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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Tuesday, November 26, 2002

0935

The Chair (Mrs. Sue Barnes (London West, Lib.))

Ms. Nada Semaan (Director General, Income Security Programs, Strategic Direction Branch, Department of Human Resources Development)

The Chair

Mr. Bryon Wilfert (Parliamentary Secretary to the Minister of Finance)

0940

0945

The Chair

Mr. Scott Reid (Lanark—Carleton, Canadian Alliance)

The Chair

Mr. Scott Reid

Mr. Jean-Claude Ménard (Chief Actuary, Office of the Superintendent of Financial Institutions)

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

0950

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

Mr. Scott Reid

Mr. Jean-Claude Ménard

The Chair

Mr. Bill Mitchell (Director, Financial Markets Division, Department of Finance)

0955

Mr. Scott Reid

Mr. Bill Mitchell

Mr. Scott Reid

Mr. Bill Mitchell

Mr. Scott Reid

The Chair

Ms. Pauline Picard (Drummond, BQ)

1000

Mr. Bryon Wilfert

The Chair

Ms. Pauline Picard

The Chair

Ms. Maria Minna (Beaches—East York, Lib.)

Mr. Bryon Wilfert

1005

The Chair

Mr. Jean-Claude Ménard

Ms. Maria Minna

The Chair

Mr. Peter Stoffer (Sackville—Musquodoboit Valley—Eastern Shore, NDP)

Mr. Bryon Wilfert

1010

Mr. Peter Stoffer

Mr. Bryon Wilfert

Mr. Peter Stoffer

Mr. Bryon Wilfert

The Chair

Mr. Peter Stoffer

Mr. Bryon Wilfert

Mr. Peter Stoffer

1015

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Mr. Peter Stoffer

The Chair

Mr. Bryon Wilfert

The Chair

Mr. Peter Stoffer

Mr. Bryon Wilfert

1020

Mr. Bill Mitchell

Mr. Peter Stoffer

Mr. Bill Mitchell

The Chair

Mr. Bill Mitchell

The Chair

Mr. Nick Discepola

Mr. Jean-Claude Ménard

Mr. Nick Discepola

Mr. Jean Claude Ménard

1025

Mr. Nick Discepola

Mr. Jean Claude Ménard

Mr. Nick Discepola

Mr. Bryon Wilfert

Mr. Nick Discepola

Mr. Bryon Wilfert

Mr. Nick Discepola

Mr. Bryon Wilfert

1030

Mr. Nick Discepola

Mr. Bryon Wilfert

The Chair

Mr. Bill Mitchell

Mr. Nick Discepola

Mr. Bryon Wilfert

Mr. Nick Discepola

Mr. Bryon Wilfert

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

The Chair

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance)

1035

The Chair

Mr. Richard Harris

The Chair

Mr. Richard Harris

Mr. Scott Reid

The Chair

Mr. Scott Reid

The Chair

Mr. Richard Harris

The Chair

Mr. Peter Stoffer

The Chair

Mr. Peter Stoffer

The Chair

Mr. Bryon Wilfert

Mr. Richard Harris

Mr. Bryon Wilfert

The Chair

1040

Mr. Peter Stoffer

The Chair

Mr. Peter Stoffer

The Chair

Mr. Peter Stoffer

The Chair

Mr. Peter Stoffer

The Chair

Mr. Scott Reid

The Chair

Mr. Scott Reid

The Chair

Mr. Scott Reid

The Chair

Mr. Bryon Wilfert

1045

The Chair

Ms. Pauline Picard

The Chair

Mr. Scott Reid

The Chair

Mr. Scott Reid

The Chair

Mr. Scott Reid

The Chair

Ms. Gail Cook-Bennett (Chairperson, Board of Directors, Canada Pension Plan Investment Board)

The Chair

Ms. Gail Cook-Bennett

1050

1055

The Chair

Mr. John MacNaughton (President and Chief Executive Officer, Canada Pension Plan Investment Board)

