Government Operations Committee on June 18th, 2013

[The Chair, NDP, Pat Martin]

Good morning, ladies and gentleman. We'll convene our meeting of the Standing Committee on Government Operations and Estimates.

As one aspect of our mandate, we not only review the planned expenditures of various government departments and their estimates, but we also review the statutory programs. One of the recommendations made in a recent study we did as a committee was to do a better job of oversight as a committee; to commit to review all significant statutory spending at least once every four or eight years, I believe it was. Obviously, it's difficult to do more than that.

We're very pleased. This is the first attempt to provide this additional scrutiny to some of the statutory spending undertaken by the government, so we're very pleased today to welcome very much a blue ribbon panel dealing with the public service pension plan.

We're joined by representatives from the Treasury Board Secretariat: Ms. Kim Gowing, director of the pension and benefits sector; and Ernest Meszaros, senior adviser, pension and benefits sector.

Welcome, Ms. Gowing and Mr. Meszaros.

We also have, from the Office of the Superintendent of Financial Institutions, Jean-Claude Ménard, chief actuary.

Welcome, Mr. Ménard.

We also have Public Sector Pension Investment Board representatives Martin Leroux and Mark Boutet. I'll let them introduce their positions.

I understand that all three groups will have brief opening statements. I hope we have time for a thorough go-round to ask questions.

Proceeding in the order that we have them on our agenda, we'll invite Ms. Gowing, the director of the pension and benefits sector of the Treasury Board Secretariat, to make opening remarks.

Welcome, Ms. Gowing.

[Kim Gowing, Director, Pensions and Benefits Sector, Treasury Board Secretariat]

Thank you, Mr. Chair.

Thank you for the invitation to appear before your committee today. I'm here with Ernest Meszaros, a senior adviser within Pensions and Benefits at Treasury Board.

We'd like to provide you with an overview of the public service pension plan and the work we do with our partners to manage and administer the plan.

The public service pension plan has existed for over 100 years, since 1870, and in its current form is subject to the Public Service Superannuation Act. The plan provisions in this act have been amended from time to time, with the most recent changes coming last year with budget 2012. The plan is a contributory defined benefit plan covering most of the employees of the federal public service, territorial governments, and certain public service crown corporations. As of March 31, 2012, the pension plan had a total of 565,125 members, of which 313,652 are active contributors.

The President of the Treasury Board is responsible for the overall management of the public service pension plan. The Treasury Board Secretariat provides the president with operational support to manage the provisions of the pension plan, such as providing recommendations on contribution rates and the production of the annual report. The Treasury Board Secretariat also engages with partners such as the Office of the Chief Actuary and the Public Sector Pension Investment Board, both of which are represented here today, and provides them with policy and program advice.

Public Works and Government Services Canada is responsible for the day-to-day administration of the plan. The Public Service Pension Advisory Committee, composed of employee, employer, and pensioner representatives, is established under legislation to provide advice to the President of the Treasury Board on various matters relating to the plan.

Under the Public Service Superannuation Act, a member's pension benefit is determined as 2% times the number of years of service, up to a maximum of 35 years, times the average of the five highest-paid years of salary. Pension benefits are coordinated with the Canada Pension Plan and the Quebec Pension Plan, and indexed to the consumer price index.

The plan was most recently amended on January 1, 2013, to implement the following changes announced in budget 2012: employee contributions will be increased over a five-year period to reach a 50-50 current service cost-sharing ratio between government and employees by 2017; the government's share of the cost as of 2012 was 62%. New employees joining the plan after January 1, 2013, will be eligible for an unreduced pension at age 65 instead of age 60 for pre-2013 members; and other age-related retirement thresholds were also increased by five years for new employees. The Public Service Pension Plan Advisory Committee was consulted on these changes prior to their coming into effect. The chief actuary was also enlisted to provide expert advice.

Prior to 2000, employee and government contributions were not invested. In 2000, the government established the Public Sector Pension Investment Board, PSPIB, in order to invest pension contributions into the capital markets. Employee and government pension contributions, net of payments and expenses, are now sent to PSPIB and invested. The funding of the post-2000 pension liability is dependent on employee and government contributions and the returns achieved by PSPIB on the invested assets. The president is responsible to make certain funding decisions for the plan and relies on advice from the chief actuary.

