Public Accounts Committee on Feb. 15th, 2022

[The Vice-Chair, Liberal, Jean Yip]

I call this meeting to order. Welcome to meeting number six of the House of Commons Standing Committee on Public Accounts.

Pursuant to Standing Order 108(3)(g), the committee is meeting today to study “Report of the Joint Auditors to the Board of Directors of the Public Sector Pension Investment Board—Special Examination Report—2021” of the 2021 reports of the Auditor General of Canada.

Today's meeting is taking place in a hybrid format, pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application. The proceedings will be made available via the House of Commons website. So you are aware, the website will always show the person speaking, rather than the entirety of the committee.

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Given the ongoing pandemic situation and in light of the recommendations from health authorities, as well as the directive of the Board of Internal Economy on October 19, 2021, to remain healthy and safe, all those attending the meeting in person are to maintain two-metre physical distancing and must wear a non-medical mask when circulating in the room. It is highly recommended that the mask be worn at all times, including when people are seated. You must maintain proper hand hygiene by using the provided hand sanitizer at the room entrance.

As the chair, I will be enforcing these measures for the duration of the meeting. I thank members in advance for their co-operation.

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With regard to a speaking list, the committee clerk and I will do the best we can to maintain a consolidated order of speaking for all of the members, whether they are participating virtually or in person.

I would now like to welcome our witnesses.

Today we have, from the Office of the Auditor General, Andrew Hayes, deputy auditor general and Melanie Cabana, principal. With the folks from the Office of the Auditor General is Victoria Loutsiv, partner at Deloitte, who was involved with the audit. From the Public Sector Pension Investment Board, we have the chair of the board, Martin Glynn; Neil Cunningham, president and chief executive officer; and Jean-François Bureau, senior vice president and chief financial and risk officer.

You will have five minutes to make your opening statement.

I will go to deputy auditor general Mr. Hayes.

You have the floor.

[Andrew Hayes, Deputy Auditor General, Office of the Auditor General]

Madam Chair, thank you for this opportunity to discuss the results of our special examination of the Public Sector Pension Investment Board.

I want to start by acknowledging that this hearing is taking place on the traditional unceded territory of the Algonquin Anishinabe people.

I'm accompanied today by Mélanie Cabana, who led this audit on behalf of our office, and by Victoria Loutsiv, who is a partner with the accounting firm Deloitte. Our office and Deloitte are appointed joint auditors of this Crown corporation.

The Financial Administration Act requires that a special examination be carried out at least once every 10 years to assess whether a Crown corporation's systems and practices provide reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently and its operations are carried out effectively. We report a significant deficiency when, in our opinion, the corporation could be prevented from having such reasonable assurance.

The Public Sector Pension Investment Board plays a significant role of investing and managing contributions from the pension plans of the public service, the Canadian Armed Forces, the Royal Canadian Mounted Police and the reserve force. This special examination focused on selected corporate management practices and on the management of the corporation's investments and operations. I am pleased to report that the corporation had good systems and practices for managing its investments and operations. We found no significant deficiencies as a result of our audit work.

However, we noted potential for improvement in areas not related to the management of investments, such as performance measurement and performance monitoring and reporting. For example, the corporation had set several strategic objectives, but did not have targets for measuring progress against these objectives in areas that included talent management, diversity and inclusion. As a result, the corporation did not consistently report to the board of directors on some of these performance indicators. Without this information, it is difficult for the board to monitor the corporation's performance, and for management to track progress against strategic objectives and take corrective action as required.

We also noted that improvements were needed in risk mitigation and risk monitoring, and reporting. For example, the corporation lacked risk appetite metrics, thresholds, or limits for some significant non‑investment risks in certain areas such as human resources planning. Without such thresholds and limits, management cannot make effective decisions to address these risks in line with the risk appetite statement approved by the board.

Our office has committed to assessing and reporting on the United Nations' Sustainable Development Goals across all our audit work, to support Canada's progress on this important international commitment.

During this audit, we noted that the corporation integrated environmental, social and governance considerations into its decision-making, and its investments indirectly addressed three of the United Nations' goals. There is an opportunity for the corporation to enhance its reporting on the sustainability of its investment activities to more clearly link to the Sustainable Development Goals.

