Public Accounts Committee on May 28th, 2014

[The Chair, NDP, David Christopherson]

I now declare this 29th meeting committee of the Standing Committee on Public Accounts in order.

Colleagues, I'll mention two quick things before we begin. One, because of the votes that we had at 3 o'clock, we're a little late starting. But you will recall that as a result of the membership change we don't have as many members, and that if it follows the normal rotation—notwithstanding that we have quite a number of presentations—we may only be off the mark by minutes. At that point the committee can decide whether they've dealt sufficiently with this chapter or whether those few minutes matter, in which case we can have motions to reconvene. My hope is that we'll be able to consider this a full hearing, as this is not an unusual circumstance. It's not the best, but it's not unusual. So hopefully with that we can proceed in the usual fashion.

The only other thing I wanted to mention was that I got back from Ukraine less than 24 hours ago and I'm one of those who suffers badly from jet lag. So could you just give me a little bit of leeway today, as I'm pretty fogged up.

[Malcolm Allen, NDP, Welland, ON]

I thought it was a Hamilton issue.

[The Chair, NDP, David Christopherson]

This is on top of that.

Colleagues, I appreciate the cooperation. I also want to thank my vice-chair for stepping in while I was in Ukraine and chairing one of the report writing sessions.

Colleagues, with that if there are no further interventions we'll turn to our guests. We have a full house today.

To our guests, you're offered five minutes a presentation. If there's any chance to shorten that without losing anything it would be helpful, but if you need to give your full complement....

The only one I will mention is Mr. Watson from the Treasury Board Secretariat. I understand that yours tended to be a little lengthy. You've already agreed to shorten it. With the agreement of the committee, I would suggest that we append his full remarks so that we still have them for the record and they would be considered part of our deliberations. That way, Mr. Watson, you don't need to worry as much about things that you're trying to get in during that shortened period of time. So I think we're good.

All right, hearing no interventions, I'm going to ask each of you—you've already agreed on the order of presentations—to introduce your delegations.

Ms. Cheng, you are stepping in today for Mr. Ferguson as the Assistant Auditor General. Welcome, Madam. We're pleased to have you here again. You now have the floor.

[Nancy Cheng, Assistant Auditor General, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

Thank you for this opportunity to meet with your committee today to discuss the chapter on public sector pension plans from our 2014 Spring Report. Joining me at the table is Richard Domingue, Principal, who was responsible for this audit.

Public sector pension plans have a large impact on the government's financial position. The net liability relating to these plans exceeds $150 billion. Pension plans are now operating in an environment where interest rates are low, and plan members are living longer. It is therefore important that the plans be designed and managed in a way that not only considers present circumstances, but that also protects the interests of current and future employees and taxpayers.

The audit focused on the three main public sector pension plans, those of the public service, the Canadian Forces, and the RCMP. The audit objective was to determine whether the Treasury Board of Canada Secretariat, the RCMP, National Defence, and the Department of Finance Canada carried out selected key aspects of their governance and management responsibilities with regard to the public sector pension plans.

Although we found that the entities we audited had carried out their responsibilities under the law, no one is responsible for the regular, systematic assessment of whether these pension plans are sustainable over the long term. It would be reasonable to expect that the plans be designed to be sustainable and affordable. We recommended that the secretariat, in collaboration with the RCMP and National Defence, periodically assess the pension plans' sustainability. If deemed appropriate they should recommend changes to plan designs so that they are up to date, affordable, and fair to current and future generations.

We also found that the legislative framework that governs the pension plans disperses responsibilities among a number of entities and does not include a funding policy. So far the Public Sector Pension Investment Board has assumed that the funding risks required to meet the rate of return on assets set by the actuary are acceptable to the government. Funding decisions related to the plans could have an impact on the government's budgetary framework. We recommended that the secretariat, in collaboration with the other supporting entities, finalize a funding policy for all three plans on a timely basis.

Clear and complete information on the pension plans and good reporting on the budgetary impact of government liabilities are essential to allow for better transparency and accountability.

We found that information in public sector pension plans and liabilities is not user-friendly. We recommended that the Treasury Board of Canada Secretariat, with the collaboration of the RCMP and National Defence, prepare a proposal for a consolidated report with clear and understandable information on the public sector pension plans for consideration by the President of the Treasury Board.

