Finance Committee on April 23rd, 2009

[The Chair, Conservative, James Rajotte]

I call to order the 21st meeting of the Standing Committee on Finance. We are continuing today our study on access to credit, focusing our second of three meetings on pensions.

We have several organizations with us here today. We have the Public Sector Pension Investment Board, the Pension Investment Association of Canada, Teamsters Canada, the United Senior Citizens of Ontario, and an independent analyst, Ms. Diane Urquhart.

Monsieur Laforest has a point of order.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Mr. Chairman, could you possibly reserve five minutes at the end of the meeting to discuss our future business and the scheduling of upcoming meetings? Is that all right?

[The Chair, Conservative, James Rajotte]

Absolutely. Thank you.

If we can have each organization and individual present an opening statement of five minutes, we'll go down the line. Then we'll start with questions from members.

We'll start with the Public Sector Pension Investment Board.

[John Valentini, Executive Vice President, Chief Operating Officer and Chief Financial Officer, Public Sector Pension Investment Board]

Good morning.

Mr. Chair and members of Parliament, I want to thank you for inviting us here today to discuss the current liquidity crisis, its impact on our financial system, and in particular its impact on pension funds.

My name is John Valentini. I am executive vice-president and chief operating officer of the Public Sector Pension Investment Board, otherwise known as PSP Investments. With me here today is Pierre Malo, first vice-president of asset allocation strategies and research.

PSP Investments is a Crown corporation created in 1999 by the Government of Canada to invest net contributions received after April 1, 2000 from the pension plans of the Public Service, the Canadian Forces and the Royal Canadian Mounted Police. We also manage employer and employee contributions to the Reserve Force Pension Plan made after March 1, 2007.

We are one of the youngest and fastest-growing investment managers. It is important to note that we are an investment manager and not a pension plan manager. Responsibility for liabilities rests with the federal government. The pension payments under defined benefit plans are guaranteed by the Government of Canada. We report to the Treasury Board and to each of our stakeholders, through their respective ministers, the Minister of Public Safety and the Minister of National Defence. The Office of the Chief Actuary of Canada produces a triennial report on each of the Plans, and the next one is scheduled to be released this year for the period ending March 31, 2008. Our financial statements are also audited by the Auditor General of Canada.

Historically, we have performed favourably amongst our peers in Canada. According to RBC Dexia, in the past four fiscal years ending March 2008, we ranked in the top quartile of peer pension funds in Canada based on investment performance. However, our short-term performance these past two years has clearly been impacted by the liquidity crisis that began in 2007. The ABCP crisis was clearly one of the first consequences of the global liquidity crisis. I know that this committee has studied ABCP, so I will not prolong my discussion of it, other than to say that we are extremely fortunate that the PanCanadian Investors Committee for the Restructing of Non-Bank ABCP was able to successfully restructure the non-bank ABCP market in Canada.

PSP Investments participated actively in the restructuring process. A successful resolution of the crisis is a major achievement that will help most investors, small and large, to ultimately recover the majority of their investments.

Until the fall of 2008, the global liquidity crisis remained somewhat contained. Then, in September 2008, the other shoe dropped. The financial world changed dramatically after the collapse of several large financial institutions. Confidence was broken, and financial markets around the world plunged. It was the worst sell-off since the Great Depression.

Liquidity disappeared and volatility increased dramatically. Buyers became sellers. Many investors were forced to sell their investments across all asset classes at depressed prices. While managing liquidity was challenging last autumn, PSP managed to work through that time quite effectively.

It is important to note that this was not the first time in the past decade that we experienced such a large market movement that affected pension fund returns. In 2001 equity markets dropped approximately 18%. In our own fiscal year of 2004, equity markets and PSP Investment performance rose more than 25%.

There is no doubt that the current financial crisis exacerbated a serious problem that was already present in the pension industry--namely, the funding position of many pension plans. When looking for solutions to this problem, one has to look at the basic equation of a pension plan: net contributions plus investment returns--the assets--should equate the present value of the future benefits to be paid--the liabilities. If contribution levels or investment returns are too low, or if the liability structure changes, then we see a deficit developing.

