Mr. Speaker, I welcome the opportunity to participate in today's debate on Bill C-2, the Canada Pension Plan Investment Board Act.
I would like to congratulate you, Mr. Speaker, on your appointment and to thank my constituents for the trust they put in me by re-electing me as their federal representative.
My remarks today will focus on a very important element of the legislation at hand, a new investment for the Canada pension plan.
This policy is critical to the sustainability of the CPP reforms. It enjoys the support of all the provinces and all the pensions experts. Even more important was the overwhelming support of Canadians during the public consultation on the CPP.
A number of key themes emerged from these consultations, which included 33 sessions in 18 cities across every province and territory.
What did we learn? We learned that Canadians wanted to preserve the CPP. They wanted to reduce its cost, to straighten its finances and to improve its investment practices. All of these themes are mutually sustaining. A better investment policy is vital to preserving the CPP.
Ordinary Canadians and experts alike have made it clear that a better investment policy for CPP would be one similar to that of private and public pension plans. CPP funds would have to be invested in the best interests of plan members, with a proper balance between returns and risks. This would call for an effective government structure to be put into place in order to ensure sound fund management with the right measures of independence and accountability.
The consensus in favour of this principle was clear. In October 1996 we saw the federal and provincial finance ministers adopt them as guiding principles for the new investment policy.
These principles will be turned into concrete reality by the legislation before us today.
The legislation proposes that in future CPP funds will be carefully invested into a diversified portfolio of securities in the best interests of plan members, like other pension funds. In turn, the fund will be managed by qualified investment professionals at arm's length from government by a board of 12 directors, the CPP investment board.
To ensure independence of the board, the legislation prohibits government employees from serving as directors and it requires that the board include a core of directors with financial investment expertise.
Bill C-2 includes a conflict of interest provision for directors and officers of the board even more stringent than those under existing Canadian corporate law.
The question now is why this new investment policy is necessary. Why not continue with the existing policy?
At present the CPP has a fund equal to about two years' worth of benefits. Funds needed immediately to pay benefits are loaned to the provinces at the federal government's long term bond rate, which is slightly below the provinces' own cost of borrowing from financial markets.
As it happens, this policy has given good returns until now. That is because much of the money was locked in at favourable rates in the eighties. However, with the current financial environment such a policy cannot be expected to deliver the best investment performance over the long term.
Canada's chief actuary, responsible for evaluating the financial position of CPP, estimates that the old policy could be expected to yield a real rate of return, that is the rate of return minus the rate of inflation, to about 2.5 percent annually.
Under the new policy the chief actuary considers the long term annual real return of about 3.8 percent to be realistic.
Clearly there is a lot at stake in the investment of the CPP fund. This is why a great deal of care has been given to the vital matter of fund governance in the drafting of this bill. A CPP investment board will set broad investment policies and oversee the progress of the fund but will hire qualified investment professionals to manage the investments on hand on a day to day basis.
In setting investment policy the board will be subject to fundamentally the same rules as other trustees of pension funds. Most of the investment regulations under the Pension Benefit Standard Act will be applied to the board and the foreign property rule limit for pension funds will be strictly respected.
The federal-provincial CPP agreement of February 1977 does specify a couple of further parameters for the new investment policy. For the first three years the board's domestic equity investment will be selected passively, meaning that the board will mirror one of the more broad market indexes instead of picking individual securities.
A fund that invests in this way tends to reflect the composition and the average return of the market as a whole. This requirement is meant to help ensure that the CPP fund's entry into the equity market proceeds smoothly. This investment approach is a common practice among Canada investment funds. It still allows for significant investment discretion with respect to allocation. For example, the passive equity requirements will be re-evaluated at the first triennial CPP review.
Also under the new investment policy provinces will continue to have access to some CPP funds. However, the practice of provinces paying interest on a new CPP loan below the cost of the old market borrowing will come to an end. From now on when provinces borrow from the CPP they will pay the same rate of interest as they do on the market. As a traditional measure provinces will have the option of rolling over their existing borrowing at maturity, at market rates, for almost 20 years.
For the first three years provinces will have access to half of the new CPP funds that the board chooses to invest in bonds at market rates. After these three periods, to ensure that the fund's investment in provincial securities is in keeping with market practices, new CPP funds offered to the provinces at market rates will be in line with the proportion of provincial bonds held by pensions funds in general.
Having spoken about the CPP fund's proposed investment practice, I would like to take a moment to reassure anyone who has wondered about the impact of the new fund on Canadian capital markets.
I mentioned that the policy of passive investment in domestic equity will help smooth market entry for the fund. There are additional reasons to be confident that entry of the new fund will not disrupt capital markets. Canada's capital markets are mature, well developed and growing. Moreover, the new investment fund will grow gradually in its first few years. Even after 10 years the size of the CPP fund would only be comparable to that of the Caisse de dépot and the Ontario teachers pension fund.
It should also be remembered the the CPP will be reviewed every three years. Hence there will be ample opportunity to evaluate the fund's impact on markets and to make any necessary adjustments.
Ensuring the independence of the CPP investment board is a very important aspect of today's bill. However, just as important are the provisions designed to ensure that the board remains accountable not just to the federal and provincial governments but to the Canadian public.
The investment board will keep Canadians well informed of its policies, operations and investment results in the following ways: making its investment policies, standards and procedures public, releasing quarterly financial statements, publishing an annual report, and holding regular meetings in each province to allow for public discussion and input.
In addition, the ministers of finance and human resources development will prepare an annual report on the CPP which will include the financial statements of the CPP investment board as well as the report of the auditor general on those statements. This report will be sent to the provincial finance ministers and will also be tabled in Parliament.
In conclusion, the effect of the new policy I have outlined will be to treat the CPP as a true pension plan. This is not just my view but that of experts in the pension field. One of the most distinguished of them has written that a move to a market oriented, diversified investment policy would enhance intergenerational fairness, increase public confidence in CPP finances and also increase the CPP fund's prospective rate of return which in turn would reduce the long term cost of the plan.
In short, the legislation before us will address a range of crucial objectives for ensuring that Canadians will be able to look toward their retirement years with greater confidence and security.