Finance Committee on April 21st, 2009

[Susan Eng]

No, but everybody is talking about it, so I suppose that's an advance.

On the importance of a pension summit--and I'm sure it will happen soon--the people at the table would be the ones who could make the changes. So it wouldn't be everybody else talking amongst themselves; the finance ministers who actually have the authority to make the changes in this area would be sitting at the table.

Also sitting at the table should be representatives who can speak on behalf of retirees and pension plan members. You've heard today the kinds of things that have historically brought us to this point; for example, employer representatives saying we have to change the rules without asking for the consent or involvement of the pension plan members because it would be too difficult and they'd have to learn too much. Let's start teaching them. At this point people are very much aware of the issues. It is not that difficult. Although the pension experts say this is a mystical area, it's really simple arithmetic. If you take out money when times are good, you're going to face problems when times are bad. It's that simple, and that's what has been happening.

These are the kinds of changes that will rebalance the rights and interests to keep our pension plans much more stable and robust for bad times.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you. That is the central theme that was explored by Monsieur Lamoureux as well when he said that when you say something that goes against the current thought when times are going well, such as that you should be careful because you have to save for a rainy day, you get shot down, and that is the best segue to Mr. Kolivakis.

Leo, I've had the great pleasure of meeting with you a number of times over the past couple of years. I am going to say in all sincerity that the analysis you provided here today should be compulsory reading for anyone who wants to understand the subject of what has gone wrong with our pensions. I can also say that you're in a little bit the same position as the engineer who wrote a very critical piece before the second space shuttle crash in 2003, predicting exactly why the crash would happen if certain changes weren't made; and when the crash occurred, that person was roundly criticized for having written that note, even though everything he said in it was right. It's cold comfort to that engineer, and it's cold comfort to you to know that the predictions you've been making and the analysis that has been out there, both in your blog and in your writings, have all come true. All the things we have seen in the last eight months you predicted for exactly those reasons. A lot of people in Canada should note that at least someone in this country has been on this case. That hasn't made you very popular with the people you made those predictions to, and I find that regrettable.

I want to get back to one part of your presentation and ask you for your analysis on PSP Investments. As you correctly pointed out, the senior officers like to pay themselves bonuses. This year is no different. They'd still like to pay themselves bonuses despite the fact that they lost billions and billions of dollars. The way they are going to try to convince us that they should get a bonus this time around is to say that actually you should look at their results on a four-year revolving basis and not just on the last year.

Based on everything you know--and you're one of Canada's leading experts in the field--what do you think is the appropriate thing this year for the senior cadre executives at PSP Investments? Do you think they should be paying themselves bonuses with the money from those savings?

[Leo Kolivakis]

I don't think any pension fund of the large Canadian pension funds should be paying bonuses this year, period, especially if they've lost the amount of money they've lost, and in the way they lost the money. That's very important. It's not just losing money; it's where you lost money.

To answer your question, no. When you use this four-year rolling return argument, who does it serve? It serves the interests of the senior executives of the pension fund. It does not serve the beneficiaries or the stakeholders. It serves to line the pockets of the senior executives of the pension funds. That is a key thing we have to keep in mind.

When we have catastrophic losses like those in 2008, it's nice to say this is a once-in-a-lifetime event. Well, Leo Kolivakis wasn't the only one who predicted this. There were a lot of other people who are smarter than I who predicted what was going to happen. I saw it because I was working within the confines of the large pension funds. I went to all the conferences in London and in New York, and I saw it was like a financial orgy on hedge funds and private equity and real estate. Well, the music has stopped, and you know, as Warren Buffett said, when the tide goes out, you'll see who has been swimming naked. There were a lot of people who were swimming naked.

[Thomas Mulcair, NDP, Outremont, QC]

There are two main theories of regulatory analysis that can apply here. One is regulatory lag. In other words, regulators are always a step behind what happens and always reacting to it. The other is regulatory capture. There is a lot of discussion these days about how large private firms like Goldman Sachs have been placing their people in key situations of leadership.

One of the reasons we have public institutions in Canada like the CMHC is so we can avoid the Freddie Mac and Fannie Mae debacle in the United States. You maintain public institutions. Is regulatory capture a part of our problem here, such that we have people handling public pensions who consider themselves, when they wake up in the morning and start snapping their suspenders, to have sort of become magnates in the private world of investment, who don't have to respond with that same level of fiduciary responsibility?

[Leo Kolivakis]

You have touched on a point I have written about in my blog. The quality and the independence of the board of directors of these large plans is very important, and if you keep putting in the same people from the financial industry, basically it's like a big club. They all know each other. They all get compensated pretty much the same way. They all will talk the same talk. But if you have, for example--and I've been arguing about this--a more independent board of directors.... For example, I would put in academics from universities who maybe don't have any affiliation whatsoever with the financial industry. And if you also augment all your auditing by independent performance, operational, and fraud audits at least once a year by independent experts to see if the activities are in accordance with best standards, then you would be able to avoid all these things and also keep the public pension funds at arm's length from the government.

Norway provides a perfect example. They have been doing this, and to their credit, they have been doing it quite well. They've been able to keep the fund at arm's length from the government, but they also have independent consultants looking at whether or not the operations are being run in accordance with the best interests of the key stakeholders.

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Thomas Mulcair, NDP, Outremont, QC]

On that last point, I'd like to go back to the case....