The Treasury Board Secretariat is in agreement with all three recommendations. In particular, it has committed to work with the RCMP, National Defence, and Finance Canada to implement a funding policy and propose a consolidated report for the three pension plans.

We found that the Department of Finance Canada monitors the budgetary impact of the pension plans. However, it has not concluded on the merit of funding the pre-2000 pension liabilities. The government needs to assess the benefits and risks, and determine if it would fund the liabilities. The Department of Finance has agreed with our recommendation and has committed to assess this issue in the 2014-2015 fiscal year.

Mr. Chair, that concludes my opening remarks. We would be pleased to answer any questions the committee may have.

[The Chair, NDP, David Christopherson]

That's excellent. Thank you.

Now we're moving to Treasury Board Secretariat.

Mr. Watson, you have the floor.

[Daniel Watson, Chief Human Resources Officer, Treasury Board Secretariat]

Thank you, Mr. Chair; I'll be as brief as I can.

I’m pleased to provide the government’s response to chapter 1 of the Auditor General’s 2014 spring report, specifically how we’ll act on the report’s recommendations. I have with me today Kim Gowing, who is a director in the pensions branch, and also I have Bayla Kolk, the assistant deputy minister responsible for pensions and benefits.

The Auditor General's 2014 Spring Report audited the three main public sector pension plans. These plans cover substantially all of the employees in the public service of Canada, the Canadian Armed Forces and the RCMP, as well as employees of certain public service corporations.

The government agrees with the Auditor General's findings and recommendations. We are pleased that the report confirms that the Treasury Board Secretariat, National Defence and the RCMP are meeting their legislative obligations and assuming their responsibilities.

With respect to the Auditor General’s first recommendation concerning the periodic assessment of these plans, we recently reviewed them and have taken steps to help ensure their long-term sustainability. We have increased the employee contribution rates for the public service to reach a 50-50 employer-employee cost-sharing ratio for public servants with comparable increases for the Canadian Armed Forces and the RCMP. We've also raised the normal age of retirement from 60 to 65 for employees who joined the public service after January 1, 2013. These reforms are expected to provide $2.6 billion in savings by the fiscal year 2017-18, and more than $900 million in annual savings after that.

In addition to helping ensure the sustainability of plans, these actions will contribute to the ongoing stability of our pension costs as a percentage of pensionable payroll. To further strengthen collaboration on sustainability among departments, this year the secretariat will establish an interdepartmental committee at the assistant deputy minister level that includes the Department of Finance, the RCMP, and National Defence. This committee will manage pension-related issues across departments and coordinate work across departments on the government’s response to the Auditor General’s report.

Regarding the Auditor General’s second recommendation, the secretariat will continue to work in collaboration with its partners to complete the development of the funding policy for all three plans. This policy will clearly identify the funding and financial preferences of the plan sponsor, establish parameters for monitoring and evaluating funding risks, and develop benchmarks for evaluating plan sustainability.

The third recommendation calls for a consolidated report.

In this area, the secretariat will collaborate with National Defence and the RCMP to develop a proposal for a new consolidated report for the sponsor's consideration. If the proposal is accepted, the goal is to introduce this report for 2015-2016.

The fourth recommendation focuses on reviewing our governance practices.

Again, the secretariat will collaborate with its partners to review the governance practices for these plans, and make recommendations to the plan sponsor. This work will serve to help strengthen the governance framework of the public sector plans, and help ensure they remain affordable and sustainable.

The fifth recommendation calls for assessing the cost of funding pre-2000 pension liabilities.

The Department of Finance is better positioned to speak to this recommendation. However, the secretariat has committed to supporting the Department of Finance in concluding the assessment of their obligations.

Mr. Chair, we place great importance on the financial integrity of these plans, and present detailed information on the plans and their liabilities through the public accounts in accordance with the standards prescribed by the Public Sector Accounting Board.

Finally, while the Auditor General did not examine the sustainability of the plans, we will continue to support efforts to ensure their affordability and sustainability in a way that is fair to both taxpayers and employees.

[The Chair, NDP, David Christopherson]

Thank you.

Now we go over to the Department of National Defence, Major-General David Millar.

Sir, you have the floor.