The Chair

Mr. John MacNaughton

1100

1105

1110

The Chair

Mr. Scott Reid

Ms. Gail Cook-Bennett

Mr. Scott Reid

Ms. Gail Cook-Bennett

Mr. Scott Reid

Ms. Gail Cook-Bennett

1115

Mr. Scott Reid

Mr. John MacNaughton

Mr. Scott Reid

Mr. John MacNaughton

Mr. Scott Reid

The Chair

Mr. Scott Reid

1120

Mr. John MacNaughton

Mr. Scott Reid

The Chair

Ms. Pauline Picard

Ms. Gail Cook-Bennett

1125

Ms. Pauline Picard

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. John MacNaughton

Mr. Shawn Murphy

Mr. John MacNaughton

Mr. Shawn Murphy

Mr. John MacNaughton

Mr. Shawn Murphy

Mr. John MacNaughton

Mr. Shawn Murphy

1130

Mr. John MacNaughton

Mr. Shawn Murphy

The Chair

Mr. Peter Stoffer

Mr. John MacNaughton

Mr. Peter Stoffer

Mr. John MacNaughton

Mr. Peter Stoffer

1135

Mr. John MacNaughton

Mr. Peter Stoffer

The Chair

Ms. Gail Cook-Bennett

Mr. Peter Stoffer

Mr. John MacNaughton

Mr. Peter Stoffer

Mr. John MacNaughton

Mr. Peter Stoffer

Mr. John MacNaughton

Ms. Gail Cook-Bennett

Mr. Peter Stoffer

Mr. John MacNaughton

1140

Mr. Peter Stoffer

The Chair

Mr. Nick Discepola

Mrs. Gail Cook-Bennett

Mr. John MacNaughton

Mr. Nick Discepola

Mr. John MacNaughton

Mr. Nick Discepola

Ms. Gail Cook-Bennett

Mr. Nick Discepola

Ms. Gail Cook-Bennett

Mr. Nick Discepola

Mr. John MacNaughton

1145

Mr. Nick Discepola

Mr. John MacNaughton

Mr. Nick Discepola

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

Mr. John MacNaughton

Mr. Gary Pillitteri

The Chair

CANADA

Standing Committee on Finance

NUMBER 029

2nd SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, November 26, 2002

[Recorded by Electronic Apparatus]

¿ (0935)

[English]

The Chair (Mrs. Sue Barnes (London West, Lib.)): Good morning, everyone. Bienvenue à tous.

The order of the day is Bill C-3, an act to amend the Canada Pension Plan and the Canada Pension Plan Investment Board Act.

We have appearing before us today Bryon Wilfert, Parliamentary Secretary to the Minister of Finance; and from the Department of Finance, Bill Mitchell, Director, and Larry Weatherley, Chief, Financial Markets Division, Financial Sector Policy Branch; Réal Bouchard, Director, Federal-Provincial Relations and Social Policy; and Jean-Claude Ménard, Chief Actuary, Office of the Superintendent of Financial Institutions.

We also have with us Nada Semaan. Would you please tell me what position you hold?

Ms. Nada Semaan (Director General, Income Security Programs, Strategic Direction Branch, Department of Human Resources Development): I'm the Director General, Strategic Direction, at Income Security Programs.

The Chair: Thank you very much.

Mr. Wilfert, whenever you're ready you can commence.

Mr. Bryon Wilfert (Parliamentary Secretary to the Minister of Finance): Good morning, Madam Chair and members of the committee. I welcome the opportunity to speak to the committee today on Bill C-3. I'll keep my remarks brief so that we can have some time for questions.

This bill amends the Canada Pension Plan and the Canada Pension Plan Investment Board Act in order to transfer all CPP assets currently being managed by the government to the independent CPP Investment Board. Before discussing the bill, I want to provide some background that will help to put these measures in context.

Canada's retirement income system, a blend of public and private pension provisions, is considered internationally as one of the most effective ways to provide for retirement income needs. The system is built on three pillars. The first is the old age security program, which provides public pensions for seniors based on residence and ensures all Canadians a basic income in retirement.

The second pillar is the Canada Pension Plan, CPP, which is the focus of Bill C-3. The CPP provides everyone who has worked in Canada and contributed to the plan with retirement income. The plan can also provide financial assistance to contributors or their families in the event of disability or death.

The third pillar is the private component of the system and includes tax-assisted, fully funded, employer-sponsored pension plans, RRSPs, and other private savings.

Quebec, as the members of the committee know, administers its own complementary plan, the Quebec Pension Plan, the QPP.

The CPP is a compulsory earnings-based national plan that was set up jointly by the federal and provincial governments in 1966, to which nearly all working Canadians contribute. The plan worked well for 30 years. However, in 1995 the Chief Actuary of Canada predicted that the CPP assets would be exhausted by 2015 and that contribution rates would have to increase to more than 14% by 2030 for the plan to be sustainable for future generations.