I will concentrate on how investment managers try to mitigate the market volatility. In the case of PSP Investments, the investment policy is developed taking into account the liability structure of the pension plans, the desired contribution level of the stakeholders, and the perceived risk appetite of the sponsor and stakeholders. We are currently working with Treasury Board Secretariat and the Office of the Chief Actuary in developing a financing policy that would clarify these key elements.

How do we invest the net contributions? In an ideal world, the net contributions we receive could be invested in Canadian government inflation-linked bonds, and the risk associated would be zero. Unfortunately, this is not a feasible solution. Therefore, we need to invest in different market instruments with a higher risk-adjusted return. This is done through diversification. Since 2004, PSP Investments has diversified into more asset classes, including private investments, real estate, and infrastructure. Diversification has added significant value to PSP's investment performance over that period.

In fact, a review of long-term results that we had performed ourselves last year on the major funds in Canada indicated that private investment returns in real estate, private equity, and infrastructure all outperformed the total overall return of each of those funds, thus outperforming public markets.

PSP Investments is in a unique position. We have the liquidity and the flexibility to take a long-term view of our investments. Each year we receive a steady inflow of new funds of almost $4 billion. Net contributions are projected to remain positive until the year 2030. Because of this, we are less affected by the crisis than many other investors.

We are seeing distressed price levels for many assets, including solid infrastructure and real estate assets with good cashflows and built-in price increases. As patient buyers, we are well positioned to benefit from the drop in asset prices, which means that our stakeholders will ultimately benefit from today's distressed prices. That is good for our stakeholders, and that is ultimately good for the Canadian taxpayer. Of course, for us to succeed, we need markets and the global economy to succeed as well.

I would like to thank you for your attention and for giving us the opportunity to address you today.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll go to the Pension Investment Association of Canada, please.

[Barbara Miazga, Secretary-Treasurer, Pension Investment Association of Canada]

Thank you.

I'd like to thank the committee for inviting the Pension Investment Association of Canada, or PIAC, to appear today. I'm Barbara Miazga. I'm the secretary-treasurer of the board of directors of PIAC.

PIAC has been a collective voice for Canadian pension funds for over 30 years now. PIAC is actively involved in advocacy on behalf of its members. An example of that would be the submission made in response to the financial sector division of the Department of Finance in response to the consultation paper on private pensions, dated March 13, 2008.

My remarks today will be centred on the highlights of that submission. Moving into the background, this committee study is on measures to enhance credit availability and the stability of the Canadian financial system. The relevance to PIAC is more towards the stability of the Canadian financial system. PIAC's position is that the stability of defined benefit pension plans in Canada is integral to the overall stability of the Canadian financial system. There are really two areas in which our members impact the financial system.

One is that the financial markets are largely dominated by large institutional players. Our member funds have responsibility for oversight and management of over $940 billion in assets, so that has a significant impact. Any activities in the pension industry impact the capital markets.

The other area is that defined benefit pensions have a significant impact on the economic well-being of millions of Canadians. Those both go to PIAC's mission to promote sound investment practices and good governance for the benefit of pension plan sponsors and pension plan beneficiaries.

In the submission that PIAC made on March 13, PIAC proposed that the Government of Canada could take steps to alleviate some of the funding and regulatory challenges that pension plan sponsors are facing. Those are related to the shrinkage in defined benefit plan coverage in Canada. That decline is more pronounced for private sector workers. The fundamental reasons for the decline and for the greater impact on private sector workers are the funding challenges, the risk-reward asymmetry, and a complex regulatory regime.

There are three steps that PIAC proposes the Government of Canada could take. The first of those steps is to ease the solvency funding requirements and address the risk-reward asymmetry in the rules regarding surplus entitlement. The reason for focusing on solvency funding is that the solvency calculation is only one of two calculations to determine the funded position of a pension plan. Solvency is hypothetical in the scenario where there's a plan wind-up. The stronger the plan sponsor and the less likelihood of a wind-up, the less relevant is the solvency calculation.