[Major-General David Millar, Chief of Military Personnel, Department of National Defence]

Mr. Chair and members of the committee, good afternoon.

It is a great pleasure for me to be here today to represent the Canadian Armed Forces. I am joined today by Mr. David Grandmaison.

Of course, the Canadian Armed Forces' pension plans are very important to forces members, both as an incentive program but also as a safety net for retirement. For this reason, we welcome the OAG report on behalf of all members who want to ensure their pension entitlements are safe and being administered properly. It is reassuring to have the objective opinion of the OAG that these responsibilities have been met by the Department of National Defence.

To this end, the Canadian Armed Forces' members who are looking for information with regard to the status of their pension plans may avail themselves of many resources, in particular the online detailed explanation of the provisions of the plans and access to the call centre staffed by knowledgeable and experienced personnel.

In light of the recommendations in the OAG's report and the action plan, we look forward to continuing our very close collaboration with our colleagues to improve the Canadian Forces' pension plans to ensure that our members see that the plans are adding value as part of their military careers, but also, importantly, upon their retirement so that they're confident that the pension plans will assist them in their transition to life beyond the military.

Thank you very much.

[The Chair, NDP, David Christopherson]

Thank you very much, Major-General.

I appreciate the brevity.

Moving now to the RCMP, we have Assistant Commissioner Gilles Moreau.

Sir, you have the floor.

[Assistant Commissioner Gilles Moreau, Director General, Workforce Programs and Services, Royal Canadian Mounted Police]

Thank you, Mr. Chairman and members of the committee.

I would like to thank you for the opportunity to respond on behalf of the RCMP to the recommendations of chapter 1 of the Auditor General's 2014 spring report.

I have with me Ms. Chantal Pethick, former director general of national compensation

and Ms. Geneviève Tremblay, Director of Pension Services.

The RCMP is pleased that the OAG's report confirmed that the RCMP has carried out its responsibilities appropriately. As highlighted by examples in the audit, the RCMP, through its ongoing efforts, reviews plan provisions to minimize costs to the plan.

The RCMP pension plan is an invaluable tool to attract and retain a competent workforce, whose main goal is to provide the safety and security of Canadians.

For this reason, the RCMP agrees with the findings and recommendations of the Auditor General, and recognizes the need for increased measures to ensure a sustainable and financially responsible plan for our members and for Canadian taxpayers, now and in the future.

In response to the recommendations put forward by the Auditor General, the RCMP is committed to supporting the Treasury Board Secretariat's action plan. We will look for their guidance and direction as we continue to collaborate with all government stakeholders in making informed recommendations to the plan sponsor.

Thank you again, Mr. Chairman and members of the committee for the opportunity. I look forward to answering any questions you may have.

[The Chair, NDP, David Christopherson]

Very good.

Thank you.

We'll now move over to the Office of the Superintendent of Financial Institutions Canada, and our chief actuary of Canada, Jean-Claude Ménard.

Sir, you have the floor.

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

Good afternoon, Mr. Chairperson, honourable members of the committee. Thank you for the opportunity to appear before you today.

The Office of the Chief Actuary is an independent unit within the Office of the Superintendent of Financial Institutions. It offers a range of actuarial valuation and advisory services to the Government of Canada. While I report to the Superintendant of Financial Institutions, I am solely responsible for the content and actuarial opinions reflected in the reports prepared by my office.

As part of its mandate, my office conducts statutory actuarial valuations on the pension plans covering the federal public service, the Canadian Armed Forces, the Royal Canadian Mounted Police, federally appointed judges, and your own pension pan, the plan for members of Parliament.

These actuarial valuations are conducted every three years, or whenever an amendment is made that has a significant impact on the financial status of a plan. The purpose of these actuarial valuations is to determine the financial position of the plans and to assist the President of the Treasury Board in making informed decisions regarding the financing of the government's pension benefit obligations. The actuarial assumptions used in the actuarial valuations are determine independently by the office and they represent the office's best estimate.

The assumptions are revised every time a new valuation is performed based on economic trends and demographic experience. The actuarial valuations are conducted in accordance with accepted actuarial practice in Canada.

We had seen remarkable gains in life expectancy. Back in 1965, the average life expectancy at age 65 was another 15 years, so people were expected to live until 80, with women living slightly longer than men. Today retirees at age 65 can expect to live for another 20 years on average, again with women living slightly longer.

