Finance Committee on April 23rd, 2009

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

Yes, but it stopped doing that.

[John Valentini]

It did not provide a rating after that because the firm was bought out by Standard & Poor's. This market operated efficiently for almost 20 years. For almost 20 years, there was no problem. There was not even any rating downgrade for 20 years. This is a product that represented some 40% of the market. There is no doubt that—

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

Mr. Don Drummond, Vice-President of the TD Bank, also appeared before the committee. In answer to certain questions, he said that, as far as he is concerned, it was absolutely obvious. His bank did not invest in those securities and did not have the negative results that others did. How can you draw a parallel there? You say that it was a good investment for 20 years. And yet, one of the largest banks in Canada has clearly stated that it did not want to go in that direction. Mr. Drummond's testimony in that regard was quite telling.

[John Valentini]

Mr. Laforest, there is no doubt that, in retrospect, there were risks associated with these products. There was the credit risk and the liquidity risk. The liquidity risk was underestimated. One of the main reasons was the liquidity clauses, which have generated a great deal of discussion. These clauses were the same ones that appear in Canadian bank trusts, as well as in other trusts.

In early August, when Canadian banks were called on to inject liquidity into their trusts, they did so. When non-Canadian banks were asked to do so, they had not yet done so. And many of them did—

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

Did the performance bonuses not give people an incentive to invest a little too heavily?

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Laforest.

[John Valentini]

There are many things that can act as an incentive. As I was saying, this was a very well-known product on the market. There is no doubt that the bonuses and the availability of the product were greater than for other products, in a market which was not very extensive. It represented some 40% of Canada's money market. Unfortunately, third-party ABCP suffered the consequences that Canadian bank ABCP did not, because of similar liquidity clauses. It is our belief--

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Valentini.

[John Valentini]

That was a decision that had to be made in August, when the market fell. That was one of the decisions that was made at one point. Were we going to go after foreign banks to get them to fulfill their contracts? Some of the foreign banks who were asked to inject liquidity did so. As did the Canadian banks.

[The Chair, Conservative, James Rajotte]

Merci. Thank you.

Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair. I want to welcome our witnesses here this morning. Thank you all for coming and helping us through this relatively difficult piece.

The issue of solvency is on the table, but there's one area that the Pension Investment Association of Canada brought forward that you're all more than welcome to comment on. I am not sure where I stand on it, so I'm going to ask the question. I'm going to give you an example that happened to me personally—which my colleagues know I like to do. At one time I was a member of OMERS, and I was a member of a municipal council. A payment holiday came along. The members of OMERS didn't have to pay for a couple of years, and the cities didn't have to pay their portion, because they were over-subscribed and had too much money in the system. Wisely or unwisely, I won't say which, the council of the day decided we were not going to collect the money from the municipal taxpayer and the savings would be passed on to the tax base. The staff wanted to continue to collect the money and save it for a rainy day. Whether this was right or wrong, I'm not sure.

Right now there is a 110% limit. You're advocating going to at least 125%. Is there any argument that there shouldn't be a limit at all? When things are great, we could continue to collect money and keep it in the fund. Then when things go badly, as they always do sometimes, the money would be there for that rainy day. If this were the case, we might not be in the same trouble that we're in today. Let's face it, the economy goes up and down; it has never stopped going up and down.

So why 125%? Why not no limit? You could continue to collect on defined benefit plans.

[Barbara Miazga]

I agree completely that the employer-employee contribution holiday, which largely arose out of surpluses, and which did not end up being permanent, created some of the problems we're facing today. Your situation at OMERS probably mirrored the experience of a lot of other plan sponsors and beneficiaries.

As for your question on the limits, PIAC has always advocated that there should be no quantitative limits. I would agree that there is no need to have a limit. If there has to be a limit, if only because there's a feeling that there should be one, it should be at least 125%. So I agree that there is an argument for having no limit. This would provide the ability to build a significant cushion that could offer protection in down markets.

What we've seen over the last couple of years is almost unprecedented in the financial industry. At the beginning of 2007-08, even very well-funded plans found themselves in completely different circumstances following the market downturn. This is particularly problematic on the solvency side, where the solvency calculation is also largely driven by the impact of declining interest rates. As interest rates go down, the value of the liabilities goes up, and that exacerbates the funded situation on the solvency basis.

[Mike Wallace, Conservative, Burlington, ON]

Mr. Benson.

