Mr. Speaker, I will reprise that a little, taking into account what you just said.
The quote continues:
--Liberal leadership candidate...says...Money now going to the Canada pension plan should be channelled into a chain of regional funds across the country.”
The following is a direct quote from the former finance minister who was then, as now, a Liberal leadership candidate. He said:
Take the savings of Atlantic Canadians, kick-start it with federal government money and allow the money to back Nova Scotia entrepreneurs who are going to create jobs....
That indicates a willingness to use moneys in the Canada pension plan for the purpose of improving regional development. That goal does not maximize the pension incomes of Canadians or the return on investment of the Canada pension plan investment fund and that is a serious problem.
Let me continue with another citation from the former minister of finance. The next one is from September 26, 1997. This one is important because it indicates the direction in which he and the bill are planning to take this large pool of Canadian money. He said:
I have always been an apostle of the Caisse de dépôt and I think having a Canadian Caisse de dépôt to manage the savings of Canadians is very important.
The reference here is to the Caisse de dépôt et placement, the Quebec government pension plan that invests the tax money from Quebeckers who, as I think many people here will know, are not actually participants in the Canada pension plan.
That statement was made by the former finance minister as he was setting up the board that we are now seeing put into place.
I want to talk a little about what is involved in using the Caisse de dépôt et placement model because in fact we do have a 30-year history of the Caisse de dépôt et placement carrying out investment activities on behalf of the citizens of Quebec and it is not a pretty picture.
I have another quote by Andrew Coyne taken from an article in the National Post speaking about the Caisse de dépôt et placement and the possibility of creating a pan-Canadian version of the Caisse de dépôt et placement. He said:
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 [the former minister of finance] is already calling it, to be the vehicle with the same mix of nationalism, dirigisme and plain-old cronyism for which the original is justly famous.
I believe that is a very good question.
There are no guarantees in the legislation of non-intervention on the part of the Canadian Caisse de dépôt in the Canadian economy. All we have right now are guarantees of goodwill on the part of the people who are running it, the people who are being appointed to the Canada Pension Investment Board.
Going through the commentary of the individuals who are currently on the board, I am somewhat encouraged, for the short term, by what has been said by current appointees. In particular, I am encouraged with John MacNaughton, one of the members of the board. I will quote from an interview that was reported in the Financial Post about two years ago when he was being appointed to the board. He was asked about some of the interventionist activities that the Canadian Pension Plan Investment Board might take. He said:
Unlike high-profile U.S. pension funds such as the 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.
He does not believe in using the Canada pension plan investment funds for the purposes of gaining seats on boards and trying to get involved in direct corporate governance. However the very fact the question could have been asked of him indicates that that possibility exists.
I will quote further. Regarding the teachers' plan which was cited by the parliamentary secretary as being a model, I should mention that the teachers' plan in Ontario does get involved in corporate governance. In fact we have evidence right here in the House today that the government anticipates the possibility of this fund being used to get actively involved in corporate governance. We should remember that this is a model that varies from the sole goal of trying to achieve a maximum rate of return on the pension funds of Canadians. “Mr. MacNaughton”, states the article, “is adamant that the government will never be able use the” Canada pension plan investment fund “to support any industrial strategy”. As well, states the article, “Nor will he heed any government plea”, which means it could happen, “to restore calm if the stock market tumbles”. So I am reassured about Mr. MacNaughton's intentions. I am not, however, reassured about this legislation.
Here is one reason why. In an article in The Financial Post on July 17, 2000, we read that a number of people being appointed to the board have expressed this point of view, but the article points out that the investment board nevertheless “opens the door to demands that collective equity funds”, or in other words funds invested by the CPP, “be used for collective equity goals to meet ethical criteria, to stabilize the stock market or to develop a an industrial strategy. And, if the politicians so desire, Mr. MacNaughton can be replaced.”
