Evidence of meeting #94 for Government Operations and Estimates in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was plan.
A recording is available from Parliament.
Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
In the previous report, in 2008, there was a small surplus of about $1 billion.
Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
And if you...oh, sorry.
Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
If you look at how the situation evolved from 2008 to 2011, you will see in our report that many factors have affected the funding status of the plan. One item was, of course, the investment losses of 2008 and 2009. But another aspect of it is...I changed the assumptions of the real rate of return. In the 2008 report, it was 4.3% in real terms; now it's 4.1%. Obviously the minute you reduce the expectation on the discount rate, you increase the liability. This also explains the size of the deficit.
Moreover, for the first five years of the projections, we recognize that interest rates are very low, and we have an assumption that is lower than the 4.1% we had for the first five years. There are all these factors, plus of course since the past decade, let's say, public servants are living longer. Even if in previous reports we had improved our future longevity, we still have more than what we expected in the past. This has also contributed to a higher deficit.
NDP
The Chair NDP Pat Martin
Thank you, Judy. Actually, you're well over your time.
Next, for the Conservatives, Bernard Trottier.
Conservative
Bernard Trottier Conservative Etobicoke—Lakeshore, ON
Thank you, Mr. Chair.
And thank you, guests, for being here today.
The first question is for Ms. Gowing.
You described the pre-2000 regime and the post-2000 regime, and credit where credit is due, I think there was a recognition at that time under the Liberal government that we needed to have a different set-up for funding public sector pensions.
In the post-2000 plan you mentioned that there's a deficit of $4.4 billion. I'm wondering if you could talk about the special payments to make up for that $4.4 billion. In a way, we have a certain generation that signed up well before 2000 that was entitled to certain benefits, but now, based on the deficit, there's an inability to make those payments, so the current taxpayers have to top that up.
What other options did the Treasury Board have in terms of addressing that pension fund deficit that was there?
Director, Pensions and Benefits Sector, Treasury Board Secretariat
The pension deficit had to be addressed by the government. They're responsible for the deficit, as the legislation lays out. So the government assumes full responsibility for that.
Conservative
Bernard Trottier Conservative Etobicoke—Lakeshore, ON
So out of the general revenues that the government receives, about $435 million will be paid for the next 13 years to address that deficit. Is that correct?
Director, Pensions and Benefits Sector, Treasury Board Secretariat
Yes. But I also think it's important to note that based on the next actuarial evaluation, there's a possibility that the deficit could be reduced or, in and of itself, eliminated, depending on the results of the next actuarial evaluation.
Conservative
Bernard Trottier Conservative Etobicoke—Lakeshore, ON
Is there a provision that if that deficit is addressed by a higher-than-expected return on investment, the $435 million a year could also be reduced?
Director, Pensions and Benefits Sector, Treasury Board Secretariat
It would either be reduced or disappear or cease.
Conservative
Bernard Trottier Conservative Etobicoke—Lakeshore, ON
Okay, very good.
One of the things that's special about Canada, when you look at debt-to-GDP ratios, is that we tend to focus on net debt to GDP, and it shows a much healthier fiscal situation of Canada compared to other countries. I'm not sure if you're an economist or can talk about this. With a net debt to GDP, we take out the fact that the pension liabilities are not coming out of general revenue. In many cases, things like the CPP, the current public sector pension plan...they're self-funded by investments, whereas in other countries they resemble our pre-2000 regime. So compared to the United States or other G-7 countries, Canada is in a much healthier fiscal situation.
Can you talk about that, why net debt to GDP is actually a pretty valid metric to look at when we compare Canada's fiscal situation to that of other countries?
Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
Yes. I think you are right to say that, especially when we compare Canada's situation with those of OECD countries. In many other countries, the pension liabilities are not reported in their books.
In the case of Canada, we have been doing this for many decades now. Even then, we have started to back the pension liabilities with tangible assets, so to some extent, when we compare Canada to OECD countries, we are in a very favourable position.
Conservative
Bernard Trottier Conservative Etobicoke—Lakeshore, ON
Thank you.
My next question is for Mr. Ménard.
You mentioned the fact that life expectancy is going up and the fact that the population is aging. Those are two trajectory forces. Today, there are fewer young people to pay the benefits, but more pensioners. To some extent, that reflects a transfer of wealth from one generation to the other.
I believe important steps have been taken such as raising the eligibility age from 65 to 67 and the contribution rate from 35% to 50%.
How do those measures—meaning the increases in the eligibility age and the contribution rate—compare to steps other countries are taking?
Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
To answer that, I'd like to give you some information that is more relevant to the national level. As you know, the eligibility age for the old age security program went from 65 to 67. That change will start coming into effect in 2023 and be fully implemented by 2029.