So we're focusing on solvency relief as being a key component in that first step. That can be done by unconditionally extending the amortization period for solvency funding from five years to ten years for financially strong companies. It could also be achieved by providing plan sponsors with the flexibility to use letters of credit, which already exist on a permanent basis in both Alberta and British Columbia. It could also be achieved by permitting plan sponsors to establish special purpose accounts--we're calling them solvency accounts--that are independent from the main pension trust. If we do that, we will avoid the situation of trapped surplus, in which plan sponsors make solvency payments that in the future form part of a surplus. In the past, those surpluses have resulted in changes to the benefit structure that have been long-term and permanent. If the solvency account is independent from the main plan trust, that alleviates the situation of that trapped surplus.

The second step the Government of Canada could take is to facilitate the opportunity for plan sponsors to enhance the funded position of their pension plans, when they are able to do so, by amending the Income Tax Act to allow plan sponsors to make contributions beyond the current 110% to at least 125%. Doing that would allow a more sufficient cushion to be built during the good times to provide some downside protection in the tough times.

The final step that could be taken is to hold pension investments to the standard of a prudent person and eliminate all quantitative limits on investing. I'll focus on two reasons for eliminating the quantitative limits: one, it puts Canadian pension plans on an unlevel playing field with foreign pension plans and foreign jurisdictions not subject to those restrictions; and two, it's arbitrary.

In conclusion, funding flexibility and regulatory relief will safeguard the long-term viability of defined benefit pension plans, thus contributing to the overall stability of the Canadian financial system.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for the presentation.

We'll now go to Teamsters Canada, please.

[Phil Benson, Lobbyist, Teamsters Canada]

Thank you, Mr. Chair, for having us here this morning.

My name is Phil Benson. I'm the lobbyist for Teamsters Canada.

Teamsters Canada is a labour organization with more than 125,000 members. It is affiliated with the International Brotherhood of Teamsters, with more than 1.4 million members across North America. We represent workers in several sectors, including transport--air, rail, road, and ports--retail, motion pictures, breweries and soft drinks, construction, and so on.

In our September 2005 submission, we stated that the private pension plan system in Canada, the U.S., and other G-8 countries is entering a period of financial crisis caused by years of inappropriate practices by those responsible for the well-being of these plans. The financial deficit of the system is in the billions, if not the trillions, of dollars. Those responsible include government and government regulators, plan sponsors, and professionals involved with the operation of the plans, including actuaries, investment managers, accountants, lawyers, and others.

After 40 years of regulation and more than a decade of unprecedented economic growth, it is unforgivable that there is a pension plan crisis in Canada. If it were a crisis during boom times, what could we expect three months into a recession? What should we expect?

We submit that nothing will change unless you have the courage to fundamentally change the regulatory regime underpinning pensions, one that recognizes that pensions are foregone wages of workers and that stops corporate greed. There should be no questions of if, only, when, and how.

Let's start with fundamentals.

Pensions are not a gift from a company. Pensions are foregone wages--a contract between the company and the worker. The regulations do not recognize that relationship, nor do they protect it. The only reason for a pension plan to exist is to deliver promised pensions to current and future retiring members of the plan. Fiduciary duty must mean fiduciary duty--no payment holidays, no surplus clawbacks.

It really comes down to risks. For pensioners and workers, risk is zero in real terms. The money has to be there. Under the current regulatory regime, pensions are viewed by companies as just another investment to manage within their goals of maximizing shareholder returns. After all, when a company boosts income and returns to shareholders, it pleases investors and fattens CEO compensation packages.

People talk about a company's risk, but we don't think there's much. If there's a surplus in the plan, take a payment holiday. If there's a solvency issue, claim financial problems and spread the solvency problems over 10 years. If a company goes bankrupt, the CEO will get a buyout and I guess he will have to downsize to a 75-foot yacht.

The underfunded pension plan means employees lose their pensions. This is not fantasy. Teamsters are at risk of losing payments from the Nortel pension plan, while the company is paying a retention bonus of $45 million to its executive officers.