No sooner had Mr. MacNaughton made his comments with regard to the board and how he was going to avoid getting involved in the social goals than the New Democratic Party's finance critic was urging the then finance minister, current candidate for the leadership of the Liberal Party of Canada, to get involved in instructing the Canada Pension Plan Investment Board not to invest in companies that profited from human rights abuses or from threats to health. The former minister of finance, the hon. member for LaSalle—Émard and the current candidate for the leadership of the Liberal Party, said that in fact he would take these comments “quite seriously”. In other words, he was willing to look at goals other than providing the maximum rate of return on investment and thereby maximizing the pension incomes of Canadians from the Canada pension plan.
This is a problem that has occurred elsewhere. I mentioned, of course, that the former minister of finance has repeatedly said that he is an enthusiast of the Caisse de dépôt. I would just like to show what happened in the Caisse de dépôt et placement when it was faced with a similar problem: a man leading the investment board for the Caisse de dépôt who believed in complete non-intervention, who believed in simply maximizing rates of return, and a government that had other goals. In doing this, I am quoting from a book called Québec inc. et la tentation du dirigisme , by Pierre Arbour, who was formerly involved in the administration of the Quebec Caisse de dépôt et placement. I will quote from what he says about an occurrence:
Things were not going so well on the board of the Caisse de dépôt. Eric Kierans, former head of the Montreal Stock Exchange, had been appointed to the board in October 1978. Unfortunately, he resigned in 1980 in an uproar upon learning that Jean Campeau had negotiated with the Department of Finance a loan to the Province of Quebec at a preferential rate, which placed the depositors to the caisse at a disadvantage while benefiting the Department of Finance.
Jean Campeau 's behaviour was that of a former Deputy Minister of Finance rather than of the head of the caisse, and it deprived the caisse of an experienced administrator in the person of Eric Kierans, a man capable of standing up against such abuse.
It happened there and given the fact that there are no safeguards, it could happen here too. In my opinion, if the government takes seriously the goal of protecting the pension incomes of Canadian seniors, it will provide amendments to this law that prevent the kind of thing that happened in Quebec. I have not seen any interest by the government on this point. I hope that it will change its mind on this point and reject the legacy of the former finance minister who wants to use Canadian pension funds for purposes other than maximizing the retirement incomes of Canadian citizens.
Looking at the Caisse de dépôt model, the question that should be asked is what kind of results can we expect to get if we adopt this model federally? Looking at the 16th statutory actuarial report of the Chief Actuary of Canada, I find that from 1966 to 1995, the period that he was covering in that report, the average real yield after inflation on the Quebec pension plan account, which has always been invested in the manner that is now being proposed for the Canada pension plan, 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 enormous amounts of money and enormous losses to Quebec pensioners particularly when we take into account that, projecting into the future, the federal government is talking about investing amounts over $100 billion. We are talking about enormous losses to Canadian pensioners and a permanent reduced standard of living if this level of performance is repeated.
In fact, I would go further. I would say that the federal government, and particularly the former minister of finance, the current leading candidate for the Liberal leadership, is fully aware this would be the result and moreover, has projected into the future this kind of result. In his initial proposals in 1997 he stated that the projected rate of return, the anticipated rate of return on the Canada pension plan investment fund would be 3.8%, that is to say even lower than the submarket rate of return achieved by the Caisse de dépôt et placement that he is using as his model. It is extraordinary that this could actually be considered seriously in the House, this appallingly unacceptable model.
I should also mention that this rate is projected ahead based on the use of a passive index. Using a passive North American rate of index gets a better return than using a passive domestic index, and using a passive domestic index of stocks and portfolios produces a better result than an active index. I am going to spend some time talking about this because this plan makes two further assumptions that I think will do a great deal of damage to the rate of return it will produce.
Looking again at the Quebec model, we see that the Caisse de dépôt et placement has been heavily invested on the basis of producing regional development goals, of promoting industrialization, of promoting social equity and so on, all of which have reduced the rate of return it has produced. It also was 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 a period of two years. That may be an intelligent strategy if one's goal is, as the goal of the government of Quebec then was, to have some other nobler, greater purpose than shoring up and protecting the pension incomes of the people that it is supposed to work with. However, I believe that no goal should interfere with the goal of trying to ensure that Canadians maximize their pension incomes.
