Mr. Speaker, when I left off a couple of days ago, I was making reference to the way in which the legislation and this series of changes to the Canada pension plan was modelled by the former minister of finance, the member for LaSalle--Émard, to allow moneys in the Canada pension plan to be used for purposes other than the goal of achieving a maximum rate of return. First, I was in the process of pointing out to the members of the House how this had the effect of reducing the likely rate of return that would be achieved through the Canada pension plan investment fund.
Second, I was demonstrating, through a history of the minister's prior actions on RRSPs, old age security and earlier changes he made to the Canada pension plan, how this was part of a pattern he had demonstrated of repeatedly seeking to accomplish other goals with pools of money in our various pension plans, how this would have the impact of greatly reducing the amount of wealth available to Canadians when they retired and how this would cause a great deal of damage to the economic interests of all Canadians, both those currently at retirement age and those who would eventually be of retirement age.
Having gone through this demonstration, I pointed out that the finance minister had based his model on the Quebec pension plan and on the Caisse de dépôt et placement, which is the vehicle by which the government of Quebec invests its pension moneys. In fact I quoted from him. On a number of occasions he had made it quite clear that the Quebec pension plan and the Caisse de dépôt et placement was his model. He went so far as to describe himself as an apostle of the Caisse de dépôt et placement.
Members on this side of the House have a problem with this. We feel that the only suitable use for Canada pension plan moneys is to invest them to achieve the maximum rate of return. No other consideration should be taken into account, not regional development, which the minister has suggested, not stabilizing the economy, which is an idea that has been floated and not dealing with any social goals that might occur. Raising the best rate of return is the only consideration that should be taken into account.
I want to describe what happened a few years ago when the first stage of this transition of the Canada pension plan was underway. The National Post and the Ottawa Citizen carried a column by Andrew Coyne and he commented a little on these changes. I will quote from what he said at that time. He said, referring to the former finance minister, that he “confesses to being 'an apostle' of the Caisse de dépôt's approach”. Then Mr. Coyne asked:
Is this what we really want: a mammoth, government run investment fund, with the money and the mandate to take controlling stakes in private firms, hire and fire directors, block takeovers and otherwise tilt the scales in the capital markets to suit the whims of the government of the day? Socialism by the back door? Is the Canadian Caisse, as Martin is already calling it, to be the vehicle for the same mix of nationalism, dirigisme and plain-old cronyism for which the original is justly famous?
That is a good question.
There are no guarantees of non-intervention on the part of the Canadian Caisse de dépôt et placement in the Canadian economy. All we have right now as guarantees is the goodwill of the people who are running it, the people who are appointed by the Department of Finance to the 10 man board that runs the Canada pension plan investment board.
Going through the commentary of the individuals who are on the board, I am somewhat encouraged for the short term by the current appointees. In particular I am encouraged with the situation with John MacNaughton who is on the board. I will quote from an interview that was reported in the Financial Post about two years ago when he was appointed to the board.
He was asked about some of the interventionist activities that the Canada pension plan investment board might make. I am quoting not from him but from the article which paraphrases him. It states:
Unlike high-profile U.S. pension funds such as California Public Employees' Retirement System, Mr. MacNaughton has no plans to be a crusader on corporate governance. For him, a solid board of directors is every company's best watchdog.
Nor does he intend to mimic [the] Teachers' [plan] by joining other outside investors to force change in executive suites.
...Mr. MacNaughton is adamant that the government will never be able to use CPPIB [Canada Pension Plan Investment Board] to support any industrial strategy. Nor will he heed a government plea to restore calm if the stock market tumbles.
I am reassured about Mr. MacNaughton, but as another article which I quoted in my prior remarks a few days ago pointed out, Mr. MacNaughton is dispensable and over time it is not inconceivable, indeed, given the record of the government it is a virtual certainty, that more politically compliant individuals will be placed on the board. Moreover, the pressure to do so will be there.
Looking at the results of this kind of model, the obvious question is, what kind of results can we get? We do have a model. It has been in existence for nearly 40 years: the Caisse de dépôt et placement. What kind of rates of return does it have? I am looking at the 16th statutory actuarial report of the Chief Actuary of Canada, who reports that from 1966 to 1995 the average real yield after inflation on the Quebec pension plan account, which has always been invested in the manner in which the Canada pension plan account will now be invested, was a little under 4%. By comparison, the average of the largest private managed funds in Canada was just under 5%. Compounded over several decades these are huge amounts of money, particularly when the government is talking about an investment capital of over $100 billion. This adds up to an almost incomprehensible sum of money, which is deliberately being forgone.
