Finance Committee on March 16th, 2010

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Wallace.

We'll go to Ms. Hall Findlay, please.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you, Mr. Chairman. I would like to thank the witnesses for being here, for their time and their presentations. My question is about a response given to a question asked by my colleague.

This time I actually want to direct my question to Mr. Georgetti and Mr. Benson, and if we have time, someone else can weigh in on it. It has to do with the time of entitlement. It is not so much the age but the ratio of the number of years that somebody is entitled to pension benefits as it relates to the number of years worked.

Over the last number of months and the last couple of years, there has been much commentary around the world on the entire demographic challenge of people living longer, and not only living longer but living more healthily. It raises questions on overall economic productivity and personal responsibility.

This is perhaps a more philosophical question. What are your thoughts about the appropriateness of the current ratio that we have and the fact that the ratio is increasingly becoming skewed as people are living longer? From a labour perspective, could you provide your thoughts on whether it's really tenable and whether it's sustainable on a larger macro basis?

[Phil Benson]

First of all, these are issues that go to collective bargaining as a whole. It's not a gift from a company. When collective bargaining takes place, it's a quid pro quo. It's a balancing act between having money now versus having money later. It might surprise you to learn that one of the hardest challenges a union has is to convince younger members of the need to fund pension plans. I'm talking to the effect that if you have a younger group, they want the money now and they'll look after themselves.

[Martha Hall Findlay, Liberal, Willowdale, ON]

I was actually asking a different question.

[Phil Benson]

I'm getting to the question. You're talking about collective bargaining. When you are changing the entitlement, you are talking about collective bargaining.

I would remind you that it's wonderful if someone today can actually work in a job for 30 years and is out at 30/85, or whatever the number is. The truth of the matter is that people change careers three or four times in their lives. They change employers more often in their lives. I'm going to suggest to you that 30/85 might be great for the civil service, where people tend to be there for a long time. But in the private sector, it's akin to Bismarck making age 65 as the age of retirement for universal pensions, because he damned well knew nobody was ever going to receive it. When you get to the private sector, I'd suggest that the 30/85 rule is fairly rare.

We have dealt with companies that have gone bankrupt over the years. They've gone out of business. They've merged. Pension plans have changed. Employees are not staying in jobs for 30 years anymore. They're moving on. They're patching things together. If they are in a multi-employer plan with the Teamsters, that's fine. It's one pension plan. No matter who they work for, it's going to accumulate. But for a single-plan employer, that is not necessarily the case. For some of the big six that we deal with, such as CP and CN, of course, that's not true. They have a lot of people of long standing, but a lot of the younger people are shuffled in and out, and it takes a long time.

The answer is that the entitlement issue may be something for the public sector, but it's not for the private sector.

[The Chair, Conservative, James Rajotte]

You have about one minute left, and Mr. Georgetti wants to respond.

[Ken Georgetti]

We have argued, and we still argue, that the whole issue has to be discussed.The age of entry into the workforce is changing. The nature of work is changing. When we bargained for our first pension in the plant I worked in, you probably couldn't work there past age 58, because the work was too difficult. The nature of that is changing. The assumptions on which we based our original pension plans are changing.

We need to have a discussion about it, as we said, in a holistic way. We would argue the most important thing that we could do is to sit down with all of the experts and talk about the whole system. It has significantly changed since we designed what we would commonly refer to as pensions, the age of retirement, and the duration of work.

My son is entering the workforce with a law degree this year. He's 33 years old. He won't have enough pension credits unless he makes a significant contribution by age 65.

We have to talk about it. At this point in time, we think there are more urgent needs, but we agree there has to be debate and dialogue.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you Ms. Hall Findlay.

I just want to ask a couple of questions.

I want to quote from Professor Mintz's report, a statement that frankly surprises me. I think Mr. Benson and Mr. Georgetti would certainly support it, and I want to get comments from two of the others. The statement is that:

There remains, however, an important puzzle that is not explained by the research. Given that both pension plan and mutual fund active management performance seems no better than passive income performance on a persistent basis, it is unclear why managers engage in active management, given the costs involved. Uninformed individual investors and pension beneficiaries may not be able to determine whether active or passive strategies are better to pursue, but fund managers in competitive financial markets should advise pursuing more passive strategies. Perhaps, there is optimism that active management improves returns on savings, but the studies do not bear this out.

Now I have to say I was surprised by this statement, but I think we have to take it seriously, since Jack Mintz is a serious person. This is something I think both Mr. Georgetti and Mr. Benson have told this committee previously.

I want to get, from perhaps Mr. Charbonneau and Mr. Lefebvre, your reaction to this statement. Is this something, based on your experience, that is true what Mr. Mintz says here?

