Finance Committee on April 20th, 2010

[James Pierlot]

The CPP was higher. I understand the reason was that the CPP had very little exposure to asset-backed commercial paper. The QPP, or the Caisse de dépôt et placement du Québec, had more exposure to that.

The large government pension funds operate fairly cost-effectively and generally deliver fairly good returns, but I think when you put all of that money into the hands of a few investment managers, you have a diversification risk. When all of the pension money is managed by all of these different managers in the private sector and one of them makes a mistake, it won't affect everybody. If more money is aggregated than we currently have and it's in the hands of a few investment managers, when they do well, it's great. But if they make a mistake, we all lose.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

So it's diversification.

[James Pierlot]

Diversification is the issue and there are solutions for that. For example, you could take blocks of a supplementary CPP fund and farm them out to the private sector, so that if any one group of investment managers didn't do well, it wouldn't affect the entire fund. There are ways around the problem.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

In your opening remarks, you also mentioned a need for reform. Specifically, you commented that an employee currently can't join a pension plan without having an employer who sponsors it. Are you suggesting, then, that self-employed individuals or employees who have an employer who doesn't want to sponsor a plan should be allowed to join their own pension plans? How would that be different from simply investing in their own RRSP?

[James Pierlot]

The reason it would be different is that there are two kinds of pension plans that are permitted under the Income Tax Act: defined benefit and defined contribution.

Defined contribution works just like an RRSP. Defined benefits are more complex arrangements that allow you to fund toward a particular targeted retirement benefit.

In a defined benefit pension plan, there's aggregation of risk and there's aggregation of assets. That presents opportunities for more flexible investment policies and also to lower costs. Under the current tax rules, individuals are not allowed to pay for their own defined benefits. An employer must do it.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Is there a reason for that policy?

[James Pierlot]

It's a historical restriction that dates back to the very beginning of pension saving when it started in 1917 under the Income Tax Act. At that time, you could only have employer contributions to a pension plan. That changed in 1946, I think it was, when employee contributions were permitted. But those restrictions have carried through, and the Income Tax Act essentially says that you can only have pension contributions in respect to your income from an office or employment, which means employment income, and your employer has to pay for those defined pension benefits.

Under the Income Tax Act, the amount of money that you can put away for retirement is much greater under a defined benefit arrangement than it is under an RRSP. So there's this real inequality between the two kinds of plans. This is one of the reasons why the public sector plans are better: because they're all defined benefit plans.

So what I'm really suggesting here is that we disaggregate the employment relationship from pension savings, so that anybody can contribute taxable income to any pension arrangement within an aggregate lifetime tax limit. Essentially, eliminate the distinction between defined benefit and defined contribution plans, and just give everybody the same limit. Allow anybody to contribute up to that limit in any arrangement they so desire, whether it's be pension plan or an RRSP.

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

My last question is for Mr. Hamilton.

You talked about strings being attached by lenders to companies with pension plans. If this change were to occur, do you think fewer corporations would offer pensions because of the strings attached with financing their companies from a start-up perspective and onwards?

[Malcolm Hamilton]

It would be a complication. Now, in all honesty, corporations right now are not looking to start up defined benefit plans. That's one of the reasons there's so much concern about the decline in defined benefit plan coverage. So if nobody is starting them up anyway, this isn't going to be a big change.

I do think that it will make the ones that are struggling to continue plans regret more strongly that they have the plans if they find out that in order to access the capital markets they have to deal with these very complicated loan covenants.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hiebert.

We'll go to Mr. Marston, please.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, Mr. Chair.

Ms. Marin, before we go any further, I find it difficult when we are talking so much about pensions and you have your particular issue facing you; I mean, we've proposed to the government, through a bill that I tabled, the potential for change. We certainly will support the Liberal bill if it comes to the House of Commons. We've asked the government to do whatever they can do. In fact, the purchase of annuities of a couple of hundred million dollars, while it doesn't sound huge, could take care of the situation. So a variety of things with potential are still out there.

Mr. McCallum talked earlier about a supplemental CPP, and, Ms. Reibel, I wouldn't mind directing a question on this to you--or anybody else who wants to respond. The NDP has proposed a similar thing, but rather than a supplemental CPP on the side, with new administration, we're talking about growing the core assets for the CPPIB to manage. Right now, 4% or 5% is contributed to the CPP by the employer and 4% or 5% by employees. We're saying to increase the contribution by the employer by 2.5% and, over a 40-year plan, to grow it.