The corporation agreed with our recommendations and prepared an action plan. As our audit work was completed in October 2020, I cannot comment on the corporation's progress in implementing its plan, but I expect the corporation's officials will be happy to update the committee.

This concludes my opening remarks. We would be pleased to answer any questions the committee may have.

Thank you.

[The Vice-Chair, Liberal, Jean Yip]

Thank you, Mr. Hayes.

We will now go to Mr. Glynn. You have the floor.

[Martin Glynn, Chair of the Board, Public Sector Pension Investment Board]

Thank you very much.

Good morning. I'm pleased to appear before the committee today to discuss the results of the special examination of PSP Investments that was tabled at the end of 2021.

I would like to start by acknowledging that, since I'm in Vancouver, I am on the traditional unceded territory of the Coast Salish peoples.

I am accompanied virtually on this call today by PSP's CEO, Neil Cunningham, and its chief financial and risk officer, Jean-François Bureau.

The special examination was performed by PSP's joint auditors, the Office of the Auditor General of Canada and Deloitte. It considered whether PSP's systems and practices provided reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively. I am happy to report that this is the case and that no material deficiencies were found as part of this detailed and extensive audit exercise.

PSP is a Crown corporation that operates at arm's length from the Government of Canada. It was established in 1999 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. As of March 31, 2021, PSP's net assets under management were $205 billion.

PSP Investments' statutory mandate is to manage the funds in the best interests 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. PSP's investment approach is designed to achieve the best possible alignment with the obligations of the pension plans. The government communicates its risk tolerance for the pension plans to PSP annually. Our task is to design and implement the most suitable investment strategy, taking into consideration the level of risk tolerance of the government while also maximizing returns and fulfilling the other requirements of our mandate.

One way to evaluate the success of our investment approach is to compare PSP's return with the return of a reference portfolio. A reference portfolio is an example of the returns an investor could achieve with a passive investment approach that reflects the government's risk tolerance. PSP's investment strategy is focused on the long term, in line with the long-term nature of the pension obligations, so we believe that comparisons with the reference portfolio are most useful when considered over a long-term horizon, such as a 10-year horizon.

Over the last 10 years, I'm proud to report PSP has achieved a return of 8.9%, which compares favourably with the 8.2% return of the reference portfolio. This additional 0.7%, representing close to $11.3 billion, represents the value added by PSP Investments' strategic decision to build a more diversified portfolio—called the policy portfolio, it includes less liquid assets—and to engage selectively in active management activities.

Let me now turn to the main focus of our appearance today, which is the result of the special examination. We were pleased that the auditors concluded that there were no significant or material deficiencies in the corporate management practices or management of the investment operations of PSP. The findings validate the diligent work of the board, management and our hard-working and dedicated employees to implement and maintain a comprehensive and effective risk governance framework.

The board oversees the business and affairs of the corporation, and PSP is accountable to Parliament for the tabling of its annual report. The special examination confirmed that PSP's board functions independently, provides strategic direction, has the capacity and competencies to fulfill its responsibilities and effectively carries out its oversight role. I feel privileged to have the opportunity to serve on the board of PSP with truly exceptional individuals who take great pride in serving their country and working diligently to ensure PSP's success in delivering the pension promise.

While all systems and practices were found by the auditors to meet established criteria, some areas of improvement were identified.

PSP has already implemented measures to address three of those areas. We have set and improved risk appetite metrics and thresholds for significant non-investment risks. We have completed compliance risk assessments to evaluate adherence to relevant regulations. We have established a solid and more frequent framework for reporting of regular and ad hoc risk areas to the board.

A fourth recommendation to ensure that strategic objectives are supported by measurable performance indicators is nearly fully implemented, with full implementation expected to be completed by the end of March 2022.

An action plan to implement the last recommendation—to develop and apply an enterprise-wide risk management framework for model risk—has been launched, with significant progress already having been made. The model governance framework currently in place for risk group models is being reviewed and adapted to include the chief investment officer group models. This recommendation is expected to be fully implemented by the end of the next fiscal year.

In conclusion, I would like to thank our auditors, the Office of the Auditor General and Deloitte for performing such a thorough and diligent examination.

The board of directors, management and employees of PSP all share the same objective, and that is to fulfill PSP's mandate to the very best of our abilities. While the recent pandemic has most certainly taken a physical and emotional toll, we're proud that we were able to stay focused on our investment mandate, our responsibilities to the contributors and beneficiaries and the health and well-being of our people.

