Public Accounts Committee on Feb. 15th, 2022

[Andrew Hayes]

I'll start with describing a risk-based compliance program, and then maybe Ms. Cabana can add to this.

What we would expect is that the corporation would have taken an inventory of the various legal instruments, whether it's laws, policies, regulations, directives, etc., that apply to them. Ultimately, there would be an assessment of whether or not the responsibilities are well understood for who owns that, risk mitigation assessments, the implementation policies and practices and ultimately reporting to the board on the carrying out of this function.

Ms. Cabana might be able to give you some specifics as to what we have seen, but, ultimately, having this information gives the board an understanding of how the corporation is addressing compliance risks.

[Mélanie Cabana]

I can maybe add one thing. What we noticed during our audit is that the assessment had started through the different asset classes, so the different business lines. It was not completed. That was the purpose of our recommendation, to make sure this gets completed.

[Richard Bragdon, Conservative, Tobique—Mactaquac, NB]

Good. Thank you.

According to your report, PSP investments had a procedure for validating the models used to value its financial instruments and measure the associated risk, but this procedure did not include a model risk assessment methodology or other model risk management procedures.

Can you explain in greater detail the nature of the problem identified and the measures that should be taken to correct it?

[Andrew Hayes]

I will again leave that question to Ms. Cabana or Ms. Loutsiv, if they want to add to that.

[Mélanie Cabana]

Victoria, do you want to go?

[Victoria Loutsiv, Partner, Deloitte]

Yes, thank you.

During the time of the examination we confirmed that the procedure was in place and that procedures specifically addressed the requirements for model validations. However, we found that the procedure did not include risk assessment methodology that would enable classification and assessment of criticality and materiality of the models.

We determined that was an important documentation observation, and we included that in our observation.

[Richard Bragdon, Conservative, Tobique—Mactaquac, NB]

I have one more in this segment.

How important is model risk validation for valuing financial instruments in measuring the associated risk?

[Victoria Loutsiv]

It's fairly important. It's a good governance process.

What we have confirmed through a special examination assessment is that a model validation process is in place. It's conducted by a risk management group, and all models that are critical material are subject to model validation, which is independent verification.

[Richard Bragdon, Conservative, Tobique—Mactaquac, NB]

Thank you.

I have one quick question here for the public sector in regard to the aspect of pension investment, perhaps for you, Mr. Glynn.

You mentioned a reference portfolio as a measure of how well your portfolio is performing. Is this reference portfolio constructed by your organization or by a third party?

[Martin Glynn]

I think I'll allow Neil to answer that.

[Neil Cunningham]

Sure. It's given to us by Treasury Board.

[Richard Bragdon, Conservative, Tobique—Mactaquac, NB]

Okay. How do you construct or select this reference portfolio, or is that done totally through them?

[Neil Cunningham]

It's done totally by them, and it is meant to reflect their view of the risk that they are willing for us to take, which I guess is the best way of describing it. It comes in the form of three or four categories of public equities and categories of fixed income, which are domestic and global, with specific percentages attached to it.

[Richard Bragdon, Conservative, Tobique—Mactaquac, NB]

Thank you very much.

Those are all the questions I have, Madam Chair.

[The Vice-Chair, Liberal, Jean Yip]

Thank you.

Now we move to Mr. Cooper for five minutes.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you, Madam Chair.

I will direct my questions to the PSP witnesses.

I want to ask about investments in the Canadian energy sector. I know a great emphasis has been placed upon ESG, but we know that here in Canada we have the safest, cleanest and most ethical oil and gas in the world. Significant opportunities have been identified in the energy sector. We know that oil is in a multi-year bull market, and in terms of maximizing profits in what is likely to be at least a four- to six-year bull cycle, there is significant opportunity in terms of Canadian oil and gas.

Among those who have recognized this is Eric Nuttall, who is the senior portfolio manager with Ninepoint Partners. He has said that among the best opportunities in the world are here in Canada. In particular he is most excited about smaller oil and gas companies, given their depressed valuations.

Could the PSP witnesses speak to that?

[Neil Cunningham]

Thank you for the question, Mr. Cooper, which sounds like an investment recommendation that we should be looking into.

The reality is that we don't have a specific oil and gas asset group to invest in the sector specifically, and that's more because of the historical volatility, the size of the investments and the skill you require in order to invest in some of those junior oil and gas companies you're referring to.

By the same token, we also, as I said earlier, do not have exclusions for oil and gas or other industry, because we think there are circumstances when an investment does make sense. I described earlier the financial filter that one would put on any investment where the cash flows that one expects to return—to get from them—and the residual value at the end of your investment period would factor into it.

To the extent that there are opportunities in the Canadian oil patch, whether it's in public entities or private ones, we are potential and actual participants without a bias one way or the other, but taking those long-term factors into account, including the improvement that companies have made and will make in terms of environmental footprint from their activities.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you for that.

I just wanted to say that obviously the overriding mandate of the board is to get the best rate of return. I hope—and I take it from your answer—that the significant opportunities that exist are not going to be forgone as a result of, for example, ESG.

[Neil Cunningham]

Well, ESG is taken into account in everything we do, so it's not just the “E”, not just the “S” and not just the “G”. It's all of them. That's a significant part of all our investing decision-making, so I guess the short answer to your question is yes.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Yes? The short answer to my question is yes to what?

[Neil Cunningham]

Maybe it's no. We won't exclude an investment because of a factor which appears to be.... It's the mitigation, I guess, that is the question, so yes, everything is on the table in terms of a potential investment if it meets the investment screens I've described.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you, Madam Chair.

[The Vice-Chair, Liberal, Jean Yip]

Thank you.

We move now to Mr. Fragiskatos for five minutes, please.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you, Madam Chair, and thank you to all of you. Congratulations again.

I'm new to the committee, so perhaps it's my good fortune to come across a group and sit in on a meeting where the audit is so complimentary. Mr. Lawrence has gone, but he spoke about his experiences on a committee and how it's not always certain what you're going to find, but this is good. This is very refreshing.

This first question will go to Mr. Hayes. I note that in the report it's pointed out that there are 147 subsidiaries of the board, six that are wholly owned. The report notes that the audits of the subsidiaries did not take place. It would be hard to do the 147, but what about the six wholly owned subsidiaries and doing audits there. Was there anything preventing you legally from carrying that out or was it a question of resources? What held back that audit from going forward?

[Andrew Hayes]

Thank you for the question. I might ask Ms. Cabana to expand on this.

We are appointed as of right in the Financial Administration Act as the auditor or joint auditor of all Crown corporations, including the parent Crown corporations and wholly owned subsidiaries. We do have the opportunity to waive the appointment for those corporations. We typically do not waive, but in some cases there are some subsidiaries that we do not audit. I believe there are some in this portfolio that we do not audit.

Ms. Cabana, could you add to that?