Government Operations Committee on Oct. 2nd, 2018

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Mr. Robson, I'm not going to get to see the MP pension plan, and may never get to see it if 2019 doesn't work out for me, so there you go.

I don't want to talk about the RRB, but I do want to talk about the way you came to your numbers. If I heard you correctly, the Ontario Teachers' Pension Plan is a good model. Is that correct?

[William Robson]

Yes, I think it is.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Have you done an analysis of the Ontario Teachers' Pension Plan?

[William Robson]

We haven't done the same kind of analysis, because the nature of the promise in a shared-risk plan is different.

As you may know, with the Ontario Teachers' Pension Plan, there is conditional indexation. Also, one of the virtues of these jointly governed plans—and I don't say this of Ontario teachers particularly; there are many other examples—is the fact that you've got the two sides at the table which facilitates conversations if things beyond what the plan design contemplated originally were to arise. Simply being there at the table promotes a good conversation about how to manage the plan, so that it appears reasonable in terms of its current cost, and also provides a good replacement income for the participants.

The type of analysis that we've done with the federal government's pension plan is the sort of analysis that you do when you have this unconditional promise to pay. If you look at other types of federal debt.... If you look at some of the litigation in the United States where there have been battles over who gets priority, the bond holder or the pensioner....

As a first approximation, it makes sense to say these are promises like every other senior debt obligation of the government. We should think of them in that capacity. There's as much risk attached to a federal government pension, or the possibility that you'll see it if you qualify, as there would be if you were a holder of the federal government's bonds. It makes sense to put them in the same mental category.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

At C.D. Howe, you seem to be saying that we should probably change the structure of our pension plan going from a defined benefit to a defined contribution, or a mix of that. Are you aware if that is reflected in the Ontario Teachers' Pension Plan? I know it's a joint governance model, but is that a defined benefit or defined contribution?

[William Robson]

Shared-risk plans, target benefit plans—there is different terminology, but they all reflect the idea that there's flexibility not just in the contribution rate but also in the benefit formula. It's proved to be quite a popular design in the broader public sector in Canada. In fact, it's quite well known around the world, partly because of the investments they make but also because it's a very intelligent plan design.

One of the difficulties with the pure defined-benefit model, whether it's in government or anywhere, is that it tempts the participants to mentally check the box of “I'm covered” or “It's good”. They're not quite as attentive as they might be. Perhaps their representatives aren't quite as attentive as they might be to the question of how the assets and the liabilities look when you put them side by side.

What you tend to find in these jointly governed plans is much more focus on the funded status of the plan. Are we 100% funded? The Hospitals of Ontario Pension Plan is a bit better than 100% funded, and they're very proud of that. They advertise it. When they talk to their participants, when they talk to the labour management, they're successfully focusing the conversation on the promise to pay the pension benefit.

I do think that's an attractive model. I would recommend that the federal government look at it. It would cause the contribution rates to go up because we would be thinking more seriously about the assets that match the liabilities, but I think that would be a good thing all around. In fact, I talked about tone at the top. I think it would be very good for the federal government, MPs and public servants alike, who make so many of the rules that affect the rest of the population, to play by some of the same rules that the rest of the population plays by.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

I think we just got to fifty-fifty not too long ago. You talk to the old guard around here, and they're not super happy about it, but that's another reality.

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

Everyone that railed against the pension retired.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

What about the impact on the pensioner? When you move towards either a joint governance model or a targeted benefit model, have you done the analysis of whether the contribution rates rise year over year or whether they stay stable? Do they vary? Does that happen?

[William Robson]

It depends on the formula you choose. Typically when you have a jointly governed plan there's attention to avoiding big swings in the contribution rates. Nobody likes that.

If I understood your question correctly, you were concerned about the people whose pensions are already being paid or people who are about to receive it. Typically when you do a transition like this in a controlled way, you're grandparenting the people who have already gone through the system.

You would certainly encounter a lot of opposition, I think quite reasonably, if there were anything in prospect that would cause the value of benefits and pay, or benefits that have largely been earned or entirely earned, to go down. The trick is to make the transition, as happened in 2000, in a way that leaves people intact. You phase it in. It's not quite fair when you think about the status of the newly arriving public servant versus the public servant who's about to retire.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

My generation.