Before I close, I would like to acknowledge the announcement yesterday of our—

[The Vice-Chair, Liberal, Jean Yip]

I'm sorry, Mr. Glynn. We will now have to move on to questioning.

We will start our rounds of questioning, beginning with the official opposition for six minutes.

Mr. Lawrence, go ahead, please.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you.

I'll yield the first little bit of my time, maybe a minute or so, and the witness can finish, if that's okay with him.

[Martin Glynn]

Yes. I'm 30 seconds away. I appreciate this.

I just wanted to say that yesterday there was an announcement of our CEO Neil Cunningham's planned retirement, the news of which was officially conveyed to the board last week. He has given us 13 months' notice so we can perform a proper external/internal search. After 19 years of service, he leaves PSP in excellent shape and performing very well.

We wish him well in his retirement.

That concludes my remarks. Thank you very much for the extra time.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I'd like to start out by congratulating you, sir. In two years in public accounts, I don't know if I've seen an audit this clean. It's really great work. I'm sure it's a great relief, and an appreciation, to all those great public service workers out there that you are indeed doing your job, which is fantastic to hear.

In the report on page 2, we see that the five-year return was 5.8% and 8.5%.... I know your number is slightly different because you have slightly different dates. I assume that yours are more up to date than this.

You referenced a similar risk portfolio; I think that might be a fair way to characterize it. Would you happen to know or be able to get for me how your return would compare to, say, the indexes, like the TSX, the Dow, the NASDAQ, etc.?

[Martin Glynn]

Neil or J.F., do you want to answer that?

[Jean-François Bureau, Senior Vice President and Chief Financial and Risk Officer, Public Sector Pension Investment Board]

I can certainly comment on it. I'll use the March 31, 2021, results to give you a better idea.

We have the reference portfolio that is set by the government, but we also have a policy portfolio that we track, and it becomes our benchmark. In there, you have a series of benchmarks, like the S&P 500 and the TSX, etc., for public markets. For private markets, we have custom-made benchmarks that we track.

To use the same 10-year approach that Mr. Glynn used in his presentation, the total fund generated over 10 years approximately 1.1% above the benchmark, for a total of almost $13 billion, so clearly, based on our own internal benchmark, we're performing slightly better than against the reference portfolio set by the government.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Once again, well done. Congratulations on that.

One of the few minor deficiencies, I guess they would be called, that the auditor did come up with was the lack of metrics respecting non-investment risks. One was with respect to global branding. I didn't quite understand the importance of global branding for this pension fund, but perhaps you could explain that to me and why you were deficient and what you're doing to fix it.

[Jean-François Bureau]

The comment refers to our initial strategic plan. That was a five-year plan which was set almost seven years ago now. At the time, one strategy was to expand the global branding of PSP.

The idea was to benefit from a better relationship with global partners and to make sure that PSP had access to the best investments possible around the world. We wanted to be better known and better recognized. One thing we did at the time to achieve that was to open an office in New York and also one in London. About two years later—and I may be off on my timing here—we also opened a smaller office in Hong Kong.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you for that.

One thing that comes across quite clearly from both the Financial Administration Act and the audit is that your mandate is fairly specific. I'm sure there are some nuances, but it's to generate the best possible rate of return at the minimum amount of risk going forward.

In this audit, I did see a bit of mission creep. This is as much a comment as anything, but I would encourage you to stay on mission. There are, of course, tens of thousands of public service workers who are depending on you going forward.

I'd make that comment and then I'd say that we have been in a bull market for a long while. I think it's one of the longest bull markets in history. At the end of every bull there is a bear. How are you preparing the pension fund to tolerate a bear market?

[Neil Cunningham, President and Chief Executive Officer, Public Sector Pension Investment Board]

I'll take this. Thank you for the question.

Our portfolio is designed for long-term performance, which means that we have different aspects of the portfolio construction. J.F. described some of the asset classes that we're in, both public and private. The intention is to add as much diversification as we can so that over the long term the portfolio can handle the ups and downs that inevitably come from market activity.

