Finance Committee on April 23rd, 2009

[Barbara Miazga]

If the account was set up for the purpose of plan funding, and if that funding was required in the event that the company failed and the plan was wound down, it would go to the plan. If there was a fully funded pension plan in that situation it would revert back to the sponsor.

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

Is the plan the preferred creditor in a situation of that kind?

[Barbara Miazga]

I can't answer that question because I don't know. It would depend on the specific circumstances.

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

It's a rather significant issue, if this is a proposal to ameliorate the risk.

On letters of credit, I've never met a letter of credit that can't be revoked. If you're meeting your solvency requirements with letters of credit and the company is in financial difficulty, doesn't that actually create a whipsaw effect, so that not only does the company have problems with its bank and balance sheet, but it now has an additional problem with its pension plan, because it didn't sponsor the pension plan with cash, it sponsored the pension plan with credit?

Doesn't that, in fact, accelerate your difficulties rather than decelerate them?

[Barbara Miazga]

The proposal is centred around financially strong companies. The ability to use a letter of credit provides a security for the pension plan. Also, as you say, letters of credit can be revoked. The financial health of the particular plan sponsor will dictate whether or not that plan sponsor is able to put a letter of credit in place. Again, this proposal is based on the scenario where you have a financially strong plan sponsor that has the credit facilities in place to put up the letter of credit, which means they're not putting the money into the pension plan, which at some point in the future--

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

We're here talking about companies that are on the margins, companies that are really on the edge and begging for relief. You come along with a proposal that effectively would affect only companies that don't need relief, companies that are already strong. The only companies that are going to get letters of credit from a bank are strong companies.

[The Chair, Conservative, James Rajotte]

Very briefly.

[Barbara Miazga]

PIAC's constituency is a lot broader in that we represent corporate plans, public sector plans, and quasi public sector plans. When we're looking at asking for relief, the reason we're asking for relief is because the solvency funding requirements can actually put a financially strong company into jeopardy because the requirements are onerous based on the existing rules.

[The Chair, Conservative, James Rajotte]

Thank you.

Monsieur Carrier, s'il vous plaît.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chairman.

Good morning, ladies and gentlemen. I have a lot of sympathy for people facing the situation described by Ms. Smith, of United Senior Citizens of Ontario. I think that you are giving us a very accurate portrait of what retirees are going through—retirees who have neither power nor a voice in the face of the economic turbulence we are experiencing in this country.

I would like to come back to the main reason for the drop in revenues affecting various pension funds—namely, poor investments and poor decisions on the part of individuals who are supposedly investment experts. I would also like to come back to the matter of performance bonuses, because it is absolutely scandalous. People are receiving bonuses of many hundreds of thousands of dollars in addition to their salary. The amounts can be as high as one million dollars, regardless of the consequences of these individuals' decisions for overall performance.

I would also like to know what Mr. Valentini thinks of this practice. He said earlier that the board of directors is the one who sets these policies. However, I would like to hear his own views. He holds a senior management position and is responsible for an investment board. I would like to know whether he approves of the idea that performance bonuses should be paid to staff solely on the basis of short-term performance, something that can have very significant prejudicial effects on the pension fund over the long term.

[John Valentini]

It is important to understand certain aspects of the current situation. First of all, incentive bonuses are generally paid across the industry. That is the standard, when there is a benchmark portfolio. Furthermore, I can tell you that PSP's benchmark portfolio, which determines the basis for incentive bonuses, is considered one of the best. In fact, according to a study carried out by our peers at RBC Dexia, our benchmark portfolio ranks first. It is the most rigourous.

In addition to that, a study by our peers that I myself was involved in last year showed that, among the large funds, we were ranked at the end of the scale, which is consistent with our benchmark, which is the most rigourous.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I am going to stop you there because our time is limited. I would like to hear your opinion on performance bonuses. Do you not think they have a perverse effect on pension funds and that legislation should be passed to modify, reduce or even abolish that practice?

[John Valentini]

Mr. Carrier, compensation is managed by our board and paid over the long term. Incentives are based on the long term. We simply follow industry standards.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I know, you said that already, but I am wondering about these infamous industry standards. To me, they introduce distortions, since people are paid based on returns, rather than their negotiating skills. I am certain you have an expert committee that assesses risks and makes decisions in your organization. Why pay someone based on the fact that he generated certain returns, without any concern for the long-term consequences of those returns?