The chief actuary generally provides this advice through actuarial valuations. The most recent valuation for funding purposes was completed as at March 31, 2011. This report was tabled in Parliament on June 21, 2012. The chief actuary also prepared an updated actuarial report for the public service pension plan to reflect the plan design changes outlined in budget 2012. This report was tabled in Parliament on March 25 of this year.

The president, based on advice from the chief actuary, recommends employee contributions to the Treasury Board for approval. The rates for 2013, 2014, and 2015 have been approved and implemented. Based on actuarial advice from the chief actuary, the president approves government contributions that are required in addition to the approved employee contributions to pay for the current service cost.

Pension costs and corresponding contribution rates have risen over the last 20 years due to many factors, such as low interest rates and increases in longevity of pensioners. For example, in 1980, employee contributions were approximately 5% of pensionable payroll and they are now closer to 9%. This trend is not unique to the public service pension plan, as all pension plans are faced with the same economic and demographic challenges.

In 2011 the actuarial valuation report valued the post-2000 liability at $46.8 billion while the actuarial value of assets were $42.4 billion, resulting in a deficit of $4.4 billion.

Pension plan surpluses or deficits occur when actuarial results vary from the projections that were set in the previous actuarial evaluation. There are many factors affecting the funding of the plan that explain the deficit as of March 31, 2011. Notably, liabilities were higher than anticipated for various reasons, including the fact that Canadians are living longer. Assets were also lower, as the return since the beginning of the funding of the post-2000 liability was lower than initially anticipated during the period that witnessed two of the worst market crises.

Legislation requires that the President of the Treasury Board fund this deficit over a period of no longer than 15 years. In 2012 the president approved special payments of $435 million annually to the plan over the next 13 years. These payments are expected to eliminate the deficit by 2026. The first payment was made as of March 31, 2013. These funds are transferred to the PSPIB and invested along with regular contribution amounts.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Ms. Gowing.

We'll invite Jean-Claude Ménard from the Office of the Superintendent of Financial Institutions to speak.

Mr. Ménard.

[Jean-Claude Ménard, Chief Actuary, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions]

Mr. Chair, honourable members of the committee, good morning. Thank you for the opportunity to appear before you today.

The primary role of the Office of the Chief Actuary is to provide actuarial services to the federal and provincial governments that are Canada Pension Plan stakeholders. While I report to the Superintendent of Financial Institutions, I am solely responsible for the content and actuarial opinions reflected in the reports prepared by my office.

The Office of the Chief Actuary conducts statutory actuarial evaluations—generally, every three years—on the Canada Pension Plan, the Old Age Security Program, and pension and benefits plans covering the federal public service, the Canadian Forces, the Royal Canadian Mounted Police, federally appointed judges, and members of Parliament. In addition, whenever a bill is introduced before Parliament that significantly impacts the financial status of a public pension plan under the statutory responsibility of the Chief Actuary, the office must submit an actuarial report to the appropriate minister.

Following the passing of Bill C-45, the Public Service Superannuation Act was amended to increase the pensionable age—from age 60 to 65 in the case of new participants—for contributors entering the plan after January 1, 2013. Member contribution rates will be increased to bring their share of the plan's current service cost from 35% to 50%, thereby splitting the cost 50/50 between the members and the government. The President of the Treasury Board, the Honourable Tony Clement, submitted an actuarial report on March 25, 2013.

In the second half of the 21st century, we experienced remarkable gains in life expectancy and highly decreased mortality rates. In 1965, average life expectancy at age 65 was another 15 years. This means that someone who was 65 years old back then could hope to receive their benefits for 15 years, on average, until the age of 80. At that time, women lived slightly longer than men.

Today, 65-year-old retirees can hope to live another 20 years on average—with women still living slightly longer than men. However, the gap between the two sexes is narrowing quickly. According to projections, taking into account future mortality improvements—that is, future gains in life expectancy resulting from decreasing mortality rates—we could expect an additional three to four-year gain in life expectancy at age 65. Around 2050, based on our projections, people will reach the age of 88—people who were 65 years old 23 years earlier. Canadians are living longer, healthier lives and are working to a more advanced age.

According to the most recent labour force survey from Statistics Canada, the number of Canadians between the ages of 65 and 69 who are working has more than doubled over the last 10 years, increasing from 144,000 in 2002 to 374,000 in 2012. The number of those aged 60 to 64 who are still working also increased significantly to reach one million in 2012. Overall, the number of workers between ages 60 and 69 has more than doubled over the last 10 years, increasing from 600,000 to 1.4 million.