Right now only 30% of our assets are in publicly traded equities. The other 20% is in fixed income and roughly 50% is in various public markets investments that have different characteristics and correlations, if I can use that word, to what happens in the public markets. All of this is designed to protect in the long term, remove volatility to the extent that we can and to provide cashflow on a constant basis.

We did make an adjustment to the portfolio last year when we started worrying more about inflation than we have in the past. That was to make some slight adjustments to add a portion of our infrastructure portfolio related specifically to high inflation correlated assets. We also added some allocation to our private credit business, which typically is investing in floating rate debt that will move with the market.

These are significant for us, but we're not making dramatic swings ever because the long-term nature of the portfolio construction is most important.

[The Vice-Chair, Liberal, Jean Yip]

Thank you, Mr. Cunningham.

We now move to Mr. Dong for six minutes.

[Han Dong, Liberal, Don Valley North, ON]

Thank you very much, Madam Chair.

I want to thank all the witnesses for joining us today.

I always knew that PSP was quite large, but it wasn't until I read the report.... It's actually enormous. As of March 31, 2020, it's $169.8 billion. I count eight zeroes following the eight. It's quite sizable.

For the public who are watching, that's a pension contributed to by the public service, the armed forces, the RCMP and reserve forces. You can see the importance of the health of this pension.

My question is for Deputy Auditor General Hayes. How does PSP's performance compare to other large pension funds in Canada?

[Andrew Hayes]

Thank you for the question.

I think this might be one that the management at PSP might be best able to answer. Our focus is really on looking at systems and practices and making sure that they provide the corporation with reasonable assurance that their assets are protected.

I'll leave the answer to Mr. Glynn.

[Han Dong, Liberal, Don Valley North, ON]

Sure.

[Martin Glynn]

Neil, why don't you take this?

[Neil Cunningham]

I'll start and J.-F. might want to add something at the end.

One of the things that is really important to always remember about PSP is that our investments mirror the risk appetite that is given to us from TBS, and it's reflected in the reference portfolio that Jean-François referred to earlier. Our reference portfolio is comprised of 59% equities and 41% fixed income. It's a theoretical mix of equities and fixed income on a passive basis.

The other organization that uses a similar approach is the Canada pension plan, which has an 85% equity and 15% fixed-income asset mix. That is fully reflective of the risk appetite that our sponsor, the Government of Canada, Treasury Board, is willing to take.

What it means is that to do a direct comparison between our results and that of CPPIB, or even one of the other pension funds that have different mandates, different liability profiles, different maturities, is an apples-to-oranges comparison. It's the reason we use measures such as the reference portfolio to say, if we were totally passive, maintaining the risk appetite that's given to us—a very similar process to what your own broker would do when they ask you about your own risk appetite—how do we do relative to that? In other words, what's our return while maintaining our diligence on the risk appetite that we're given?

Notwithstanding that, we do some benchmarking. J.-F. might want to get into that a bit, but just a little bit for time's sake.

[Han Dong, Liberal, Don Valley North, ON]

There is limited time, but I get the idea. Thank you very much.

Going back to Deputy AG Hayes, in your opinion, how did the governance and board of PSP perform?

I know there's no large deficiency. Could you quickly give us an overview?

[Andrew Hayes]

That's right. You've covered the overall conclusion. The corporation has reasonable assurance that the board is operating well. We did identify a few areas that management could improve on in order to increase the information that the board receives so that it can follow the progress being made towards strategic objectives and targets and all that, but overall we did not identify any significant deficiencies in the board and management.

[Han Dong, Liberal, Don Valley North, ON]

Your audit encourages PSPIB to integrate to sustainable development goals. Can you please explain how you have seen this done elsewhere and what kind of impact there would be for PSPIB?

[Andrew Hayes]

Sure. The sustainable development goals, of course, are a major focus for our office and we do see the integration of these goals, targets and strategies in a number of Crown corporations. It's becoming more prevalent. The importance of these for a given corporation will depend on the nature of their mandate and given the investment mandate of PSPIB and the influence that it can have on the achievement of sustainable development goals. We suggested that this could be a lens through which it can look at some of their activities.

In addition, it provides an opportunity for PSPIB to show how the work it does contributes to the government's achievement of its commitment to the UN SDGs.

[Han Dong, Liberal, Don Valley North, ON]

That's good.

Going back to the last special examination in 2011, has the PSP board implemented all the recommendations offered by the AG's office?