The companies coming and begging for relief say they need to pay less into the underfunded pensions so they can invest in the capital items for the company, create jobs, and grow the economy. That's a great line for 2009, but that's exactly what they said in 2005 and 2006, when this started. The fact that companies admit it proves our point. To companies, the pension funds are just another capital pool to fund their ambitions. And silly us, we thought companies had a fiduciary duty to beneficiaries--clearly not. Our members and the public don't buy that argument, and we hope you don't either.

Let's talk about establishing the principle of delivery of pensions with a very high degree of certainty. Investment policies should be focused on the primary objective of meeting obligations.

Eliminating the holiday for pension payments when a plan is in surplus would send the message to lower the investment risks. Accepting the fact that pension plans are foregone wages and giving all surpluses to the beneficiaries would further that goal.

Treat pensions in the same manner as insurance, forcing a move toward bonds and away from equities. Conventional wisdom that stocks beat bonds is, well, conventional.

I gave you an article from the National Post by Mr. Gold and Mr. Bader, and I quote:

Venerable pension consultant Peter Bernstein reports that over the most recent five, 10 and 25 years, U.S. Treasury bonds earned more than U.S. equities.

I'll add, there's no money in selling bonds. Of course, some claim that all bond funds would be too expensive. Well, some information just came to me. A company that we deal with has 40% of its funds in the market. It admitted that's what was causing the deficit in the fund. A wholly bond fund would have cost $30 million to $40 million a year over the past 15 years, a term of record profits. It faces $300 million a year over five or $150 million over 10.

We have pension plans because of the demands of citizens coming out of the Dirty Thirties and World War II. Come to think of it, we have just about all of our social programs because citizens demanded them.

I will tell you, companies don't want pension plans, they don't want unemployment insurance, CPP, workers' compensation, or welfare. They don't want health and safety laws. They don't even want to pay wages. Come to think of it, isn't that why we're here?

The two largest voter blocks, by turnout and size, are seniors and baby boomers. Seniors want to continue to receive their pensions and baby boomers are finally getting serious about retiring. Politicians long ago made their decision who they stood with; now it's your turn.

At the beginning of this presentation we asked you to have courage to dare to make changes. And I do want to be very clear that Teamsters Canada is willing to work with any and all of you to make better laws and regulations that will protect working people on the job and long retired.

Thank you for having me here. I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to the United Senior Citizens of Ontario, please.

[Marie Smith, President, United Senior Citizens of Ontario]

Thank you.

Good morning, everyone. Good morning, Mr. Clerk.

I'm Marie Smith, president of the United Senior Citizens of Ontario. It is a pleasure to be here today to bring our problems to you.

There is great anxiety among the 300,000 seniors who are members of the United Senior Citizens of Ontario about the financial crisis. Companies are filing for bankruptcy protection and going bankrupt while their pension funds have large deficits. Seniors are worried their pensions will be cut. Personal retirement savings have been hit. Seniors are afraid to spend money because they need to preserve their capital.

The professional investment managers of Canada's pension funds have let seniors down. Pension funds bought high-risk investment products, allowing financial companies to amass these toxic products on their balance sheets. The bank executives, and the pension fund managers themselves, were paid millions of dollars in compensation based on false profits from high-risk products. Now the pensioners have to pay for their greed and possible fraud. The pension fund managers let this happen without uttering a word to us.

The United Senior Citizens of Ontario and our affiliate, the National Pensioners and Senior Citizens Federation--one million senior members--have been working with Diane Urquhart since 2006 on financial abuses affecting seniors. Pensioners and senior citizens are suffering billions of dollars in losses in their retirement accounts due to unsuitable and fraudulent investment products. These are being sold to them on the basis of misleading marketing information. We conclude that our members' interests are not being protected by current self-regulatory organizations and provincial securities commissions governing securities and accounting standards.

Representatives of the United Senior Citizens of Ontario, better known as the USCO, and the National Pensioners and Senior Citizens Federation met with federal public safety ministry officials and the opposition public safety critics in Ottawa on March 30. We have told these public safety officials that the first priority for structural change in the field of securities is to rebuild how the securities crime policing is done in this country. The USCO supports the proposed new Canadian securities crime unit developed by the respected and recently retired detective sergeant of the Toronto Police Services fraud squad, Gary Logan. We need to listen to Gary Logan because he is a success story in securities crime policing. Mr. Logan put two of Canada's notorious rogue brokers in jail—Michael Holoday and Nelson Allen.