As for what other countries are doing, the retirement age in 14 OECD countries is currently above 65 or between 65 and 67. That is the case right now or will be the case eventually.
On the matter of the aging population, I would put it in the context of the Canada Pension Plan because population changes are more significant in that regard. Ours is a nation of immigrants. We have welcomed a great many immigrants over the past 40 years, especially in English-speaking Canada. That is why our population will age, but at a much slower pace than in European countries.
Conservative
NDP
The Chair NDP Pat Martin
Actually, your time is up, unfortunately, Bernard. Thank you.
We're just about to go to the second round. But if I could take one minute, I'm still curious about the changes made in Bill C-45, the two significant changes of 60 to 65 years old and the 35% contribution to 50%.
With regard to the $50 billion surplus we had in the year 2000 that was legislated away from the fund, if that had been invested at the 4% annual compounding interest, would either of these steps have been necessary if the workers' deferred wages had not been taken away from them in the year 2000 in the big scoop of Marcel Massé's final move as Treasury Board president? Has anyone ever extrapolated the position the fund would be in if we had not been denied that $50 billion actuarial surplus that existed in 2000?
Monsieur Ménard, you've been here since 1999. Has that study ever been done?
Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions
I would like to first correct the $50 billion. It was actually $28 billion, and it was a national surplus. The decision was taken at that time through Bill C-78 to finance the liabilities—the pension benefits and the pension promise going forward—by tangible assets. I cannot comment further on what you have said, but I can say that it was and still is a national surplus.
But what is important is that we have moved from national funding, from 1924, let's say, until 2000—because these superannuation accounts have existed since 1924—to real funding with tangible assets to back the pension promise. To some extent, we have strengthened the system by doing so.
NDP
The Chair NDP Pat Martin
Okay. That's interesting. Thank you.
We'll go to the questioners.
Linda Duncan, please.
NDP
Linda Duncan NDP Edmonton Strathcona, AB
Thank you very much.
I want to follow up on this renewable portfolio. I have a series of quick questions on this.
Who is the Public Sector Pension Investment Board seeking advice from on selection for the renewable portfolio? When you're evaluating, are you also giving consideration to other externalities? In other words, some of the investments you may make in renewables may provide additional revenue through taxation and so forth to the Government of Canada. I'm particularly interested in the interest in investing in timber, and I'm wondering if preference is being given to those corporations that are dedicated to sustainable harvests, and some are also dedicated to setting aside caribou habitat.
My final question on this is about agricultural land. In your annual report of 2012, you say you are interested in moving toward the purchase of or investment in farmland. I find it odd that at the same time as the federal and the Saskatchewan governments are selling off the 80-year-old prairie pastures, which generate tens of millions of dollars in tax revenue for the Government of Canada, the pension fund is now interested in investing in agricultural land.
Vice-President, Policy Portfolio and Asset Liability Management, Public Sector Pension Investment Board
I'll try to address all of your questions.
In terms of decision-making, as with our other private asset classes, we have built an in-house team to make decisions. From time to time they will be seeking external advice to help them, but we see a lot of value in making those investments with in-house expertise.
To give you some background on why we've created this asset class called renewable resources, which include timberland and farmland, there are a few things that as an investment organization we want to make sure we're focusing on. The first thing is to recognize that we are funding liabilities, and thus we will be taking a close look at the nature of those liabilities. As I mentioned before, that means we will be favouring investment so that where we fail, there's an equity premium we can get that will also provide some inflation protection over time. One thing we need to keep in mind is that the pension obligations of the public service pension plan are highly sensitive to inflation. Those final average earnings are fully indexed in retirement, so we want to pay close attention to inflation. In our mind, timberland and farmland are definitely well geared to keep pace with inflation.
A third criterion that we look at is purely diversification. In our mind, investing in timberland and farmland is definitely a strong diversifier from the other investments in our portfolio, which will help us weather more volatile market conditions. A good example of that is when we invest in timber we buy into biological growth, which is not well correlated with the economy or where the stock market is going, so for us there are strong advantages in doing that.
I believe you had one question on the ESG. Mark, do you want to touch on that?
Vice-President, Communications and Government Relations, Public Sector Pension Investment Board
With regard to renewable resources, ESG is a factor that we take very seriously, and we are very conscious of the social licence to operate these types of assets. I would argue that in having an investor such as a pension fund—and you were referring to TimberWest, where we're partnering with BCIMC—you probably have the ideal owner for those types of assets because we're not focused on maximizing the annual cashflow from the assets. TimberWest was a publicly listed company that had a lot of debt. Because they had debt, they had to cut more trees to pay the interest on the debt. Obviously, as a pension plan with significant inflows, we don't have that issue.
So I think those types of assets have found the ideal owner in public pension funds in private hands.
