Finance Committee on March 27th, 2007

[James Ralston]

That amount, the $21, was an increase over the previous amount. So they receive more than $21.

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

Yes, but the additional benefit of $21 for 65,000 recipients for 12 months is $16 million. The increase of $18 million just doesn't—

[William Baker]

Once again, I'll ask Mr. Ralston to give you that precision.

[James Ralston]

I think part of it is just due to rounding. The actual—

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

You can round up. You can round $16 million to $17 million.

[James Ralston]

—increase was $20.83 per person, and that raises the total amount paid to $266.66, and the actual number of recipients is 64,654. So I think it's the rounding.

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

That's fine, but that $18 million is for the benefit itself?

[James Ralston]

Yes.

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

It is not the cost to implement. Okay, that was the question.

[William Baker]

If I might explain, these are children in institutions who would otherwise, if they were at home, be getting the child tax benefit.

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

I understand. I just thought it was a cost of $18 million to pay out $16 million.

[James Ralston]

No.

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

Okay. Thank you, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, monsieur.

Thank you for being here again. It is nice to see you again, and we'll let you get back to the business of collecting those taxes on behalf of Canadians.

We'll recess just briefly and ask the Office of the Superintendent of Insurance to come forward now.

[The Chair, Conservative, Brian Pallister]

Pursuant to Standing Order 81(4), main estimates 2007-08, vote 30 under Office of the Superintendent of Financial Institutions--which I mistakenly earlier referred to as the Office of the Superintendent of Insurance, which was a reflection of my previous existence in the private sector, and I do apologize for that--referred to the committee on Tuesday, February 27, 2007, I call vote 30.

Madam Julie Dickson is with us.

I welcome you and your associates to the committee and invite you, if you wish, to make some opening comments.

[Julie Dickson, Acting Superintendent of Financial Institutions, Office of the Superintendent of Financial Institutions Canada]

Yes. Thank you, Mr. Chair and members of the committee. Good afternoon.

The Office of the Superintendent of Financial Institutions was created to contribute to public confidence in the Canadian financial system. Canada's robust regulatory regime has assisted in creating one of the strongest financial systems in the world. The strength of this system is critical for continued development and innovation in our economy and in protecting the savings of Canadians. Therefore, maintaining our status as a world-class prudential regulator is an OSFI priority.

OSFI is mandated to supervise institutions and pension plans to determine whether they are in sound financial condition, and are complying with their governing law and supervisory requirements. In the event we perceive any material deficiencies, we advise institutions and require them to take necessary corrective measures. OSFI also monitors system-wide or sectoral issues that may have a negative impact on institutions, and we advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk.

Canadian financial institutions are operating in an increasingly complex international environment. To meet its mandate, OSFI must monitor Canadian institutions' ability to manage the risks of operating in this environment. OSFI's priorities for the coming year and beyond build on our commitment to world class regulation.

OSFI's major priorities for the current planning cycle include Basel II implementation for banks, an assessment of Canada's financial system by the IMF and the World Bank, an assessment of Canada's anti-money laundering and anti-terrorist financing regime by the Financial Action Task Force, an in-depth review of life insurance capital rules, the adoption of international accounting rules in Canada, pensions, internal systems and processes, and readiness planning.

OSFI's costs of regulation and supervision are almost fully recovered from the industry. As well, CIDA currently funds approximately $1.3 million of our annual costs for the assistance that we provide to foreign supervisors through our international advisory group. The costs of the Office of the Chief Actuary are largely funded by the organizations for which it does actuarial work. An annual appropriation of approximately $780,000 covers the actuarial services the OCA provides to various public service pension plans.

OSFI's overall costs will rise by 6.5% between 2006-07 and 2007-08. The increases are due to normal inflationary and merit adjustments and continued technology investments related to the implementation of the Basel II Capital Accord, and to support our monitoring of private pension plans.

OSFI's accountability framework has a variety of elements. Our internal audit group conducts assurance audits based on a comprehensive five-year risk-based plan. Audit results are reviewed by OSFI's executive and the audit committee at regularly scheduled meetings.

OSFI strengthened its internal audit program considerably in 2006-07 in accordance with the new Treasury Board audit policy. Effective the first quarter of 2006, OSFI appointed four external members to its audit committee who serve with the superintendent. The independent members represent a majority of the committee.

Internationally, as mentioned previously, OSFI participates in reviews jointly held by the World Bank and IMF to determine whether we are meeting internationally established principles for prudential regulators. We also regularly conduct anonymous surveys of knowledgeable observers on our operations.

We consult extensively on our regulatory rules before they are finalized. We issue an annual report, and our financial statements and related control processes are audited annually by the Auditor General of Canada. We also discuss our budget with financial institutions and pension plans every spring.