[Phil Benson]

I submitted to you three articles from the National Post, which talk a lot about OMERS and the decisions they made.

We're opposed to the payment holidays. But just talking about payment holidays and percentages of surplus doesn't get to the root topic. If you remove them and you ask people to do prudent investment, if companies cannot see any reason for having a surplus, they're not going to have one. They're going to be running at 100%. It's about changing the fundamentals of how we deal with them. As long as we're talking about a surplus, we're talking about companies and people viewing this as a way of saving money and passing it on to taxpayers. If that's removed, if the investment structures are properly run and there is no reason for a company to run a surplus, they won't. Trust me.

We talked about 2007. In 2005 and 2006, these same companies, in a time of unprecedented boom, with record profits year after year, were coming here claiming relief. We shouldn't make bad laws in bad times.

[Mike Wallace, Conservative, Burlington, ON]

Let me just follow up on that with you. I appreciate that. You have some very good points. We had a meeting earlier this week. At the end of the day, right now, the surplus is a tax deduction, in a sense, for the company, and if we have it wide open it has the potential of being a big tax deduction.

At the end of the day, your argument is that the plans are there to protect workers; it's deferred wages. Even if we allow them to have big tax deductions and they stay in business, they still have employees. Does this still not help the employee in the long run, that those plants have money for that rainy day that will eventually come around?

[Phil Benson]

When you say the surplus can be 150%, it's just like this one company I referred to that had 40% in the market. Given their demographics—I'm not going to mention them, but I question it—their investment strategy will be to maximize returns. That's what businesses do, and God bless them--we live in a free enterprise society--that's what they're supposed to do. But what you, as a regulator, have to look at is that beneficiaries are entitled to receive what was promised.

If it is wages, then why not just pass a law that says employers can take $2 or $3 an hour off your paycheque and use it for capital investment? Intellectually, it is no different. At the end of the day, we're better off to change the structures to figure out if, when, and how we can do it, so that whether it is good times or bad times, pensions are reporting that they have met—the only thing they have met is the requirements to the beneficiaries, not a surplus, not anything else.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much for those answers.

[The Chair, Conservative, James Rajotte]

Mr. Mulcair, please.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chairman.

I would like to thank Mr. Benson for his final remarks, as they certainly clarify matters.

Earlier this week, we heard a presentation from the Canadian Institute of Actuaries, which told us that, in cases of bankruptcy, priority must be given to pensions. Do you agree with that, Mr. Benson?

[Phil Benson]

That's actually part of a written submission to the department in 2005, 2007, and 2009. Absolutely, they should be workers' wages followed by pension holders.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you very much.

Mr. Valentini and Mr. Malo, welcome and thank you for being here.

Mr. Valentini, I cannot help but say, with a smile, that you reminded me of Jean Charest when you were giving your testimony earlier. During the fall election campaign, Mr. Charest said to all and sundry that he could not say what was the extent of the losses incurred by the Caisse de dépôt et placement, since the audited financial statements had not yet come out. In fact, everyone in Montreal knew that the Caisse had lost between $35 billion and $40 billion. Yet, he continued to say that because, technically, it was true.

You served us up exactly the same answer today. Your fiscal year has ended. You know, as we all do, that you lost several billion dollars, but you are saying this morning that you don't know the actual amount because it has not yet been audited. So, I am going to put the question to you a little differently.

Have you lost billions of dollars this year?

[John Valentini]

Mr. Mulcair, you have only to look at our portfolio, which is public. Our benchmark is included in the annual report. All you have to do is take a look at market returns. It is possible for someone to predict what returns will look like. PSP's returns this year will probably be similar to those of other pension funds, which have been hit just as hard, because we are all in the same market. I repeat that we are abiding by our legislation, that we release and prepare--

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Valentini, I am growing impatient. Is there something in your legislation which prevents you from telling parliamentarians what the actual situation is? I asked you a clear question, and you spent two minutes talking without ever answering it. Have you lost billions of dollars in the fiscal year which just ended on March 31, yes or no?

[John Valentini]

And I am telling you, Mr. Mulcair, that we will post the same returns as our peers.

[Thomas Mulcair, NDP, Outremont, QC]

I will repeat my question for a third time, Mr. Valentini. I think your refusal to answer borders on contempt of Parliament. Yes or no, did you lose billions of dollars?