As joint stewards, the federal and provincial governments subsequently undertook a complete overhaul of the plan, and in 1997, following a major review and extensive cross-Canada public consultations, the federal and provincial governments adopted a balanced approach to CPP reform so that the plan could meet the demand of the coming years when the baby boomers would be retiring. These reforms included changes to CPP benefits and their administration that slowed the growth in expenditures; a moderate increase in CPP contribution rates to 9.9% by 2003 instead of 2015, as scheduled at that time; and the buildup of a larger asset pool while baby boomers are still in the workforce. These assets would be invested in capital markets at arm's length from government for the best possible rates of return. Together, these measures ensured that a contribution rate of 9.9% could be expected to maintain sustainability of the plan indefinitely.

In the three actuary reports since the reforms, the chief actuary has confirmed the long-term viability and financial sustainability of the CPP.

A key part of the 1997 reforms was a new market investment policy for the CPP, to be implemented by an independent, professionally managed organization, the Canada Pension Plan Investment Board, CPPIB, which began investing CPP funds in 1999.

As set out by law, the mandate and the objectives of the CPPIB are to invest in the best interests of CPP contributors and beneficiaries, and to maximize long-term investment returns without undue risk of loss, taking into account the factors that may affect the funding of CPP and its ability to meet its financial obligations.

Before 1999, the CPP's investment policy represented an undiversified portfolio of securities and an interest rate subsidy to the provinces. Funds not immediately required to pay benefits and administration costs were invested in provincial government bonds at the federal government's interest rate.

Since the implementation of the new policy, CPP funds that are not immediately required to pay benefits and expenses are transferred to the CPPIB and prudently invested in a diversified portfolio of market securities in the best interests of contributors and beneficiaries. Investment rules under which the CPPIB operates are similar to those of other pension plans in Canada, requiring the prudent management of pension plan assets in the best interests of plan members, and the hiring of its own independent investment managers.

¿ (0940)

The CPPIB is also subject to the foreign property rule, like other pension plans.

Great care was taken when the governance framework for the CPPIB was set up to ensure full transparency and public accountability. As a result, the CPPIB prudently manages funds according to the highest professional standards and at arm's length from governments, with qualified, experienced managers making investment decisions.

Full accountability is assured through a robust process with strong checks and balances for identifying and appointing individuals to the board of directors. Directors are chosen from a list of qualified candidates recommended by a joint federal-provincial nominating committee. Following consultation with the ministers of finance in participating provinces, the federal government appoints directors with high qualifications. In making the appointments, consideration is given to ensuring that there are a sufficient number of directors with proven financial ability or relevant work experience to enable the CPPIB to fulfill its mandate. The current directors have extensive business, financial, and investment expertise.

The board of directors is independent and fully accountable to CPP plan members and federal and provincial governments. The board ensures that Canadians are kept well informed of its policies, operations, and investments. In this regard the CPPIB releases its quarterly financial results; publishes an annual report, which is tabled in Parliament; holds public meetings in each participating province at least every two years for public discussion and input; and maintains an informative website. I am pleased to say that the independence and quality of the CPPIB board of directors have received strong support from the public and pension management experts.

Independence from governments in making investment decisions is critical to the CPPIB's success and public confidence in the CPP investment policy. This is of the utmost importance because the money the CPPIB invests today and the high returns earned will be used by the CPP to help pay the pensions of working Canadians who will begin retiring 20 years from now.

Madam Chair, Bill C-3 completes the process begun in 1997 of reforming the investment policy of the Canada Pension Plan. This bill transfers all CPP assets remaining with the federal government to the CPPIB over a three-year period. These assets include a cash reserve and a large portfolio of mostly provincial government bonds.

The benefits will be significant, Madam Chair. First, studies undertaken by the Chief Actuary of Canada indicate that fully investing CPP assets in the market will produce a benefit in the order of $85 billion in 50 years for the Canada Pension Plan. Second, consolidating all assets under one organization would give the CPP the same authority as other major public pension plans, thereby providing fund managers with the flexibility to determine the best asset mix and investment strategies to manage risk and optimize returns. Third, the CPP will now be on the same footing as other public pension plans in Canada, including the Ontario Teachers' Pension Plan; the Ontario Municipal Employees Retirement System, OMERS; and Quebec's Caisse de dépôt. Fourth, transferring the bonds to the CPPIB over three years will provide a smooth transition for capital markets, provincial borrowing programs, and the CPPIB.

Before closing I also want to mention that provincial and territorial governments unanimously support these changes. By law they must approve any changes to CPP and CPPIB legislation. Before Bill C-3 comes into force, the provinces will also need to formally approve these changes.

