Finance Committee on April 28th, 2009

[Keith Ambachtsheer]

“Transparency” is an overused word, but the cost-effectiveness of delivery is tremendously important. Our research shows that between it being done well and being done poorly could be as much as 2% per year in terms of differential. Over a 40-year period, that basically means it costs twice as much to deliver $1 worth of pension. So I would encourage the insurance industry to be far more transparent than they've been to date about what in fact the costs are of being a customer of delivering pensions through their system.

The pension sector is in fact quite transparent. They have the numbers both on the benefit administration and the investment side as to what the costs are. There are no comparable numbers for the insurance industry, and I think that's a real problem.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Fine. Thank you.

I have a quick question for Mr. Raymond.

On your one comment, when we were talking about asset-backed commercial paper, you mentioned, of course, a little involvement. Could you just be very explicit? Is it little or no involvement?

[Donald Raymond]

We had no asset-backed commercial paper up until September 2007, which was when the non-bank-sponsored part of the market froze. As I said in my earlier remarks, it was largely due to the lack of transparency and actually some of the hidden risks inside these instruments; they were effectively leveraged financial products.

When the non-bank-sponsored part of the market froze, the bank-sponsored part of the market spreads widened significantly, and that's when we decided to enter the bank-sponsored part of the market, because there was good liquidity, good transparency, in the underlying assets. These are traditional assets that are not leveraged, things like loans and leases and credit cards, over-collateralized and basically a very good risk-return sort of balance. So that's when we entered the market, after the non-banks--

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

The proportionate size of that with respect to the overall portfolio would be...?

[Donald Raymond]

It was around $6 billion, but it's less than that now.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. McCallum again, please.

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

I have a question for either Mr. Raymond or Ms. Warmbold--not about bonuses.

With regard to Mr. Ambachtsheer's plan or other similar plans, I'd heard it reported somewhere that the CPP Investment Board had expressed a preference not to manage such funds if a new scheme were developed, on the grounds that it might dilute your current mandate or something to that effect. I wonder if you can comment on that.

[Donald Raymond]

I think what we've said is that one of the key strengths of the model, the Canada Pension Plan and the CPP Investment Board, is the single-purpose mandate that we manage the funds under.

We are here at the will of the ministers of finance--the federal and provincial ministers--and if it was determined that that was the appropriate way to go, of course we would do as asked. But I think there are a number of other underlying issues that would have to be resolved. We see it, frankly, as a complement to the original work done by politicians 10 years ago in laying the foundation for such a solid governance platform.

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

Is this a problem, Mr. Ambachtsheer?

[Keith Ambachtsheer]

I agree with Mr. Raymond, actually. It's not that the CPP Investment Board isn't customer friendly, but they only have one customer. Once you start dealing with millions of individual Canadians, you need a very different communication model, for example. You need to do a number of things differently. You need to organize individual accounts. You need to think through how the transition from individual accounts to a new organization works. There's quite a number of different things and skills that would have to be put together, and I would hate to see a perfectly good model get muddled up because of these additional demands.

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

Yes, and I guess if you're talking about something involving the whole country or at least several large provinces, you'd have the scale required. So that would not be an issue.

[Keith Ambachtsheer]

Yes, you would have the scale anyway.

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

Okay. Maybe I can to go Ms. George with regard to this application for 10 years to pay back the pension.

I had a little exchange last week with someone who could be described as the union side and someone who could be described as the company side, trying to see if there might be a compromise. The union side seemed to be saying that maybe they'd go for the 10 years if there were stronger regulation of pensions, like rules about how much should be in equities, for example. The person on the company side didn't seem to want to compromise at all. I guess I'm asking you whether you think there's scope for a compromise here, or are the positions very solid and immovable?

[Serge Pharand]

Thank you for the question. This is an interesting one. We've been having a lot of discussions on that.

We did an interesting exercise at CN, and we have to communicate a little bit more with the unions and the pensioners. As you know, the solvency test started in 1989, and CN has always been in the position where we've been in the solvency surplus throughout all those years. We've never been in a solvency deficit. So we stress-tested our own particular situation by taking the solvency ratio down by 5%. In certain situations, then, with that stress test, we had solvency deficits. We compared the 10-year amortization with our recommendation to have more governance around pensions, to have annual evaluations. So if we compare that recommendation to the current rules, we would have been in a situation where we would have contributed more to the pension plan over those twenty years. I think it's a question of communicating for us. When I communicated that to other companies, they did a similar exercise, and in their situation they more or less came to the break-even point.

All this to say that when we talk about five years versus ten years, it's in people's minds right way. They divide the solvency deficit by ten and by five, and they say there would be more contributions if we simply divided by five. But this is a proposal that needs to be looked at over the long term. And I think there's a need to have good communication on that.

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

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McCallum.

We'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair. I want to thank our guests for being here today.

I have just a couple of questions. First, let me start with our folks from the chamber. Along the same lines, in a sense, you've talked about the cap on over-contributing, and you made a recommendation to raise that threshold. My question at the last meeting was, why do we have a threshold at all?

In your recommendation, which you're upholding on Mr. Dechert's question, did your organization consider getting rid of the threshold completely and having a different system? I know a company can use it as a tax deduction, in a sense. There is some concern about an ability to use it as a bit of a haven to place money in. In the long run, employees would benefit because the money belongs to employees. Was there any consideration of changing it completely from a fixed number or a fixed percentage to something with no percentage but with a reduction in the amount of tax deduction the company could get over time, based on the amount they have in the system?

[Serge Pharand]

Yes. As you know, CN is part of a group of seven companies that had a lot of discussions over the last few years, and this is one topic that we discussed at length.

Pensions in any area are a balancing act. We did discuss removing the threshold or making the recommendation to remove that threshold altogether, but in general the consensus was that this might not be acceptable at this time because it would be asking for too much. There are the income tax implications in regard to the fact that, as you said, a company might be in a situation where they would be allowed a lot more deductions and therefore the government would lose out.

[Mike Wallace, Conservative, Burlington, ON]

Okay. I appreciate that. It's something I've been considering based on the testimony we've had.

Mr. Raymond, how long have you been with the organization?

[Donald Raymond]

I've been with the CPP Investment Board for about seven and a half years.

[Mike Wallace, Conservative, Burlington, ON]

They probably attracted you from somewhere else. Where did you work before that?

[Donald Raymond]

I was with Goldman Sachs in New York.

[Mike Wallace, Conservative, Burlington, ON]

Thank you for that.

There's a question I have for you, though, as I have another organization coming to see me this afternoon, which will go unnamed, and we're going to be talking about CPP. Since you're here, I thought I'd ask you a question. In their submission to me they talked about the funds at the end of the fiscal year of 2008--I'm not sure which--but they are saying that, in addition, the CPP fund in late 2008 had $117 billion in assets above and beyond its annual liabilities. Was that an accurate statement?

[Donald Raymond]

Not precisely; it's $117 billion in assets in the CPP fund.

[Mike Wallace, Conservative, Burlington, ON]

Right, but they're saying that it's above and beyond annual costs you have to put out. That's not an accurate statement, is it?