Finance Committee on April 28th, 2009

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

...has been paid out during difficult years. So you have to wonder what the bonuses would have been if performance had been better.

I would like to hear from Mr. Ménard, who represents the financial institutions, on the system we have at the moment.

[The Chair, Conservative, James Rajotte]

Your time is up, Mr. Carrier.

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

My time is up?

[The Chair, Conservative, James Rajotte]

Yes.

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

Fine. Then it is too late.

[The Chair, Conservative, James Rajotte]

You may ask a brief question.

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

I wanted to hear what Mr. Ménard thought about the excessive compensation being provided despite poor performance.

[The Chair, Conservative, James Rajotte]

Monsieur Ménard, you're next. Please be very brief.

[Jean Claude Ménard]

I have no opinion about the compensation paid to the executives of the Canada Pension Plan Investment Board. That decision is made by the board of directors.

Clearly, as for performance, in order to support the Canada Pension Plan in the long term... In the most recent actuarial report, I said that we needed a real performance of 4.2%, over the inflation rate. If we include inflation, the figure would be about 6.2%.

In the report, we also said that, as of December 31, 2006, as actuaries, we found that the markets were high. Consequently, we reduced the return assumptions for the next nine years. Of course, we did not know when the crisis would hit, but we did use lower return assumptions. For example, for the period from 2009 to 2011, our assumption for the return was 5.5%, and, for the six-year period, the Canada Pension Plan was at 5.7%.

The issue of compensation is not my area.

[The Chair, Conservative, James Rajotte]

Merci.

Now we go to Mr. Dechert, please.

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

Thank you, Mr. Chair. Thank you, ladies and gentlemen.

I have a question for Ms. George and the Canadian Chamber of Commerce. Ms. George, you mentioned that plan sponsors are finding that the five-year amortization period is perhaps an unreasonably short period of time to measure the adequacy of funding.

There's also, under the Income Tax Act, a rule that penalizes sponsors for putting in more than 110% of surplus in good years. A few years ago, a number of plans were in that position. Was that a good idea? Is that something the government should consider revising?

[Serge Pharand, Vice-President and Corporate Comptroller, Canadian National, Canadian Chamber of Commerce]

Thank you for the question. This is a good question.

In fact, in our recommendations, which we've submitted to Mr. Menzies' committee, we have recommended that this threshold be increased so that contributions would be....

In fact, we talked about many options this morning as to how we could improve the whole pension system. There are things that can be done to encourage companies to have defined benefit plans. There's a series of recommendations we have submitted that would encourage companies to have good governance of these defined benefit plans.

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

Thank you.

I have another question for the Canadian Chamber of Commerce. You mentioned the possibility of allowing funding to be done in the short term by way of letter of credit. I've negotiated and drafted a few of those over the years. I know they're as good as the terms written in the letter.

Who would you suggest should set the terms of such a letter of credit? Should it be a standard form letter of credit, perhaps, that is regulated by the federal government?

[Serge Pharand]

First of all, letters of credit are not easy to obtain these days, so that's something we would not like to have as a constraint for the 10-year amortization we are recommending.

Letters of credit, nonetheless, can be used to make the payments that would otherwise be made in the plan, or to cover the payments that would otherwise be made in the plan, and whenever the situation turned around, these payments could be made. This is one of the options that can be made available to companies in better times, because these days I think it would be difficult to use.

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

Thank you.

I have a question for Mr. Ménard.

Mr. Ménard, you mentioned that Canada compares favourably to a number of other countries in the world in terms of the solidity of the Canada Pension Plan. Could you elaborate a little bit? What are those other countries, and exactly where does Canada fit within that top 10 ranking?

[Jean Claude Ménard]

I mentioned earlier that when I look at the overall pension assets in Canada, at the end of year 2007 they were equal to 140% of the GDP. The other six countries in this group are the Netherlands, Switzerland, Denmark, the U.S., the U.K., and Australia.

There is no doubt that when you have significant pension assets, either with the Canada Pension Plan or with other pension plans, and you have, let's say, an important liquidity exposure, you may be hit hard. For the calendar year 2008, the Canada Pension Plan investment Board returned a negative 14%, but at the same time the markets all around the world were in the range of minus 25% to minus 40%, so it gives me some comfort that in 2008 we were able, to some extent, to mitigate the losses.

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

Ms. Warmbold, given what Mr. Ménard has just said, why has the CPPIB been able to outperform some of those funds in other countries? What kinds of investments do we do differently?

[Benita Warmbold]

Perhaps Mr. Raymond would like to talk about investments.

[Donald Raymond]

From an overall investment strategy point of view, we have a very broadly diversified portfolio, as my colleague said in her introductory remarks. It includes global equities, private equity, fixed income, inflation-linked bonds, real estate, and infrastructure.

The most important things we did right last year were some of the things we didn't do. We have a very strong culture of risk management, and some of the things we were not involved in were things like the non-bank-sponsored asset-backed commercial paper. We were also not involved in any of the injections of capital into U.S. financial institutions, and I can assure you that we were approached on every single one of those “opportunities”. We just won't invest in something that's opaque or that we can't understand, so I think it was really more a matter of what we avoided than what we invested in.

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

Was that a decision that--

[The Chair, Conservative, James Rajotte]

This is a last quick question.

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

--your pension fund advisers made, as opposed to something that you were restrained from doing by law?

[Donald Raymond]

That's correct, absolutely.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Pacetti, please.

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

Thank you, Mr. Chairman.

I would like to thank our witnesses.

What is your role as chief actuary, Mr. Ménard? Do you valuate private pension plans?