[William Robson]

Yes, the young teacher or the young public servant, generally, is in a tougher situation.

As I mentioned already, as an MP you would not know typically that your plan is unfunded. I could argue that you should know. You should peel back the layers and have a look at it, but it's the nature of this type of promise that it makes people think there's no risk. “Somebody else is handling the risk, not me”.

As you transition out of it, you have to respect that. There has to be a transition and typically the people who are about to receive or who are already receiving are whole.

[The Chair, Conservative, Tom Lukiwski]

We will now go to our five-minute round of questions.

Mr. Deltell, you have five minutes.

[Gérard Deltell, Louis-Saint-Laurent, CPC]

Thank you so much, Chair.

I am very pleased to have the President and Chief Executive Officer of the C.D. Howe Institute, William Robson, here with us. I admire his work.

It is an honour and a pleasure to meet you, Mr. Robson.

I want to address something about the millennial people. You say that it's crazy what's happening.

I was young too, and when I was young,

interest rates were at 23% and youth unemployment was at 25%.

which is not exactly the case now, so each and every generation has to address some challenges.

Mr. Robson, I would like to pick up on two points you raised earlier, beginning with the MPs' pension fund.

I have been an MP for three years, but I have to admit that this matter was not of much interest to me as a new MP. Let's just say it wasn't the first thing that grabbed my attention when I first came here. It's news to me that our pension fund's liabilities are unfunded.

What do you recommend we do about this?

[William Robson]

Excuse me for not replying in French. I would try your patience.

Taking that question first, I think the model of the 2000 reforms for the public service, the RCMP and the Canadian Forces is not a bad way of thinking about doing the transition.

In response to the earlier question, I talked about grandparenting people who've already been through the system. Realistically, that's what you do. However, starting afresh now, we ought to be thinking about the cost of this promise and we ought to be charging a contribution rate that is appropriate to fund that promise and actually funding it, buying assets that are external to the federal government that would be there against the day the payment needs to come due.

There's a line that I have attributed to Barbara Zvan of the Ontario Teachers' Pension Plan: “A plan will cost what it costs; the discount rate is about who pays.”

If you choose a high discount rate because you remember the days when interest rates were high and you think it's going to go back to that, but that doesn't occur and the interest rate stays low, the older people will not pay as much as they should and the younger people will carry the burden. If you pick a low interest rate, it's likely to be spread more fairly if we don't get back to those high interest rates.

It would be appropriate for the MPs' plan to start funding itself as was done with the rest of the major public service plans. I don't know the French term for it, but I talked already about “tone at the top”. It would be a very constructive step for MPs to do that, because then when they talk to their constituents who are trying to save for retirement and are finding it hard to save enough, given the low yields on investments, they would not just say, “I feel your pain”, they would actually feel their pain. It would be a valuable point of solidarity.

[Gérard Deltell]

I'll keep that in mind.

I would like to address another issue, raised by Madam Benson a few minutes ago, and what you said, the fact that Canadians should save more.

What advice would you give to us in terms of having a new project or helping people save more money?

[William Robson]

I mentioned already that in the broader public sector plans you'll typically find that the contribution rates are over 20%. Most Canadians who save in RRSPs or in defined contribution pension plans can only save 18%. Those limits are quite low. There is concern about the income distribution effects of raising those rates, but if you look at the public sector plans, they are saving more and I don't see why we wouldn't allow Canadians in general to do that.

There is an idea that is worth considering, that we would think in terms of a lifetime limit, so that a person who might have been low income but then succeeds later in life, or an immigrant who hasn't built up the savings room in an RRSP, for example, would be able to set something aside at a greater rate than what we now allow.

The other area I would recommend looking at is after people retire and start drawing down their savings. We have RRIF rules that oblige people to draw their savings down quite quickly. People in defined benefit plans don't worry about that because their annuity is supposed to cover them until they die, but for a person who's in a defined contribution plan or drawing out of an RRSP, those mandatory withdrawals mean that they're quite likely to run out of savings before you die, especially if the person is a woman, because women live longer.