As I stated before, this bill completes the process that the federal and provincial governments began in 1997 of investing CPP assets in the market by an independent professional investment board. The end result of moving to complete the market investment policy for the Canada Pension Plan will be increased performance, better diversification, and enhanced risk management of the entire CPP portfolio. It is important to note that although CPP assets will be managed by the CPPIB, the government will still provide Canadians with their CPP benefits, and the legislation provides for certainty of payment of CPP benefits.

¿ (0945)

When you are reviewing this bill, I urge members of the committee to keep in mind my earlier comment that the money the CPPIB invests today and the higher returns earned will be used by the CPP to help pay the pensions of working Canadians who will begin retiring 20 years from now. Together with the 1997 CPP reforms, the measures in this bill will help to ensure that the CPP remains on sound financial footing for future generations.

As indicated, officials from the Department of Finance and from Human Resources Development Canada have joined me here today, and we would be pleased to answer your questions.

Thank you very much, Madam Chair.

The Chair: Thank you very much.

We'll go for ten minutes, if you'd like, Mr. Reid, and if you'd like to share that time with Mr. Harris, that's also available to you.

Mr. Scott Reid (Lanark—Carleton, Canadian Alliance): May I ask, is the procedure on this committee ten minutes in the first round, and then five minutes in the second go-round, if there is one?

The Chair: We won't be going to a five-minute round. If you look at your agenda, this round is just going until 10:30.

Mr. Scott Reid: Thank you.

Welcome to the parliamentary secretary and all the witnesses.

My question is for the chief actuary. Mr. Ménard, regarding the $85 billion that the parliamentary secretary cited in his remarks, I'm assuming that's the estimated income over a period of 50 years. Is that correct?

Mr. Jean-Claude Ménard (Chief Actuary, Office of the Superintendent of Financial Institutions): Yes, it is.

Mr. Scott Reid: I'm assuming that's if the fund achieves the 3.8% rate of return that was projected when the initial legislation went through five years ago. Is that correct?

Mr. Jean-Claude Ménard: It is based on the assumption of a real rate of return of 4.25% on the assets managed by the CPPIB.

Mr. Scott Reid: So that's different from the 3.8% that was--

Mr. Jean-Claude Ménard: That was in the 17th report. Yes.

Mr. Scott Reid: Right.

Might I inquire as to the reason for the change, the more optimistic estimate of rate of return?

Mr. Jean-Claude Ménard: Okay, first, just as a bit of background, before we started the work on the 18th actuarial report, I decided to organize interdisciplinary seminars that were held in March and November 2000. On that occasion, I invited four experts in investment, demographics, and the economic field to provide the best advice to the chief actuary. Following these seminars, we did extensive research, and based on the assumption on the diversified portfolio, I decided that 4.25% was a reasonable assumption for a diversified portfolio on a long-term basis. This report is for a 75-year period, so in that case, 4.25% seems to me very reasonable.

Mr. Scott Reid: What would the rate of return be if there were not the cap on foreign investments of I think 30%--

Mr. Jean-Claude Ménard: In the report--

Mr. Scott Reid: --assuming the same rate of risk in the investments that are undertaken?

Mr. Jean-Claude Ménard: First, the assumptions on the asset mix, on a long-term basis, are 50% in bonds--so it's composed of federal, provincial, and corporate bonds--and 50% in equities. That's 25% in Canadian equities, and 25% in foreign equities.

In our report we made an assumption of 4.5% for the Canadian equities and 5% for the foreign equities. So it means that if CPPIB, the investment manager, decides to invest more in foreign equities, based on the assumptions, yes, you will get a higher rate of return.

¿ (0950)

Mr. Scott Reid: How many billions of dollars would that have amounted to if this restriction were not on it? Do you know?

Mr. Jean-Claude Ménard: No.

Mr. Scott Reid: What's the estimated rate of return on the provincial government bonds? You mentioned the rate of return on domestic equities versus foreign equities. I'm just wondering about the rate of return on the provincial government bonds that are in the portfolio right now.

Mr. Jean-Claude Ménard: What we call the risk-free investments are the long-term federal bonds, and yes, the assumption is 3%. If I look at the assumption on the Canadian equities of 4.5%, it means an equity risk premium of 1.5% over a 65-year period.

Mr. Scott Reid: Sorry, 3%.... Just remind me again what the foreign equity component and the domestic equity component returns were.

Mr. Jean-Claude Ménard: Canadian equities are 4.5%, and the foreign and U.S. equities, 5%. So it means an equity risk premium of 2%, instead of 1.5% for Canadian equities.