I will ask you my question in French, as a follow-up to the question asked by Mr. Laforest. Is one part of the problem, the scale of the losses suffered by the Caisse de dépôt et placement du Québec, caused by the fact that the government had suggested to the National Assembly of Quebec a legislative change that made returns with the one and only consideration? The government had for the sake of 0.17% interest—

[The Chair, Conservative, James Rajotte]

Please ask your question.

[Thomas Mulcair, NDP, Outremont, QC]

—sought out the best return, and when time came to draw down liquidity, there was none because it was all invested in asset-backed commercial paper.

[Leo Kolivakis]

Quite frankly, that is a political question. Honestly, it wasn't just about seeking a return, but also about taking into account the risk that was involved.

[The Chair, Conservative, James Rajotte]

Merci.

We'll go to Mr. Pacetti, please.

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

Thank you, Mr. Chairman.

Thank you to the witnesses. This is a very interesting committee hearing.

One of the things I've been hearing up until now—and it's not the first time we've heard it, it's every time somebody comes before us, it seems--is that it's only normal that losses were or have to be incurred, because, you know, it's expected. Nobody seems to be taking the blame in terms of what has happened or in terms of preventing it. I heard that again today: over the long run there will be declines and there will be upswings.

What do we need the experts for? I guess that would be the question, and I can address the question to two or three of the witnesses. Because if over the long term—Mr. Lamoureux, I think you said over 30 years--I invest in the stock market and I'll be at a higher rate, let's just do that. What do I need experts for when I'm going to run into problems, as Mr. Leo Kolivakis has just stated? I can't trust the experts.

Mr. Vanaselja, I think it's one of your organization's recommendations that each plant file an actuarial evaluation report each and every year. How do you run your business if you're not doing that? How do you run a pension plan if you don't provide financial disclosure to plan members? Do we have to legislate this kind of action? Exactly what do you get paid for? This is what I don't understand.

I think you guys got lucky that we get to blame it on the global downturn. There's no accountability here anywhere. Some of the suggestions are good, but where do we start? How do we fix this problem? I mean, it doesn't make any sense. I can't buy the story that people on the boards of directors are looking to put money in their pockets just for themselves. I can't buy that. We can't run on that premise. So how do we fix that?

Maybe if there's anything I could disagree with Mr. Kolivakis on, it is perhaps to not have experts on those boards of directors. Perhaps have Joe the plumber on those boards of directors, because you know what? Maybe he'll just invest in a GIC, because he won't have the expertise to buy ABCPs, derivatives, and whatever else you experts, you so-called experts—not you, but your organizations—are buying out there.

Can I have maybe Mr. Lamoureux comment and even Ms. Eng. Mr. Chairman, if you could control the time, I would appreciate it.

[Claude Lamoureux]

When it comes to investment, you have people who can right it after the fact, but when you invest, you have to look before the fact.

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

Exactly.

[Claude Lamoureux]

It's better to have experts than non-experts, and I'll talk about the Ontario Teachers' Pension Plan. Since its inception in 1990, we've beaten our benchmark by 2%. In this business, when you do that, it means you reduce the cost of the pension plan by 40%.

So you do need experts. A lot of these experts can be trusted, but last year there was not a market in which you could hide. The Canadian market gave you a return of -33%. This is something that happens. We know that over a long period of time.... And you cannot hide. Last year there was not a place where you could hide. Every market was negative.

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

No, but if I'm an expert and I'm running a pension plan, I know that the market is going to tank. Then you know what? I'm going to put my money in real estate. That's your job, not to keep the money in stocks. I understand that you're going to pick winners and losers, but--

[Claude Lamoureux]

Well, real estate went down.

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

As Mr. McCallum was saying, do we have to legislate and say, okay, you're only allowed to have 30% in stocks and 20% in bonds and 30% in real estate? I mean, that's the thing.

Ms. Eng, can you answer? I'm sorry, but my time is limited.

[Claude Lamoureux]

I don't think you have to legislate. I'm giving you an example of a plan that has beaten its benchmark by 2%.

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

Mr. Lamoureux, I understand you're one of the few, the Ontario Teachers' Pension Plan, that did a good job, and hats off to you, but let's talk about the other 98% or 99% of the people who didn't do a good job.

[The Chair, Conservative, James Rajotte]

You wanted Ms. Eng on that one.

[Susan Eng]

As the only non-pension expert at the table, I would say yes, we do need experts to manage the plans overall, but at some point the rules have to change as well. The CPP, for example, measured up extremely well compared with all the other plans, even in a bad market. Why was that? It was largely because it was extremely large, it was conservatively managed, it was independent of political interference, and it was independent of any particular employer. Those were the crucial differences. It was not because they were facing a different market.

Those changes and those choices that are made at a professional level and at a regulatory level are extremely important. That is why we recommend a similar fund to cover the rest of the pre-retirement income. The important changes to the regulations are those that prevent employers from dipping into the overall savings, so that you prevent the contribution holidays and so on.

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

Could I have Mr. Vanaselja comment on that?

[The Chair, Conservative, James Rajotte]

It must be very brief. You have about 20 seconds.

[Siim Vanaselja]

I certainly believe that experts are important. The management of pension assets needs to be closely aligned with the management of pension liabilities. Investing assets is not necessarily like investing in a mutual fund. We need experts who understand the long-term nature of pension liabilities and how the particular asset portfolios can be constructed in a manner that best meets those long-term liabilities while minimizing risks. I think experts are the best to do that.