I would look at both the amount people can save before they start drawing down and the rules that govern their drawing down once they are in retirement. If you're in a defined benefit plan, the federal government's defined benefit plan, these aren't concerns for you, but if you're a Canadian who's saving in an RRSP or a defined contribution pension plan, those are big issues.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Madam Ratansi, you have five minutes, please.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you.

I was fascinated and just a little concerned, because you started comparing us to Detroit. The Canadian government is definitely not going bankrupt.

My question is about the methodology that anybody uses. You must have used a special valuation methodology, and there are so many permutations and combinations that you do. In those permutations and combinations, how does your actuarial method probably differ from, or is it the same as, what the chief actuary would have utilized to come to the conclusions you did?

[William Robson]

I never liked being on a different side of an issue from the chief actuary, who I think does a very good job and whose reports I rely on for a lot of my work. I wish to show appropriate respect to the chief actuary and to the office of the chief actuary.

The disagreement between us is about the appropriate discount rate to use. In the public sector it is typical to use these discount rates that are relatively high, and the reference tends to be to historical returns on assets. I do not think that is an appropriate way to think about the future. Anyone who buys an investment has a warning and it's obligatory. The regulators oblige this warning that past performance is no guarantee of future results. The same is true in saving generally for retirement. We have seen returns that were much higher in the past, that is true. We've seen by now a long period of low returns. It's a mug's game to guess what kinds of returns there will be in the future. People who have a strong view on that can buy a bond, and it may go up or it may go down if they were right or wrong. It's their money. It's their choice to make.

In the case of a pension plan like this, there's a very clear alternative point of reference. I've said it already so I won't belabour the point. This is an unconditional guarantee of the federal government. It is like other federal government debt. When we do our evaluations we look at the chief actuary's work. We are not arguing with his assumptions about employment, inflation, the rate of increase of federal employees' salaries, none of that. All of the disagreement is about the discount rate. We use the sensitivity analysis that the chief actuary provides to try to make the adjustments. I think our adjustments are a bit conservative as we go all the way down to the real return bond rate. It's possible that if we had more access to the full range of data the chief actuary works with, our numbers would be worse, but we're conservative. The difference is in the discount rate, and when we try to adjust it to a lower discount rate, that's the number we get, the $96 billion.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

On the discount rates that you're talking about, in 2017 the 33rd report of the public accounts committee presented this recommendation, and there's been some progress made in updating the methodology. Have you looked at it by chance, the changes to the methodology of the discount rate?

[William Robson]

I mentioned already that the Public Sector Accounting Board has a consultation paper out on this question. It is reflecting the discussions that are very current including those in the public accounts committee about what is the right way to think of these things.

Broadly speaking, there are two camps. There is the camp which says that it's legitimate to use some kind of assumed rate of accumulation on assets, and if your plan were fully funded I would certainly listen respectfully to that argument. When your plan is unfunded, though, there's no asset to earn the return, or for most of it. In a situation like that it's appropriate to leave the assets aside. They're not relevant. What you're focusing on is the value of the obligation, the value of the liability. That's where I think the compelling logic is to use the federal government's real return bond rate, reflecting the fact that this is an obligation. You said that the federal government isn't likely to go bankrupt. The bond deals reflect that. The pension discount rate should also reflect that.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Fair enough.

Have you talked to the Public Sector Pension Investment Board? It's their job to ensure that our pensions are actually stable and funded. It's their job to ensure that the risk is reduced? Have you spoken to them? I was looking at the chief actuary's report on the MPs' pension plan, and I saw it as being properly funded, so I guess there is a difference in opinion. Would you answer that question on that Public Sector Pension Investment Board?

Before 2000 the Canada pension plan was totally underfunded and it took the genius of Paul Martin to fund it for 75 years. Should we be using that methodology?

[The Chair, Conservative, Tom Lukiwski]

Those are two good questions, but unfortunately there's no time for the answers, unless Mr. McCauley wants to pursue those questions as well.

[Kelly McCauley, Conservative, Edmonton West, AB]

One of them can.

Mr. Robson, you mentioned in your report, “even the higher employee contributions anticipated by the reforms would leave the taxpayers’ true share far above 50%.” Do you have a ballpark figure of what far above 50% would be? If it is the $96 billion unfunded right now, what is it going to be?