Let us take the other side of this equation. What if there were a national unity crisis in the future? Could we count on the federal government not to try to use this money as the Quebec government did at the time to deal with its short term credit problems? What if the Canadian stock market went into a crisis? Could we count on the Canadian government not to pressure the Canada Pension Plan Investment Board to use that money to shore up the Canadian stock market at a cost to the investment income of seniors? We do not know. I think we should be able to know.
There are some limits on the way in which the Canada Pension Plan Investment Board invests money. The most obvious one is that it is not permitted to put more than 30% outside Canada. This is important because the Canadian economy represents 2% of the world economy. The vast majority of the funds in the Canada pension plan investment fund cannot be invested outside that 2% of the world economy. The obvious result is that we greatly increase the risk of sudden shocks. The wider that money is spread, the greater the insurance against such risks.
It also has the consequence of driving down the long term payouts from the fund. We know this because a number of prominent Canadian actuaries have looked at the moneys invested in RRSPs and in company and union sponsored pension plans and compared their results to the results that would have been achieved had they been invested on a global index. On average the results have been 5% lower per annum than they would have been had they been invested internationally.
One of the prominent pension experts is Keith Ambachtsheer. The following was said in the Financial Post about his research:
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.
That is the kind of limitation we will be imposing on our national pool of pension investments. We increase the risk because we are all trapped in the same pool. All our eggs, or 70% of our eggs, are in one basket. We also reduce the rate of return. There are currency risks. There is the risk of the Canadian stock market. The market is very small and is highly dependent on certain sectors and is more likely to fall. There are also political risks.
In an article in the Financial Post on July 17, 2000, the author of the article asked the following 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?
That is a good question. It is the kind of question the legislation forces us to ask, but which we would not have to ask if the 30% cap on foreign investments were removed.
There are other problems. When we have a large player in a small market, and this would be a very large player in the Canadian market, the result is that the markets are affected by every action that player takes. In a small market a large player that purchases stock has the effect of driving the price of that stock upward just by its own actions. When it goes to sell that stock, it drives the price of that stock down, with the effect of causing itself to always pay a higher than market rate when it purchases and to always receive a lower than market rate for what it sells. The larger the player, the more that is true.
That is a problem for the California public employees retirement system, the largest private pension investor in the United States, which is the closest comparison we have in size to this. I want to read again from Pierre Arbour's book about what happens with the California system and also what has happened with the Caisse de dépôt placement, which is a larger system than the California system in terms of its impact on the Canadian market. I will then take that implication and look forward to what would happen with the Canada pension plan investment fund under the proposed legislation. Mr. Arbour said:
Some may say that the size of the caisse is a handicap to performance, and this is particularly obvious if one compares its size to that of the Canadian or American economy. With the market value of its assets in excess of $41 billion, it has an undue influence on the economy of Quebec. As a comparison, the biggest fund administrator in the United States is CalPERS, a parapublic body that invests the pension funds of California state employees. It has assets of $160 billion US, but operates within the context of an economy that is 40 times greater than that of Quebec, 11 times greater than that of Canada as a whole.
The Caisse de dépôt et placement and the Quebec pension plan have invested in the Canadian economy as a whole, not just in Quebec, because of the problems they have faced with the overwhelming size of the Caisse de dépôt within Quebec's economy. That has to some degree mitigated this problem, although it is still a very severe problem and accounts for a substantial part of the low returns that the Caisse de dépôt has achieved.
The Canada pension plan investment fund, by being restricted to the Canadian market, would suffer the same problem that CALPERS suffers in the American market and that the Caisse de dépôt suffers in the Canadian market. It would suffer it to an even greater degree, thereby resulting in an even greater penalty every time it bought and every time it sold, and therefore an even lower rate of return.
Based on this consideration, the 3.8% rate of return proposed by the former minister of finance is in fact optimistic. It does not have to be optimistic and it would not be optimistic if there were realistic and practical goals that focused exclusively on producing the highest possible rate of return for Canadian seniors on pension moneys. However, because other goals have entered into it, and other technical impediments to achieving high rates of return, we see lower rates of return being virtually guaranteed.