I would also like to bring to your attention that seniors are having difficulty surviving on the old age security and the CPP pension plans. These seniors on low incomes would welcome an increase so they can have both heat and food in their homes.

Seniors would also like to thank the government for income splitting. What can you do for individuals who still have the same expenses but now find themselves living alone when everything costs the same in their home?

I'll be interested in your questions.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Now to Ms. Urquhart for your opening statement.

[Diane Urquhart, Independent Analyst, As an Individual]

Good morning. I'm going to speak this morning about toxic investment products and how they've contributed to the financial crisis in Canada.

My apologies. I have a very hoarse voice this morning. Hopefully I'll get through this.

The financial crisis in Canada is wreaking havoc on millions of Canadians through pension fund underfunding, lost savings, and now lost jobs. We have the filing for bankruptcy protection in Canada of AbitibiBowater, Smurfit-Stone, Masonite, and Nortel, and General Motors is expected to do so as well. I'd like to note that the Nortel case is a legal precedent-setting one in which a major corporation of Canada plans to lay off thousands of people and not pay severance. In addition, the Nortel pension fund is expected to have a deficit of as much as 40%. So there is real anxiety among the Nortel pensioners and the severed workers of Nortel.

In many instances, the corporate calamities that are leading to the distress in the world can be tracked back to securities crime. There has been no policing, intervention, and deterrence in our country. Effective securities crime policing is a necessary ingredient for the stability of Canada's financial system. The world's financial system, including Canada's, has been rocked with systemic fraud in subprime mortgages--structured income products sold by the securities industry.

I've given testimony to your committee on two occasions: once on the income trust product, which we said was subject to systemic fraud in deceptive yields; and more recently on the non-bank, asset-backed commercial paper product, in which there is presently 85¢ of market-to-market loss on the dollar. That represents $27 billion of current losses in the asset-backed commercial paper product line of Canada. As I warned on the income trust product in 2005 and 2006, we have over $30 billion of damages in the business income trust market product alone, with about the same amount likely in the energy income trusts.

The Expert Panel on Securities Regulation responded to the public outcry about Canada's failure to deter securities fraud on January 12 by proposing a new national securities commission and having a consumer advisory panel report to that commission. The Investment Industry Regulatory Organization of Canada has responded to the public outcry with a new Canadian Foundation for the Advancement of Investor Rights. The OSC's answer to the outcry was to introduce a new investor secretariat a few weeks ago. We say that all of these proposed remedies by the investment industry and by the provincial securities regulators are sadly inadequate. These are not the appropriate remedial actions to be taken, given the lessons we must learn from the financial crisis throughout the world, now bearing down on our country as well.

I want to spend a few moments talking about securities crime policing in Canada. We do not agree with the RCMP's integrated market enforcement team having exclusive jurisdiction for securities crime policing in our country. We strongly disagree with the current actions of the Royal Canadian Mounted Police to integrate its exclusive securities crime unit with the securities regulatory system of Canada. We believe it is totally unacceptable that all current RCMP IMET securities criminal complaints and plans for investigation are obliged by this federal government to be shared with the joint consultation group.

We have a letter from Dean Buzza, the head of the RCMP IMET, indicating that every securities crime complaint and plan for an RCMP investigation must first meet with the approval and recommendation of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada. We believe this is wrong and highly vulnerable to corruptive influences on whether or not securities crime investigations are taking place in this country.

We agree that Canada should adopt a new federal-provincial securities crime unit that was proposed and designed by Gary Logan, who has 32 years of service in the securities crime policing field. We do not believe the securities commission, the current provincial commissions, nor the proposed national securities commission should be involved in securities fraud policing. This is the work of the police, and we believe the new securities crime unit, which is described in a video that's been put together by Gary and me, is the way for our country to go in order to receive justice for the victims of securities crimes.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Urquhart.