[Serge Charbonneau]

It is true to a certain degree that active managers have difficulty beating the index. All actuarial firms do analysis of fund returns and they compare different managers versus the index. It's very hard to beat year after year. Pension plans that choose their investment managers look at the data and they interview managers and try to figure out...“Okay, you were good last year, the last four years; what's your secret? Why are you so good?” Many of them are convinced that, yes, I'll trust this manager and I'm confident he'll beat the index in the future. Many of them do; many of them don't. That's what the index is. Half of them are better; half of them are worse.

[The Chair, Conservative, James Rajotte]

Should we just get rid of all these managers and purchase the index? It's a serious question.

[Serge Charbonneau]

No, no, you wouldn't have an index. You need players in a market.

One factor that's built into his statement, I believe, is the fee. The indexed funds have practically zero fees, and if you compare that to a manager who charges you 1%, then he has to be at least 1% above the market to make it worth his while. There are some managers who are good, a few of them. We're not talking about mutual funds here that banks sell to Joe Q. Public. We're talking I think about pension funds, and they do pay much less than 1% if we're talking about large defined benefit plans. Over the long term, you see the teachers plan and OMERS have very good results. They don't just invest in the index; they go into different asset classes where they get a lot more bang for their bucks.

[The Chair, Conservative, James Rajotte]

Mr. Lefebvre, do you want to comment?

[Rock Lefebvre]

We've conducted rudimentary analysis on it, and Professor Mintz's comments are in large part correct. There are nominal advantages on the market, but I would contend that they don't necessarily provide for the additional risk. So I would qualify Mr. Mintz's conclusion.

[The Chair, Conservative, James Rajotte]

Okay.

I want to ask, following on that, Mr. Benson and Mr. Georgetti, if plans were in fact more passive, does this then make defined contribution plans more attractive? One of the concerns you raise about defined contribution plans is that it's very relevant on the market, and if you're playing at the riskier end of the market, obviously there's a greater risk to the pensioner there. Does that make defined contribution plans more attractive, or is there still a heavy preference for defined benefit plans, especially considering what Mr. Benson said about the fact that people rarely work for the same company for 30 years any more?

Mr. Georgetti, and then Mr. Benson.

[Ken Georgetti]

It's not the investment risk, it's the benefit at the end that doesn't attract us to defined contribution plans. There's no certainty in a DC plan, and we prefer the certainty that DB plans deliver.

We agree that the consolidation of plans is attractive to us because it does drive down the MER. Still the return is important for sure, but the issue of the guarantee of the benefit is the most attractive thing that our members want outside of that.

[The Chair, Conservative, James Rajotte]

Okay.

Mr. Benson.

[Phil Benson]

The less risk taken in investment in the long run I think will benefit not just beneficiaries but also the companies and the policy goals of government. We had a lot of discussion today about the BIA Act, changing it to put it in a priority would be terrible and disturbing. I think that's the cart after the horse; the horse has left the barn.

I think if we have more confidence that we can create rules so that the solvency rate is at 100%, or above, or close to, that moving into more careful investments, more conservative investments, in the long run will benefit the good players in the industry. When they drive up costs—when people talk of costs, when they have to borrow money—if nine out of ten companies are in fact insolvent and one isn't, they should pay a price.

So I think the answer is yes, I think it would help in the long run, if it is part of a bundle of measures. It can't just stand alone; it has to be as a group of changes.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. McCallum, final round.

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

Thank you, Mr. Chair.

I want to comment briefly on the chair's question as if I were a witness, just for a second.

[Voices]

Oh, oh!

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

I think Jack Mintz is absolutely right. I used to be on the Royal Bank pension plan committee, and I was part of a minority that always argued for passive investment. I think it's very difficult, if not impossible, to consistently beat the index plan in an amount equal to or greater than your charge.

Now, we were the minority. We lost. But I think that was partly the philosophy of the bank. The bank makes a lot of its money through active management, so it's a bit difficult for them to say that active management is no good.

[Voices]

Oh, oh!

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

I also think the case is even stronger for an individual. An individual pays 0.25% for index and 2% to 3% for mutual funds. It's really hard to make 2% to 3% consistently above the index.

That's just my witness comment.

As for my politician question, I guess to Mr. Benoit, I read that the government proposal is that your group of six--gang of six, group of six--can go for ten years, providing that “no more than one-third of active and non-active plan members and beneficiaries object”, right?

But how likely is this plan to work? I would have thought it was very likely, especially in a union setting, that more than one-third of them might object.

[Michel Benoit]

Those were the rules under the temporary solvency relief measures. Those are not, to my knowledge, permanent rules that are being proposed here.

You are right that in order to secure member buy-in for the ten-year amortization, a number of companies simply...especially those companies, such as CN or CP or Bell Canada, that have tens and tens of thousands of employees. It's simply not practical to go down that route. They chose rather to secure the benefit through a letter of credit, which was the other alternative that was available.