In any case, whether the focus is on a pay-as-you-go plan or a fully funded plan, a defined benefit or a defined contribution solution, or a public or private sector pension plan, it's clear that increased longevity will continue to put pressure on pension plan financing.

Thank you very much again for the opportunity to appear before the committee.

I will be happy to answer any questions you might have.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Ménard.

From the Public Sector Pension Investment Board, we have Martin Leroux, vice-president of policy portfolio and asset liability management.

[Martin Leroux, Vice-President, Policy Portfolio and Asset Liability Management, Public Sector Pension Investment Board]

Thank you and good morning.

My name is Martin Leroux. I am the Vice-President of the Policy Portfolio and Asset Liability Management for PSP Investments—known more formally as the Public Sector Pension Investment Board. Joining me is my colleague Mark Boutet, Vice-President of Communications and Government Relations.

We are pleased to appear before the committee today to answer your questions. I will start with a quick overview of who we are and what we do, but I will be brief to leave as much time as possible for your questions.

PSP Investments is an arm's-length crown corporation that was established back in 2000 to invest the amounts transferred by the Government of Canada for the funding of the post-2000 obligations of the pension plans of the Public Service of Canada, the Canadian Forces, and the RCMP. Since March 2007 we have also invested amounts for the reserve forces pension plan. With more than 400 employees and $64.5 billion in assets under management as of March 31, 2012, PSP Investments is one of the largest pension fund managers in Canada. We've experienced a very rapid growth in assets fuelled by strong positive inflows of about $4 billion to $5 billion over the past few years, and also by our strong investment returns. Our assets under management are expected to exceed $450 billion by 2035.

Our mandate is to manage the funds in the best interest of the contributors and the beneficiaries of the plan and to invest with a view of achieving a maximum rate of return without undue risk of loss, having regard for the funding policies and requirements of the plans and their ability to meet their financial obligations.

More simply stated, this means that PSP Investments' mandate is to ensure that, given the current level of contributions, we earn sufficient return, so that there will be enough assets to cover pension benefits—that is, in the absence of other factors affecting the funding of the plans.

Currently, the Chief Actuary has determined that this requires achieving a 4.1% rate of return after inflation.

One can appreciate that achieving a 4.1% return after inflation is not risk-free. There is no single risk-free asset class or investment strategy that would deliver such a return year after year. This is particularly true in today's low interest rate environment, so at least a minimum amount of investment risk must be taken in order to achieve the desired level of return. In other words, PSP Investments must invest in the financial market to achieve its legislated mandate.

Let me give you an overview of how we achieve that. The blueprint for how we invest in the financial market to achieve the 4.1% rate of return is what we call the policy portfolio. It is basically our long-term strategic asset allocation. It dictates where every dollar we receive will be deployed in the market—in Canadian equity, foreign equity, bonds, real estate, and so on. This asset allocation strategy is the key determinant of risk and returns over time.

You will see that our current policy portfolio goes beyond public asset classes like stocks and bonds, and we do include a significant allocation to less liquid private asset classes, namely, real estate, private equity, infrastructure, and renewable resources. Those asset classes involve ownership interests in assets that do not trade on public exchanges, such as an equity stake in private companies or in an office tower.

Why are we doing this? If you look at the way the obligations of the plan are funded, we expect PSP Investments to continue receiving strong and positive inflows of capital until 2030. In other words, we won't need to sell assets to pay benefits for a long period of time. This puts us in a unique position where we can have a very long-term view with respect to our investments. It thus provides us with the opportunity to invest in assets that are private and less liquid.

Of course, we expect to be rewarded for doing so by receiving some excess returns or “illiquidity premiums”, which investors typically demand for taking on illiquidity risk—risk that we can afford given our special circumstances.

We also invest in what we call “real return” asset classes—such as real estate, infrastructure and renewable resources. Why? Because, in addition to capturing illiquidity premiums, these types of assets are considered a good match for the inflation-sensitive nature of the plans' liabilities.

As a result, the policy portfolio is expected to provide for a better return than a portfolio invested only in public markets such as bonds and equities. It is also expected to provide a better match with the pension obligations, the pension liabilities, and how they are funded, thereby reducing the risk associated with the funding of the plans and thus contributing to their sustainability.