We're looking at an existing framework. We have OAS and CPP. We're thinking in terms of the fact that I think was mentioned in your report, where you talked about the 50% of people who don't have a plan, while overall for workers, about 63% have zero savings and no pensions whatsoever.

So I'm curious about this. Because if we increase at the lower end for everybody, I don't see that as taking away from those people who are secure enough financially to invest themselves. I'd like your comments on that, please.

I'm sorry. I'll just add that it would be mandatory. So please comment on increasing the premiums and the cash in the base of the CPP as opposed to having a supplemental plan with its added costs.

[Sue Reibel]

I'd like Shirley-Ann to support me on this answer as well, because she's representing a large population of Canadian businesses in this.

I agree that there is an existing infrastructure for the existing plan, and adding on to it from an ease of use perspective is there. I think we have to look at the impact of mandatory increases in contributions on the economy and business. I think this is a good spot for Shirley-Ann to comment.

[Shirley-Ann George]

Anything that would in essence be a payroll tax, in one form or another, would definitely be of concern, especially to small businesses in Canada that are trying to get out of a very difficult downturn. While 2% may sound small, 2% over a broad base of employees can be a significant cost, especially when we're facing the very high increases in EI premiums that are coming.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

We understand, but also, as you heard from the British experience, it's going to take some time to do whatever we decide to do. Hopefully, going forward, we'll be somewhat better off than before.

On mutual funds, just out of curiosity, what would be the administration fee per year on a mutual fund, percentage-wise?

[Sue Reibel]

Percentage-wise, depending on the type of fund and its complexity, the fees are generally between 2% and 3%, and that includes for advice. There's an advice model and support and financial advice are given to the buyer by the individual who is selling that mutual fund. So you have to be aware of that, too.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Not to go too far into it, but one of the problems that somebody indicated to us is that the people who want to invest on their own behalf face the difficulty of having all of these choices. Again, coming back to the CPPIB, there is the fact that if you increase the core assets, part of that cost is equal to the administration fees. That's the point I'd like to make.

Mr. Hamilton, you were talking about preferred status. I was the one who tabled the bill in the House regarding preferred status during bankruptcies. We all know that a judge will follow the letter of the law in the CCAA. Rather than pointing a nasty finger at the judge, we recognize that this is what they're required to do.

When we look at making a change, one of the statements made is that the investment climate would change as result of granting preferred status. At a previous meeting, I raised the fact that a study tabled in Australia in 2005 said that there was just a very marginal change, and in their case, of course, they're still considered one of the top four places in the world to invest. Are you aware of that study?

[Malcolm Hamilton]

I'm not aware of the study. Australia has a largely defined contribution system. They've basically abandoned defined benefits. So I don't know why they'd even have the issue.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

I couldn't respond to that. One of our witnesses spoke about it.

[James Pierlot]

There's one thing I wanted to observe about the priority creditor status issue. I think we need to ask ourselves a question. Why is it that you have people from Nortel who are demonstrating in front of legislatures when they lose their pensions, but then you have a very large group of DC and RRSP investors who are not?

I think the reason is that when people were working for Nortel, someone made them a promise. They promised them a pension, and in the case of all of the people in DC plans and RRSPs, a pension was not promised. They were told that they would get a contribution to their pension plan, or they made contributions themselves and then they went through a market downturn and they lost money, but they understood that.

I think this is an important thing to remember in terms of how we're going to design the retirement savings system going forward.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

This is a leg of it, and I agree with you, but in the case of AbitibiBowater, Fraser Papers, and Nortel, they were all promised that their deferred wages would be there for them. In the case of the LTD, the moneys were not set aside--

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

--so we're talking about changing the CCAA and BIA to account for that, to offer workers the protection they need.

[James Pierlot]

Right, and the reason why I bring up this issue of the promise is that essentially I think what has really been going wrong with defined benefit pension plans in these situations you mention is that people have been told something that's not true, and they're upset about it. They were relying on a promise and they didn't get it.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

It's also their own wages that are being abused--