All of this is still assuming a passive portfolio. What I mean by passive portfolio is a portfolio that simply purchases a basket of equities that mirrors the Canadian equities market. This is the approach that CALPERS uses in the United States. It simply purchases a basket of equities that more or less reflects the Wilshire 2500 Index of American stocks. That is as close as one can get to achieving an even portrait or cross-section of the American stock market.
The Caisse de dépôt has chosen to invest actively. That is to say, it makes active decisions to try to pick winners and losers. The results have not been very impressive. The Quebec pension plan, which again is the model that is going to be used for the Canada pension plan, is actively involved in for example, making decisions to purchase individual companies and then trying to operate those companies. Its record has been abysmal. It has tried to get involved in real estate deals. Its record has been abysmal and in some cases has been tinged with what would appear to be corruption. This is a real danger in Canada. I see no safeguards in this legislation that overcome the basic problems the Quebec pension fund and the Caisse de dépôt have suffered in this regard.
Just to make this point, I want to cite three losses in particular that occurred with the Caisse de dépôt. It is what Pierre Arbour refers to as the perte totale dûe à l'interventionnisme. His numbers are a little out of date but the Quebec government lost $448 million in Steinberg-Socanav because it thought it could actively manage a private company. On Brascade it lost $858 million, and on Domtar $117.2 million. That is the record.
I know of no record, looking around the world, of government run pension funds that have successfully managed active portfolios, that have successfully produced satisfactory returns on investments from investing in private companies. The exception is where they have been involved actively in restricting trade, thereby forcing the population as a whole to use government services or the services of government owned companies in order to increase the returns on those companies. That is really a question of diverting wealth from other people into these funds. That is something we do not want to pursue.
It seems to me that all of this which I have gone through has not touched on perhaps the greatest question of all, which is the problem of potential political interference for partisan goals. This is a delicate subject and I do not doubt the good intentions in this regard of the former finance minister when he proposed the legislation. Nonetheless the record shows that there are individuals, including individuals who have sat in the House, including individuals who have served as ministers in the House over the years, who have not been free from the temptation to get involved in using public funds for private or political purposes.
There is a danger of having an enormous fund, which the government has put at arm's length but which is not politician proof, available when there are goals that could serve the purpose of either assisting the government to win extra votes in a certain region, or among people who work in a certain industry or that would increase its fundraising in a certain area.
The pension plan is meant to be around when I am retired and have been so for 20 years. Half a century from now, when these temptations are out there and when we project to the future, what assurance do I have that someone in the role of finance minister or a government did not have the temptation to take this money and use it for the purposes of regional development, or preserving national unity, or shoring up some aspect of the stock market, or industrial planning or for any other purpose that would have the effect of driving down the rate of return below the 3.8% which has been promised, a rate which is in itself completely unacceptable.
In dealing with the Canada pension plan the only question that ought to concern us is that all Canadians are forced by law, if they work and if they participate in the workforce, to contribute to this plan. They are forced to contribute at a certain rate. They do not have the option of taking the money and putting it in some alternative plan. They are therefore completely dependent upon that plan. The only consideration that can weigh upon us is producing the best rate of return for those pensioners.
Frankly, the legislation in its current form fails to do that. It guarantees failure. It gives the promise of something far worse than mere failure, of disaster for all Canadians who depend on the pension plan and who have nowhere else to go if this system fails to produce satisfactory income for them.
When the people who are now in their thirties and forties retire, when they have been on the pension plan and depend on it as their primary source of income when they are in their seventies and eighties, which is now projected as 40 or 50 years down the pike, the former finance minister will be long gone. His term as Liberal leader will be over. He will not have to pay the consequences. They will have to bear the consequences of this malformed plan.
Bearing this in mind, it is incumbent upon all of us to do our duty, to take the law, to indicate that we reject it in its current form and to demand that it be rewritten so that Canadian seniors, both those who are seniors now and those who will be seniors in the future, will get the best possible rate of return on their investments and the best possible security for their retirement incomes. Nothing else is acceptable.