I say deliberately because the proposals put forward by the former finance minister when he was proposing this Canada pension plan investment scheme stated that the projected rate of return on the Canada pension plan, once inflation is taken into account, is 3.8%, that is to say, less good even than the Quebec pension plan has been achieving, less good than that substandard, sub-market rate of return.
I should mention as well that if we examine just the rate we would get by using a passive index, a passive North American index would have produced a substantially better rate of return. It would also have been, and this is a remark I will be returning to later, insulated from the government's long term policy of allowing the dollar to fall and therefore all investments that are demarcated in Canadian funds to fall as well. None of this is contained in the bill and that is just unacceptable.
With the Quebec pension plan, what do we see it being used for? There are many things I could point to, but in general it is the industrial and economic development of Quebec. I do not want to suggest that the idea of regional development is not a worthwhile goal. It is not a worthwhile goal when we are talking about the hard-earned savings of Canadian taxpayers who are depending on this money for their future. The result of the regional and industrial development plans in Quebec has been a very unsatisfactory rate of return and those funds that have been focused upon real estate developments and so on have been the worst funds in terms of rate of return in Quebec, achieving in fact in many cases a substantial negative return. That is to say, it is just lost.
As well, we have seen the Quebec pension plan funds being used during the last referendum period to help the government of Quebec shore up its short term credit, so that in the event of a yes vote the government of Quebec would not have had to refinance its debt for two years. That may be an intelligent strategy if one is trying to break up the country and is worried about a lenders' strike. It was not a wise strategy for the moneys in that plan. It was completely unacceptable. That kind of use of funds is not prevented in the legislation.
I do not think the Government of Canada would seek to do quite that with the money, but we can see the argument being made that we have a unity crisis and we need to use the money for something else because we have a unity crisis and we need to shore up the unity of this country. How can we say that Canadian pension plan moneys should not be used for this? Is there anything more sacred than the unity of the country, than child poverty, than regional development or than whatever the policy demands of the government at that time might happen to be? This is simply unacceptable.
Finally there is the question of the use of the moneys for political intervention and the potential for the kinds of misuse of funds that we see being virtually endemic in the government. I do not want to suggest that this was ever part of the plan when this strategy for managing Canada pension plan investment funds was being set up. It is merely a likely consequence and one against which there is no protection.
I want to turn, then, to the question of the way in which some limits are put on the Canada Pension Plan Investment Board as to how it can invest the money. I have already mentioned that the fund is interventionist, but I think it should be pointed out just how severe a problem this is. One of the rules that governs the Canada Pension Plan Investment Board, and this is a rule that is being set in place by this piece of legislation, is that the rules that apply to RRSPs with regard to foreign content will also apply to the funds in the bill. Therefore, the hundred billion dollars or more in this fund will be kept within the Canadian market. Only 30% will be allowed to be placed outside of the Canadian market.
The Canadian market is approximately 2% of the world market. It is the market in which we are all participants by virtue of being participants in the Canadian economy. Our salaries are denoted in Canadian dollars and are paid in Canada. We find that all of our real assets, our non-pension assets, are trapped within the Canadian economy, which means that if it goes down we have no insurance against that because of the fact that the Canada pension plan and its moneys are kept within this economy rather than in the other 98% of the world economy. This is a severe problem that increases the risk on Canadians and Canadian pensioners.
We know what kind of impact this can have because we can look at the rate of return that RRSPs have been able to achieve when they are subject to similar rules. A few years ago, Keith Ambachtsheer, a noted pension expert in Canada, did some research and published a report which indicated that as a result of this rule applying to RRSPs they achieved on average a rate of return which was 5% lower than it would have been had that money been invested more broadly on the international market.
I will just quote from the Financial Post , which stated in 1995 that:
Ambachtsheer's research showed that the price of this limitation on diversification is a significant increase in risk to achieve the same return. In addition, he estimated a conservative balanced portfolio subject to the...limit [on foreign investments] earned approximately 1% less on average each year over the last 10 years than an unrestricted portfolio.
This is what we will impose on our national pension pool of investments. I have talked about the risk increasing because we are trapped in this same pool of money. We have all our eggs in the same basket, our pension moneys and our non-pension moneys. However, that is not the only kind of risk that exists. There are currency risks, of course, and there are others, such as if the stock market takes a tumble. Again, a smaller stock market is far more likely to take a tumble than the world as a whole.
