Government Operations Committee on Oct. 2nd, 2018

[William Robson]

First, I will just respond to one element of the previous question.

It is not a matter of opinion whether the MP pension plan is funded or not. It is a matter of fact that it is not funded. It's too bad that the reports give the impression that it is. The entire obligation in those plans is part of the public debt. There is no asset held against them as there is with the Public Sector Pension Investment Board, which does hold assets and those are real assets.

On the question of how high the cost would go: We do have estimates in our report of what the current service cost would be if you used these lower discount rates. The $96-billion figure is the stock. It's the amount that appears on the balance sheet. If you look at the annual accruing obligation, there are two elements to it. There's the ongoing cost of the work that the public servants are doing in return for which they deserve their compensation, and there's also the changes in the value of the plan. It tends to be quite erratic.

The very short answer to your question—I won't give you the precise number; we can follow up on that—is that it would go higher, though. The plan is notionally funded fifty-fifty right now, but that's on the basis of a current service cost that is too low because of this too high discount rate. If you were to use a realistic discount rate, the ongoing accrual of benefits would show as a higher amount, which is more valuable to the participants and more costly to the taxpayer. The appropriate amount for the people to be contributing would be higher than what the current fifty-fifty formula shows.

[Kelly McCauley, Conservative, Edmonton West, AB]

We heard a lot today about the problems with this arbitrary discount. How much of this issue is also caused by the smoothing of the assets, year by year by year?

[William Robson]

I think we can conceptually separate those two topics, even though in practice you tend to see the two together. Where you see high discount rates you also tend to see a lot of smoothing going on because people don't like—

[Kelly McCauley, Conservative, Edmonton West, AB]

The high discount rates?

[William Robson]

Yes. I hesitate to attribute too much motive, but you see these things very often in situations where it's very convenient for the cost to appear low. Under those circumstances, you don't want to be moving the rate around a lot because it raises questions in people's minds. It causes the plan to look volatile, so typically you'll find a lot of smoothing and high discount rates going together. The argument for using no smoothing—the argument for showing the value of the assets at what it is at a moment in time, and the value of the liabilities at what it is at a point in time at the discount rates I'm arguing for—is that it exposes something important about these plans. They are risky. There's a lot of volatility in these plans. I think that's a virtue on its own.

The two things can be considered separately. The Public Sector Accounting Board is consulting separately on timing of recognition—should there be smoothing versus immediate recognition, and on discount rates? When you look at the things that make pension accounting opaque, and make it difficult for us to get our minds around what's going with the federal pension plans, I think the two of them are equally problematic. It's hard for a non-expert to look at those financial statements and understand what's going on.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Our final five-minute intervention will come from Mr. Peterson.

[Kyle Peterson, Liberal, Newmarket—Aurora, ON]

Thank you, Mr. Chair.

Thank you, Mr. Robson, for being here, for your report, and the intensive work you did on this important issue.

I think you used the term “mug's game” a couple of times in this presentation. I think it really is difficult to find a value of pensions. It's an art as much as it is a science. I think you'll agree with that. Part of it is just knowing what variables we're dealing with when you try and put.... Are we trying to even put a present value on this? How does the accounting even work? What's the goal when you're trying to put this on a balance sheet? Are you looking at the present value of a pension? What's the process there?

[William Robson]

Yes, it is about calculating a present value. In the extreme, you might have a situation—and if the C.D. Howe Institute offered a defined benefit pension plan, I think this would be the appropriate treatment. We're a charity. We depend on annual donations. We could go out of business next year. It would not make sense for us to make any kind of a promise extending over many years unless we have the assets that could cover that promise right at a point in time so that if we did go under, the people who had that promise would actually receive it.

The present value calculation is all about the value of the assets and the value of the obligation discounted at a reasonable discount rate and if they're equal, you're good. If the assets are better than the liability, that's even better. If the assets are below the liabilities, that's a problem because you're not backing your promise properly.

[Kyle Peterson, Liberal, Newmarket—Aurora, ON]

The actuaries look at the gender, age, health and all that stuff that they look at when they try to determine. It might be in your report, but do you know the ratio between retirees and active employees right now under the federal pensions?

[William Robson]

I don't have that number in my head so I won't speculate about it. It's relevant to a question that was asked earlier about the Public Sector Pension Plan Investment Board. At the moment because the plan is largely unfunded it's appropriate for them to be trying to earn high returns, because most of the obligation of the older public servants, and the ones whose pensions are already in pay, is going to get covered by current revenue. It's a bit like the Canada and the Quebec pension plans in that sense. The assets are important, but most of the benefits are being paid by the money coming in.

Over time if the plan becomes better funded and becomes more mature, then the assets it would be appropriate to hold would start to change as well. You wouldn't be chasing returns, you wouldn't be taking a lot of risks with equities in your portfolio, you'd start to hold more bonds, you'd start to hold more infrastructure, you'd start to hold things that were better matched towards the liabilities. I apologize I'm not addressing your question directly, but the subject came up earlier.

