheng, I'm following up on my question to you from our last meeting, which seems like a long while ago. In your answer to me we agreed that the returns we were hearing about in this pension program, or series of pension programs, was pretty strong. But I notice that in your early chapters of this report, in paragraphs 1.11 and 1.12, you talk about “strong volatility and a prolonged period of very low interest rates” and about how the “longevity of Canadians has increased” and some of those issues.

From the perspective of our pension plans, are you finding, or do some of your colleagues have any information, that what we are experiencing is common globally, let's say, or throughout the world, in other areas where you might be able to compare like plans? Do we have any data as to how we compare with others in terms of our productivity?

[Nancy Cheng]

Thank you, Mr. Chair.

Thank you for the question from the member.

The scope of the audit relates to assessment of the administration of the three main pension plans we've outlined. It does not include an element of benchmarking. So as a result of the audit, we have not gone out to compare our plans and our situation with other plans.

[John Carmichael, Conservative, Don Valley West, ON]

Okay. Thank you.

Mr. Watson, do you have any thoughts on that same question?

[Daniel Watson]

In terms of the assessment that we do regarding long-term sustainability and the comparisons to others, certainly PSPIB benchmarks itself against other pension plans in Canada. When it comes to questions of longevity and turbulence, these are all very much factored in as part of the work we do with the office of the chief actuary.

The PSPIB spends a lot of time working on these things. You'll find in their reports issues related to changes in salaries. I know the member had asked earlier about impacts of different labour relations issues. We factored in differences in salaries, differences in rates of return, differences in longevity. I think the last time we talked about the fact that there's a $7.7 billion cushion in there to deal precisely with questions like longevity. So these are all considered.

[John Carmichael, Conservative, Don Valley West, ON]

Are your comparatives strictly within Canada as a rule?

[Daniel Watson]

The biggest ones we look at are the ones in Canada. We certainly follow trends from around the world. It gets very difficult to compare very different plans under different sets of circumstances, but we compare closely what's going on in the rest of the country.

[John Carmichael, Conservative, Don Valley West, ON]

Great. Thank you very much.

[The Chair, NDP, David Christopherson]

Thank you, Mr. Carmichael and Mr. Aspin.

Moving along, we're back to Monsieur Giguère.

You have the floor again, sir.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair.

We're dealing with a governance framework that doesn't set out a funding policy. Usually, of course, a very long-term view is adopted. You don't build a pension fund in two or three years. The average public servant has about 36 years of service, I believe. So you have to have a planning framework that more or less reflects that 36-year period.

To what extent will you be able to correct that effect quickly and to bring us a funding policy plan?

[Daniel Watson]

The work on that will begin this year. We hope to receive approval in the next fiscal year. A lot of work has already been done in this connection.

For instance, PSP Investments has a document on its risk tolerance, which we are very familiar with. In it, the chief actuary has defined a number of risk elements that he examines on a very regular basis. The legislation itself refers to undue risk.

And clearly, we have established our own policies. We're almost ready to formalize that work. We'll be able to make some proposals in the next year. If approved, all that will happen in the next fiscal year.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

I am going to echo what my colleague Mr. Carmichael said.

I've done comparisons with other plans, both public and private. Overall, Canada's plan is especially stable. Just think of the crisis in Europe. In many cases, the debt hadn't been taken into account in the budget. That wasn't the case here. A significant percentage of the post-2000 obligations are fully funded, which is really the way to go.

Generally, I am of the view that, despite the major corrections that need to be made, Canada's plan is quite sound. If I'm mistaken or if there are holes in my assessment, do not hesitate to correct me. However, generally speaking, it is my view that Canada has taken a very disciplined approach to its public pension fund.

[Daniel Watson]

Yes, I tend to agree with you there.

I would add one thing, if I may, coming back to a previous question of yours about the deficit.

The last financial evaluation dates back to March 31, 2011, and in the markets, we've seen a major change for the better since then. So we are hopeful that the deficit will have improved by the next evaluation. Clearly, we will have to wait for the formal evaluations and figures, but that is our expectation.

[The Chair, NDP, David Christopherson]

You have two minutes.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

My next question is for the official from the Office of the Superintendent of Financial Institutions.

When actuaries forecast average performance results, they usually expect some years to be good and others to be bad.

We have come through a tough period. Over 40 years, is it likely to bring things down or to even out as far as long-term actuarial studies go?

[Jean-Claude Ménard, Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions]

Thank you, Mr. Chair.

The actuarial report provides a number of scenarios. Stocks can generate additional returns, but they're volatile. Different scenarios show that, to the extent that future asset class correlations are consistent with what we've seen in the past, there could be a negative return of 10%, for example, once in 10 years, but there could also be a positive return of 22.6% another year.

Our assumption as far as achieving a real rate of return of 4.1% is consistent with Canada's top ten pension funds, including the Ontario Teachers' Pension Plan and Quebec's Government and Public Employees Retirement Plan, known as RREGOP.

What's more, as the Auditor General mentions in his report, current interest rates are quite low. We take that into account, such that, over the next 5 or 10 years, we aren't projecting 4.1%, but rather 3.3%, which is even lower. So we recognize that interest rates are low and that our assumptions could be more difficult to achieve in terms of capital markets. That could, however, also lead to an increase in liabilities. Obviously, if you compare 3.3% with 6.1% and PSP Investments continues to see good returns, the deficit will disappear much more quickly.

[The Chair, NDP, David Christopherson]

Thank you kindly.

That's our time. Thanks to both of you.

Mr. Hayes, you have the floor, sir.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you, Mr. Chair.

This is going to focus on the pension buyback.

Mr. Watson, I'm looking at the AG report and paragraph 1.20 states:

According to the Secretariat, the government could generate significant savings if service buybacks were reviewed. The Secretariat believes that the current method of costing them (based on contributions and interest) does not provide an accurate reflection of the true cost of the liability of the service being bought.

For the RCMP, according to their plan, their service buyback provisions “better reflect the true cost of the liability”.

I'm trying to understand why the two plans are different. Is there an intention to align these? I would think that all buyback plans would be identical. I would appreciate your comments on that.