You may ask how we have done so far. Have we achieved the actual rate of return of 4.1% after inflation? Since we started our diversification strategy of investing in less liquid private assets back in 2004, PSP has recorded a compounded rate of return of 7.6% after expenses. This compares to an actual rate of return of 6.2% over the same period. That is the actual rate plus inflation. So we have exceeded the actual rate of return, despite the fact that this period included one of the worst market meltdowns since the Great Depression.

This concludes my remarks today.

We look forward to your questions.

[The Chair, NDP, Pat Martin]

That makes me feel like handing you my portfolio to manage, Monsieur Leroux.

My thanks to all of you. That's a really interesting introduction and overview.

We are going right away to questions. For the official opposition, the NDP, we have Ms. Linda Duncan.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thanks, Mr. Chair.

I have one question and then I'll turn it over to my colleague, Irene Mathyssen.

It's been suggested that the costs of managing the federal pension fund are much higher than the costs of comparable pensions at the provincial level. I'm wondering what is being done to benchmark the costs of administering the pension fund against the costs of other jurisdictions. How do you ensure that the fund is well managed and that the cheques are delivered in a timely fashion? I noticed in looking at the budget that at least in one fund there is a reduction of about $20 million in administration and $1 million in the public service pension fund account.

Whoever is appropriate can speak to that.

[Kim Gowing]

It's important to understand that there are different types of structures when you're comparing us to other public sector plans. Our plan is in legislation, so we are tied to specific rules that are in there as well.

With respect to administering the plan, we've just gone through the transformation of bringing it online with the new pension platform. We are working towards finding efficiencies as we move forward with the new platform.

[The Chair, NDP, Pat Martin]

Ms. Duncan is going to be sharing her time with Irene Mathyssen.

Welcome, Irene. You have the floor.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

Thank you very much.

Welcome to the committee. I appreciate all the information you bring. I have a number of questions. I'll just ask whoever feels most comfortable answering to proceed.

The first has to do with contribution holidays. Does the Treasury Board participate in contribution holidays? if so, what is the rationale? We all know that markets go up and down and that we should contribute more when times are good to ensure there's enough when times are not.

Could you tell me about contribution holidays?

[Kim Gowing]

Our pension plan does not normally have contribution holidays.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

Lower administrative costs are expected after pension modernization is completed.

How many years will it take to offset the costs of implementing the modernization project, and how much money is expected to be saved in that modernization?

[Kim Gowing]

I would have to get back to you with the answer to that question. It's Public Works.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

I would appreciate that.

My office has had some complaints from the public service pension group in regard to delayed pensions and benefits to people with a disability due to computer problems. Does this have anything to do with the modernization plan? Can you tell me if the problem is resolved, and how were people compensated for the delay in receiving their pension?

[Kim Gowing]

I will have to work with Public Works to get you an answer to that question.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

I would appreciate that.

On June 12 of this year, the modernization disability management in the FPS was announced. At that point, it was said that the current sick leave credit system discriminates against newer and younger employees, yet in Bill C-45 there was the introduction, as you pointed out, of the first two-tier pension system in the history of FPS providing hirees after January 1, 2013, with a reduced benefit.

How do you explain and reconcile these two contradictory positions, that it's been modernized and it's going to be better, yet there's going to be this reduced pension benefit?

[Kim Gowing]

This is a decision of the government to move towards an age 65 retirement benefit.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

According to the most recent actuarial report of the supplementary death benefit plan, such as the life insurance for FPS employees and retirees under part II of the Public Service Superannuation Act filed by the chief actuary in March 2011, there's a $2.4 billion surplus in the supplementary death benefit account. The federal public service employees and retirees pay approximately 100% of the premiums for the SDB.

What are the intentions in regard to the disposition of this surplus? Have you any idea how that $2.4 billion will be treated?

[Jean-Claude Ménard]

I can confirm that the amount you mentioned is right, and indeed the actuarial report has shown a surplus. I would say it's inevitable in a sense. People are living longer, which means they are dying later.

It's clear that the insurance plan might develop surpluses over time. It's not for me to answer what the government could do with this notional surplus.

[The Chair, NDP, Pat Martin]

I'm afraid, Irene, your five minutes has expired. It goes very quickly with five minutes for questions and answers.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

Thank you very much, Mr. Chair. Perhaps there will be time later.

[The Chair, NDP, Pat Martin]

Yes, absolutely.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

Thank you.

[The Chair, NDP, Pat Martin]

We do know what Marcel Massé did with the surplus of the general fund in 2000.

We'll go to Peter Braid.