If we project into the future, taking into account future assumed mortality improvements, that is, further future gains in life expectancies due to decreasing mortality rates, we could expect an additional three- to four-year gain in life expectancy at age 65. These expected future mortality improvements are embedded in our actuarial evaluations of these pension plans. If the future improvements in mortality were not taken into account, the total actuarial liability of the three largest public sector pension plans—the public service, the Canadian Forces, and the RCMP—as of March 31, 2013 would be reduced by $7.7 billion, or 3.4%. In other words, in the liabilities already in the reports there's a provision of $7.7 billion for future mortality improvements.

In closing, I am pleased to quote the 2014 spring report of the Auditor General of Canada:

We found that the Secretariat, National Defence, and the RCMP respected the independence of the Chief Actuary.

Thank you for the opportunity to appear before this committee. I would be very pleased to answer any questions you might have.

[The Chair, NDP, David Christopherson]

Thank you, Mr. Ménard.

Thank you for your presentation.

To close off our presentations we have the Public Sector Pension Investment Board and the executive vice-president, chief operating officer and chief financial officer, Mr. John Valentini.

You have the floor, sir.

[John Valentini, Executive Vice President, Chief Operating Officer and Chief Financial Officer, Public Sector Pension Investment Board]

Good afternoon.

My colleague Martin Leroux and I are pleased to appear before the committee today as you examine chapter 1 of the recent Auditor General's report.

The activities of PSP Investments, more formally known as the Public Sector Pension Investment Board, were not within the scope of the Auditor General's report but we appreciate this opportunity to answer any questions you may have on our activities.

I will keep my remarks brief to leave us as much time as possible for your questions.

PSP Investments is an arm's-length crown corporation that was established 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, the RCMP, and since March 1, 2007, the Reserve Force Pension Plan.

PSP Investments' statutory mandate is to manage the funds in the best interest of the contributors and beneficiaries and to maximize investment returns without undue risk of loss, having regard to 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 returns so that there will be enough assets to cover pension benefits.

It is important to note, however, that factors other than investment performance can affect the funding status of the plans. For example, an increase in life expectancy, as mentioned by Jean-Claude, will increase the liabilities of the plans.

Currently the Chief Actuary has determined that this requires achieving a 4.1% rate of return after inflation over the long term. One can appreciate that achieving such a return objective is not risk free. In fiscal year 2004 we adopted a portfolio diversification strategy that goes beyond public assets like stocks and bonds to include less-liquid private asset classes such as real estate, private equity, infrastructure, and renewable resources. We are able to invest in less liquid assets because we are currently receiving between $4 billion and $5 billion every year, and it is projected that PSP will not be required to pay pension benefits until the year 2030. We can therefore have a long-term view.

Of course, we expect to be rewarded for doing so by achieving some excess returns of illiquidity premiums, which investors typically demand for taking on illiquidity risk. Our overall strategy is expected to provide for better returns and a higher likelihood of achieving the target actuarial rate of return.

So how does our performance so far compare to the actuarial rate of return? For the 10-year period since the adoption of our diversification strategy, from April 1, 2003 to March 31, 2013, PSP Investments has recorded a compound rate of return of 6.1% after expenses and inflation. This compares to the 4.1% actuarial rate of return. In other words, on an annualized basis we have exceeded the objective by 2% per year over 10 years.

This concludes my remarks today. We look forward to your questions.

Thank you.

[The Chair, NDP, David Christopherson]

Excellent, thank you. That's impressive.

Beginning the rotation, we'll start with Mr. Carmichael.

You now have the floor, sir.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Chair,

Welcome to all of our guests. We have a big crowd today.

To keep it simple, I'm going to direct my question to Ms. Cheng, and you can certainly draw in some of your colleagues as need be.

Ms. Cheng, I must admit that I came in here with some questions. Obviously we've already met with the Auditor General, and he put many of my concerns at ease. I have to admit that after listening to some of these reports today, particularly Mr. Valentini at the end, I feel much better about what I'm going to ask you about, and that is sustainability.

Major-General Millar talked about how he and the Canadian Forces welcomed the OAG report “on behalf of all members who want to ensure their pension entitlements are safe and being administered properly”. Absolutely. “It is reassuring to have the objective opinion of the OAG that these responsibilities have been appropriately performed at National Defence.”