OSFI's mandate, coupled with the powers provided to it by Parliament, has gone a long way in contributing to a safe and sound financial system in Canada. But we are always mindful of the fact that the financial services sector is dynamic and ever-changing. OSFI will continue to do its part to maintain and further develop a strong prudential regulatory regime that will have the confidence of all Canadians.

I would be pleased to answer any questions the committee might have.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Ms. Dickson. We appreciate that.

We'll begin our questioning with Mr. McKay, for six minutes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

On federally regulated pension plans, anecdotally and evidentially my recollection is that something in the order of at least 50% of them aren't meeting OSFI standards. Can you give us, in general terms, an analysis of the state of pension plans that are federally regulated?

Secondarily, part of the problem has to do with their reserves, what reserves they need to set aside in order to fund, and it's all based on ratios, which only actuaries and accountants actually understand. Is there any movement afoot to deal with those ratios and lessen that burden in order that more plans can be brought into compliance?

[Julie Dickson]

First of all, there might be some confusion about how many plans are in compliance versus how many plans have a deficit that they are paying off. Most of our plans are in compliance.

The issue is that last year we reported that three-quarters of the pension plans had a deficit, which means that they have to fund that deficit over a five-year period. That was a relatively new development. Prior to that, a few years ago, most plans were even or in surplus.

Currently, the health of the stock market last year has had quite a positive impact on pension plans. While I don't have the final results for the year 2006 yet—I will have those in a few weeks—early indications are that many of our plans are back into an even situation, meaning they would not have these deficits that they have to pay off over five years, and that is due to the strong stock market returns.

On your other question, about actuaries and accountants, accounting rules are the purview of the Accounting Standards Board, but they are announcing some changes that would have an impact. Those changes would suggest that if you're a corporation with a pension plan that has a deficit, the deficit should go on the balance sheet of the corporation, as opposed to being in the notes. That's one current development.

We continue to talk to the actuaries about their rules, because they made a major change a few years ago that has had an impact on how you calculate what pension plans owe. We continue to talk to the actuaries about that to see whether they might go in and look at revising that in the future.

[John McKay, Liberal, Scarborough—Guildwood, ON]

That's an interesting idea, moving the pension plan deficit from notes at the back of the statement onto the balance sheet itself. Presumably that could move a corporation from a profitable year to an unprofitable year, and in turn, therefore, affect the stock price of the corporation, and in turn, affect the assets of the pension plan, which would be holding some of that corporation's stock.

It creates a bit of a perverse cycle, wouldn't you think?

[Julie Dickson]

I guess it depends. At the end of the day, corporations that are affected by this will have an opportunity to provide their views to the Accounting Standards Board.

Some people might say the information is in the notes to the financial statements, so if it goes onto the balance sheet, rating agencies that might be looking at the corporation read the notes, and if this change goes through, they'll also see it on the balance sheet of the corporation. There could be a difference in those two scenarios in terms of how the market looks at the corporation. That's beyond my expertise, but it is an important issue, and corporations that are affected should be talking to the Accounting Standards Board.

Under the pension rules, I don't think pension plans are allowed to invest heavily in their own shares. That is something we would keep a close eye on.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You said the stock market has basically taken about a 75% deficit rate and zeroed it out. Is that fair? This is good for this year, and of course last year was an amazing year on the stock market.

How can rules or regulatory agencies like yours, in effect, lock in that positive balance and cut down on the downside of going back into deficit when the market turns down?

[Julie Dickson]

I think the recent experience of pension plans has led many companies to take a good look at the risks they are running with the pension plan and to better manage it. For sure, it is good news, as you know, that the stock market returns have had a positive impact on pension plans. The stock market can go like this. It can be volatile. Interest rates can increase and can decrease, and that also has a major impact on plans.

We would be encouraging people to increase their ability to manage risks in those plans, be very aware of how much risk they are taking, and manage that risk so people aren't surprised in the future if stock market returns don't turn out the way they hoped they would turn out.

[The Chair, Conservative, Brian Pallister]

Thank you. The floor now goes to Mr. Paquette.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Thank you for your presentation. My first question is on the Basel II Capital Accord and the funds allocated to implement it. In general terms, can you remind us what the accord is about, and tell us how the office intends to assist banks in adhering to the accord. In your statement, you mentioned that the Office of the Superintendent of Financial Institutions will work closely with the banks in the coming year as implementation of the Basel II Accord moves forward. I would have liked to know, in concrete terms, how exactly the office will work alongside the banks. And please remind us, if you will, of what the Basel II Accord is about.