[Kyle Peterson, Liberal, Newmarket—Aurora, ON]

I appreciate where you're coming from. Some of the most successful public sector pension funds I think have huge holdings in real estate, for example, which I think by most standards would be considered risky as opposed to a bond or something, and generally speaking, they're probably less risky than other things in that the return seems to always be growing. In that sense these might be why things like teachers' pensions are so successful and well-funded because of the investment decisions they're making.

Is there that capacity at the federal pension level for the investment decisions to be made with a goal of funding the pension, but also not making it too risky?

[William Robson]

I think the capacity is certainly there. The investment opportunities in the world right as we speak are perhaps less attractive in general. Everything seems expensive. That's the nature of the game. With regard to teachers and others, they'll speak for themselves, but my take on how they are handling their plans is that over time.... Teachers are a good example. By now they have a very mature plan. The number of new contributors coming in and the size of the contributions relative to the obligation and the amount of retirees has become quite small. Many of these plans now are negative on a cashflow in versus benefits basis, and under those circumstances, their portfolio does become more conservative. I mentioned OPTrust and HOOPP earlier. These are plans that are very explicit in saying to their members that they're not chasing the returns trying to beat the index or trying to beat the other guy. The thing they're trying to beat is the increase in the size of the liability, the obligations they have to pay, because the primary task is to pay that obligation.

[Kyle Peterson, Liberal, Newmarket—Aurora, ON]

Thank you.

[The Chair, Conservative, Tom Lukiwski]

Colleagues, that will be it for this panel.

Mr. Robson, on behalf of the committee I want to thank you very much. Your testimony has been incredibly informative, albeit somewhat unsettling, but we do thank you for being with us. Should any of our members have any further questions, sir, I would appreciate it if you would entertain their questions, and the responses can come back directly to our clerk.

Thank you once again. We look forward to speaking with you again soon.

[William Robson]

Thank you for the opportunity.

[The Chair, Conservative, Tom Lukiwski]

Colleagues, we will suspend for two or three minutes while we get our next panel to the table.

[The Chair, Conservative, Tom Lukiwski]

We will reconvene the meeting.

I would like to welcome representatives from the PBO, Mr. Giroux and Mr. Jacques.

I understand, Mr. Giroux, that you have a very short opening statement. We will entertain that and then go directly into questions from our committee members.

Mr. Giroux, the floor is yours.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Mr. Chair, I feel like I'm in the House of Commons.

Thank you for the invitation to appear before you today. I'm pleased to be here for the first time before a House committee since being appointed Parliamentary Budget Officer, thank you, upon resolution of the Senate and the House of Commons. I started assuming my function duties on September 4, 2018.

I am here today with Jason Jacques, senior director of costing and budgetary analysis.

As you know, when the Parliament of Canada Act was amended last year, the Parliamentary Budget Officer was recognized as an officer of Parliament. The September 2017 order in council brought that change into effect and confirmed the expanded mandate, which now includes the costing of parties' election platforms. In addition, the PBO is now responsible for providing analysis services to senators, MPs, and parliamentary committees.

In accordance with the PBO's legislative mandate to provide impartial, independent analysis to help parliamentarians fulfill their constitutional role, which consists of holding government accountable, my office will continue to prepare reports and analysis of the estimates of the government and the budget, in addition to other pertinent federal government documents relating to the nation's finances or economy. Following the tabling in Parliament later this fall, my office will publish a report on the 2018-19 supplementary estimates (A).

That will conclude my remarks, as I understand you may have questions for me and Mr. Jacques.

Thank you, Mr. Chair. We'd be happy to answer questions.

[The Chair, Conservative, Tom Lukiwski]

Thank you for your economy of words.

We'll go directly into questions.

Madam Mendès, you have seven minutes, please.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Thank you very much, Mr. Chair.

I thank you both for being here.

Welcome to Parliament Hill, Mr. Giroux.

I understand that you are here to talk to us about the mandate of the Office of the Parliamentary Budget Officer and the expansion of that mandate. However, in light of what we just heard from Mr. Robson about the state of federal government pension funds, I am curious to hear your take on the MPs' pension fund at least. Of course we'll give you time to look into what's going on across the federal public service. However, if you could give us a little information about the MPs' pension fund, I would really appreciate that. I believe you heard some of the remarks?

[Yves Giroux]

I'm happy to comment on that, Madam.

I heard part of Mr. Robson's presentation about the health of the MPs' pension fund, and it seemed rather alarmist to me. I do not share his point of view.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Thank you. That's what I wanted to hear.

[Yves Giroux]

In my opinion, the actuarial obligations are accounted for in Canada's public debt and provisions have been made and recognized as part of the government's future obligations to MPs and senators. It is already part of the liability. It is true that no funds have been set aside to grow in an account, but that is known and is already part of the Government of Canada's debt.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

I think that is what Ms. Ratansi was trying to say to Mr. Robson earlier. The Government of Canada's obligation in that regard is already accounted for in the actuarial statements.

[Yves Giroux]

Yes. When they say the government's debt is $650 billion or that its debt-to-GDP ratio is 30%, that includes the government's liability to its pensioners, including current and former MPs and senators.