[John Valentini]

I believe we do consider the consequences, in the sense that we do not pay an incentive bonus on the sole basis of one year's performance. It is generally over a longer term. Even Mr. Mulcair stated that. As a general rule, incentive bonuses are based on long-term performance and on the benchmark portfolio.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I would be interested in hearing Ms. Miazga's opinion with respect to performance bonuses and I would like her to indicate whether she believes that policy should be changed in order to set things straight.

[The Chair, Conservative, James Rajotte]

Very briefly, Ms. Miazga.

[Barbara Miazga]

Our organization is an organization that is made up of volunteers, so we can't specifically respond to the issues of salaries and bonuses because there are none related to PIAC, other than that we have an executive director. So if you're asking me my opinion, my opinion is that the compensation practices for each organization should be determined by the board of directors and they should be transparent. They should be based on long-term objectives.

[The Chair, Conservative, James Rajotte]

Merci.

We'll go to Mr. Dechert, please.

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

Thank you, Mr. Chair. Thank you for your presentations this morning.

Mr. Valentini, you mentioned in your presentation that the PSPIB has made investments into asset classes such as private equity investments, real estate, and infrastructure, which actually have performed quite well and in many cases have outperformed the markets. Can you give us a specific flavour of some of those investments for illustration purposes?

[John Valentini]

They're commonly referred to as alternative asset classes. Back in 2004, when we diversified our portfolio, we started to develop--and actually, we haven't been able to reap the benefits like many other big funds because we just started to develop them in 2004, and that's real estate, infrastructure, and private equity. When we benchmarked our 2004 diversification strategy, which included these investments, and we benchmarked them against our index portfolio, which was prior to 2004, we added $1.6 billion in added value as of last fiscal year.

As I mentioned before, I did a similar exercise and looked at the major peers, like teachers, OMERS, and Caisse. Each one of these asset classes for each one of these funds, and each asset class individually, outperformed the total overall fund, thereby outperforming public markets. These are asset classes that have performed very well. We've been developing them; we have benefited from them. I had done a pro forma exercise as well. Had we benefited from our targeted exposures, had we been able to have full target and been a mature fund, our performance would have been 1.5% higher on a four-year basis ending last year.

So clearly, these are assets that are only accessible if you are big, and as people know, infrastructure is getting a lot of profile these days. This is a good asset class. It's predictable cashflow. It's inversely correlated to the markets. Markets have been going down 30%, 40%. You'll see some people have already released results. Infrastructure returns are positive. So basically it has been our strategy since 2004, and I think I have given you a sense of the benefit of that.

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

In your view, if pension funds such as yours were restricted from making those kinds of investments, it would be detrimental to the pension beneficiaries you represent.

[John Valentini]

Just the data I've seen that I've quoted on the large pension funds--just the 1.5% we could have benefited from--clearly reflects that we could have added to the real return that ultimately, yes, has an impact on the equation of pension funds that I mentioned in my presentation. That could have an impact on contributions, definitely.

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

Thank you.

Mr. Benson, you have mentioned that you think pensions should be restricted in the types of investments that should be made. What is your response to the types of investments that Mr. Valentini was just describing?

[Phil Benson]

In the long run we are all dead.

Again, when we're looking at investment structures and investment analysis, we're talking about performance bonuses. So there's even something in there for people to try to outperform the market. We're talking about pensions. There's no reason or need to outperform anything. The only reason they exist is not to save money necessarily for a taxpayer. The reason they exist is for one reason only. The performance bonus should be, “Guess what, folks? We're in a recession, tough times, but don't worry. Your pension is still there.” That's a performance bonus. It's not talking about layered investments, about how we plan. The only reason it exists is to pay that money out.

As I say, in the long run we're all dead, but whatever we did in the past, this one recession is going to wipe it all out really quickly. Why? Because investments were made through conventional wisdom in all the right places, but in the long run it's the pensioners who are going to be hurt. The people who run at this board, the people who look after it, the people who pay into it are all going to be fine. If they fail, the workers are in trouble.