We'll start questions with John McCallum, for seven minutes.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

Thank you to all the witnesses for being here.

I guess I'd like to begin with Mr. Benson. I'm wondering if there might be any common ground here.

As you know, there are seven, I believe, major federally regulated companies seeking to spread their payments over ten years rather than five years to restore their pension assets. I don't think the unions or the pensioners are necessarily happy with that under status quo rules. But you seem to imply, and this is what I'm trying to get at, that such a ten-year period might be acceptable to you under certain conditions--for instance, if there were greater restrictions on the nature of the investments that pension funds could do.

Can you briefly tell us whether there would be some regulatory changes or quid pro quo under which you would find a ten-year period acceptable?

[Phil Benson]

Thank you, Mr. McCallum.

Just so you know, one of those companies that came to you just announced a $242 million profit for the first quarter.

During the last round, when we talked about it, we suggested that perhaps during boom times, when they made a profit, part of the profit should go directly to pension holders--not all of it, but of course some of it. My concern was that there would be a recession, and the comment that came back was, “You're old-fashioned, Phil. We've solved that problem; there won't be one.”

I don't like to blue-sky too much in front of committees. However, obviously some of the plans are having problems because of the regulatory schemes and decisions that were made over the years. We can't get out of that overnight. Certainly as the Teamsters we do not want companies to go out of business. We're in the business of helping businesses make money, because that's how our membership makes money.

If the core principles are there, meaning that the investment strategy is moving toward more of a bond world.... Those are some of the things we suggest in the package. As I said in my presentation, it's not if we should do it, it's when and how. And I think you're asking me the when and how question.

[John McCallum, Liberal, Markham—Unionville, ON]

No, I'm asking you whether there are specific changes--for example, that pension funds would not be allowed to hold more than a certain percentage of their assets in the stock market, or things of that nature--that are concrete and that you would regard as satisfactory quid pro quo for a ten-year payout. If you don't have a ten-year payout, you could have major problems for some of these companies, which would not necessarily be good for the employees.

I would think there's a common interest in coming to some compromise solution on this. That's what I'm asking you.

[Phil Benson]

I think our major point is that if we start from a basic premise, pension plans only exist for the beneficiaries, period. In terms of moving away from the contribution holidays, away from the idea of a surplus, if we really put fiduciary duty back into fiduciary duty so that companies stop treating these funds as capital investments or tools for other purposes, we're going to look at any solution we can.

So the answer is, yes, we'd like lists. We'd like to see much more focus on bonds, long bonds, rather than in the equity market.

Just so you know that we're not talking out of hand, the Teamsters Canada plan is less than 2% in the market. I can tell you I was very relieved to have received the letter telling me that at the beginning of this year.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you very much.

Mr. Valentini, I have just one very short question for you. There seemed to be one interesting omission from your report. What was the return on your assets, or your investment, in the latest year? I didn't hear you give us that statistic.

[John Valentini]

Our year-end is March 31. We are in the process of completing our year-end and an audit. We have not, therefore, completed our results. I feel it would be inappropriate at this time to divulge what they are.

We do report on a quarterly basis. We do provide our returns to our respective ministers and stakeholders on a quarterly basis. So they have received them, but our results as of March 31 of this year are not--

[John McCallum, Liberal, Markham—Unionville, ON]

So you don't provide your results publicly?

[John Valentini]

We do provide them, as I said, per our legislation. We submit quarterly financial statements to the president of the Treasury Board and each of the ministries responsible for managing the pension plans.

[John McCallum, Liberal, Markham—Unionville, ON]

But are those then made public?

[John Valentini]

They're not public, no. Per our legislation, they are not required to be public.

[John McCallum, Liberal, Markham—Unionville, ON]

I see.

Ms. Miazga, I think you and Mr. Benson might be on a somewhat different wavelength, and I wondered what you thought of this idea of some sort of quid pro quo in the regulatory situation in return for the ten-year payout period.

[Barbara Miazga]

Just to clarify your question, is it asking what compromises the plan sponsor community would be willing to accept to achieve that ten-year funding rule? Is that the question?