Here is a question that was raised in an article in the Financial Post on July 17, 2000. The author asks this question:
But suppose 15 years down the road, the CPP Investment Board has $100-billion or more tied up in the stock market and the market threatens to plunge 40%. Would Canadians be willing to have the Investment Board sit tight and see $40-billion in collective pension assets go up in smoke?
It is a good question, is it not? It is a question that this legislation forces us to ask because it does not protect us from this kind of risk. Indeed, it forces this kind of risk upon us.
There are other problems. When we are a large player in a small market we affect the market with everything we do. In a small market, a large player that goes in to purchase a stock has the effect of driving up the price of that stock, which means it automatically pays a penalty, a fine, simply for having moved in that direction. When it sells a stock it automatically drives the price down by virtue of the fact that it is a substantial proportion of the market itself. That has the effect of causing it to pay a fine when it gets out of a stock.
Therefore, in fact, an actively managed portfolio that dominates the Canadian market, as this fund will, will have the effect of driving down the rate of return on investments. I want to suggest that this is a consideration that was not taken into account when the 3.8% rate of return was projected. I see nothing in the government's documents that indicates it was ever considered. That means that the rate of return is very likely to be below the 3.8% the government projects.
That in turn means that when the next crisis in the Canada pension plan comes along, a crisis fomented on the Canadian people by the government and in particular by the former finance minister, we will face the same kind of decision that occurred on the part of the former finance minister five years ago when he was dealing with the last crisis in the Canada pension plan. Aside from raising the rate of Canada pension plan payroll tax, which he did by a substantial amount, he also reduced Canada pension plan benefits to seniors by about 5%. That was the first step. We can expect, if this plan goes into effect, a lot more of that sort of thing. Anybody who is a senior now or who will be a senior in the future had better think about that. That is the almost certain consequence of this structure for these investments.
There is an alternative, which is to use an index, to use what is called a passive investment. Earlier I mentioned the California public employees' retirement system, the largest privately run investment fund in the world. That pension fund invests its assets passively by simply purchasing a basket of stocks that mimics the Wilshire 2500 index of American stocks, which is basically as close to a publicly traded index as possible in terms of reflecting the United States economy. The reason this pension system uses this system is that even though it is in a vastly larger market 10 times or 12 times the size of the Canadian market, nonetheless it finds that trying to get actively involved results in lesser rates of return. It simply does not want to get into that sort of thing. I think we should follow this example. I should point out that we actually have some experience in Canada with a comparison between active and passive management of publicly managed funds, which extends over the past few years.
In its first year of operation, the Canada pension plan investment fund was simply invested in a passive index that mirrored the Canadian market. By contrast, the Quebec pension plan was actively managed on the model that it is now suggested the Canada Pension Plan Investment Board should follow. The result in that first year was that the Canada pension plan investment fund, which was passively managed and which simply mirrored the index of the Canadian market, did more than twice as well in that year as the Quebec pension plan. So why on earth would we want to go from something that is working, I would suggest, not perfectly well but tolerably well, to something that is following a model that is clearly dysfunctional? It makes no sense.
That is without considering the problems I have mentioned with regard to potential political interference in corporate governance and in the internal affairs of the Canadian economy. The government talks at great length about a pension plan investment board that is at arm's length. We have seen that this is an easy matter to overcome if this government or any future government chooses to set that rule aside.
However, what we really want is a pension plan and a pension fund that is politician proof, not at arm's length but politician proof. The legislation was brought to the House in great haste in an effort to make it look like the government has an agenda. It was brought here despite the fact that there is no report from the chief actuary stating what the implications of the legislation are for the pension system and that is something that the existing legislation clearly states is not acceptable. It makes it impossible for us to know whether this suggested series of changes will accomplish the goals that the government claims they are going to accomplish.
For this reason, I move that the motion be amended by replacing all the words after the word “that” with the following: This House declines to give second reading to Bill C-58, an act to amend the Canada Pension Plan and the Canada Pension Plan Investment Board Act, since the bill is not accompanied by a report of the Chief Actuary of Canada who reported to the government that the changes proposed in the bill will increase CPP assets by approximately $75 billion over 50 years and that members of the House cannot evaluate the impact of these changes properly without a report.