Ms. Cheng, you went on to talk about one of your recommendations to simplify the process, consolidating the statements, which I think is a very wise idea. I come from a business background, and to see it in a more simplified consolidated form, I think, makes a lot of sense.

As we talk about sustainability, one of the concerns that came out after the report was issued is that members of the media and the opposition were reporting that the audit had concluded that the public sector pension plans were not sustainable. In today's reports, in the OAG report, under the scope of the actual audit, you talk about the fact that you didn't audit sustainability. In fact, your reference to that is the following:

The audit did not assess the sustainability of the pension plans. The audit did not examine the administrative processes, investment practices, and actuarial methods for valuation calculations.

I'm confused. The media and the opposition have one opinion on the sustainability of these very important programs—these plans. We want to see these plans sustainable for the long term, and Mr. Valentini, with a compounded return of some 6% plus annually, gives me good reason to believe we've achieved that.

I wonder if you could explain where I'm missing it. How does the non-sustainability square with sustainability, when I'm hearing these reports today?

[Nancy Cheng]

Thank you, Mr. Chair.

It would be useful to confirm the scope of the audit. As the member has pointed out, we have not audited the plans and concluded that the plans are not sustainable. The concern and the issue we raised was that there weren't any systematic and regular assessments of the sustainability of the plans, as opposed to our concluding that the plans themselves are not sustainable.

In the report, we also highlighted some factors that could bear on the sustainability, which could actually have adverse impact on the actuarial obligations, determined obligations, of the pension plans.

We spoke to economic conditions, but one of the factors that the chief actuary Mr. Ménard has pointed out is indeed the improved longevity. If I may point to the report, Mr. Chair, I would like to point to the table 1.2, on page 8. There you will see that back in 1970, on average Canadians worked about three years to collect one year of pension. Fast forward 40 years later, in collecting one year of pension, the Canadian worker would have worked only about 1.7 years.

Mr. Ménard pointed out that the impact on the actuarial assumption on longevity actually amounted to $7.7 billion. That's a big number. We also did some sensitivity analyses, and if I could point to another table in the report, on page 13, exhibit 1.3, you will see the actuarial assumption being increased by either one year, two years, or three years. The numbers are $4 billion, $8 billion, and $11 billion, so they're in the billions of dollars. That's why it's important that we emphasize that it needs to be assessed on a regular basis.

The issue today is not that the plans are currently not sustainable. The issue is that we need to make sure that we keep an eye on it, continue to do regular assessments to indeed make sure that they are sustainable.

Thank you, Mr. Chair.

[The Chair, NDP, David Christopherson]

Thank you.

Mr. Carmichael, we're down to 10 seconds, which you've taken.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you.

[The Chair, NDP, David Christopherson]

Colleagues, I'm sorry, but I have to interject again. I'm advised that a vote is coming in the House. We are expecting bells within the half-hour. What I would seek is your consent to take us until 5:20, say, and at that point we would adjourn. We can decide at that time quickly that we're good with this, or we can do it at a business meeting. Just so everybody understands, it takes unanimous consent for the committee to continue to meet while bells are being rung, but since we're just down the hall, I do propose that we're good until 5:20. I'm in the hands of the committee.

Mr. Albas.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Thank you, Mr. Chair.

I'm concerned that due to our obligations to the House for different votes and whatnot we have already seen quite a bit of the time today exhausted on previous votes. I'm just concerned that we may not get the full two hours so that we can conduct a draft report. Maybe we can see how far we can get and then at that point determine whether or not we need to invite our guests back again.

[The Chair, NDP, David Christopherson]

Sure.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

I'm sure many of the committee members have questions, like I do. We certainly want to get through the issues.

[The Chair, NDP, David Christopherson]

Sure. I think that's fair.

How about this? Let's say that at about 5:18 I'll conclude the proceedings and quickly go to the committee, and we'll make a quick determination as to whether we feel that we've adequately dealt with this chapter or we need to consider it under business for another meeting.

[Dan Albas, Conservative, Okanagan—Coquihalla, BC]

Okay. Just to clarify further, Mr. Chair, you said there was also some business you needed to do at the end of this meeting?