Mr. Scott Reid: Would I be wrong in assuming that when you are as large a player as the Canada Pension Plan investment fund would be in the Canadian equities market, you would have a substantial negative impact on your own rate of return because of the fact that when you purchase any equity you have the effect of driving up the price of that equity because you represent such a large portion of the potential moneys being put into that equity and the amount being traded on any given day in the market, and that you have a similar effect in reverse, but also to your own detriment, when you attempt to sell any of those equities? I'm asking this a bit facetiously, because I'm fully aware that, for example, the California Public Employees' Retirement System has found this to be a severe problem in the U.S., notwithstanding the fact that as a player they're a fraction of our size. Has this been taken into account in calculating the rate of return on those Canadian investments?

Mr. Jean-Claude Ménard: First, let me say that the Canadian stock market is approximately 2% of the world market. If you are a prudent investor and you want to invest in equities because equities outperform bonds on a long-term basis, you have to be diversified. That is why in the assumptions we set forth in the report we added a prudent asset mix of 25% Canadian equities and 25% foreign and U.S. equities.

Mr. Scott Reid: Yes, but the question I was asking was about the rate of return you calculated on the Canadian equities. Did that take into account the effect your own actions would have on the price of any equity when you're purchasing it and when you're selling it?

Mr. Jean-Claude Ménard: I would say yes, indirectly.

Indeed, I should say that the assumption was set basically on two grounds. When we look at Canadian history for the last 60 years, we see that in that case the rate of return was much higher than 4.5%. The other thing we look at is how the actuaries of the other Canadian pension plans set their assumption for Canadian equities.

I would say that despite the fact that the Canada Pension Plan assets will be bigger than today, it won't be the only player in Canada in the market.

Mr. Scott Reid: It would be the largest player. What percentage of the Canadian equity market do you anticipate it being? Have you calculated that?

Mr. Jean-Claude Ménard: No.

The Chair: Mr. Mitchell, did you want to add to that answer?

Mr. Bill Mitchell (Director, Financial Markets Division, Department of Finance): I think your point is largely correct that big capital pools will have the impact you're saying. So that is a challenge.

In fact, the CPP doesn't get bigger than the teachers' plan, OMERS, or the Caisse de dépôt. That sounds like a strange outcome, and the reason is that it's not a fully funded plan, whereas the others are. This is only supposed to pay 25% of the average industrial wage. When it gets to the equilibrium point of its maximum growth, the estimate is that it will have about 10% of the Toronto Stock Exchange float. So will the teachers' plan, the Caisse de dépôt, and OMERS. So you'll have some very big players.

¿ (0955)

Mr. Scott Reid: One of the results of that for the Caisse de dépôt et placement is that their rate of return over the long term has been substantially below that of the average privately managed pension fund in Canada. There are other considerations there, but I would submit that this is one of the reasons for their rate of return. I'm well aware that in the last year they've been doing fine, but over the long term they've had an unimpressive rate of return.

Was this actually built into the calculations that were made, or was it excluded from the 4.5% we're talking about? When you built the 4.5%, was this one of the factors in the calculation?

Mr. Bill Mitchell: I think they're basically calculating how asset classes perform, and that kind of factor is very difficult to take into account. But I think your point is well taken.

Mr. Scott Reid: You understand my point. It is important to try to take everything into account when you're dealing with investing billions of dollars in the hopes of achieving a total of $85 billion of investment. Notwithstanding that this is only a quarter of that total amount, it's still over $20 billion. If we can take extra care and therefore produce an extra 1% on that capital at the end of the day, that is well worth our while to do, given the enormous size of the money we are considering here.

Mr. Bill Mitchell: But if the asset class does perform at that level, you're basically saying trading in and out of large blocks is a challenge, and I think that's correct. But I doubt much that it changes the overall return of the asset class in a very material way.

Mr. Scott Reid: I don't think it changes the effect of the asset class for investors in it as a whole; what I think it changes is your ability to capture that, because of the severe transaction costs that are involved, particularly since you're caught in a situation where if you try to go passive your actions become predictable and other people can then take advantage of that. If you try to not be passive and be active, then you have the problem of actually affecting the market. You are a bull elephant in the context of the Canadian market. You end up having a dramatic and arbitrary effect, even if that's not the intention. I think those are the--

The Chair: We're over time, Mr. Reid.

Mr. Mitchell, did you want to make a brief comment on that? No. All right.

Madame Picard, you have up to ten minutes, and then we'll go to Ms. Minna and to Mr. Stoffer after that.

[Translation]

Ms. Pauline Picard (Drummond, BQ): Thank you, Madam Chair.

First, I would like to congratulate you for giving Canada a professional and independent investment board; we have a model of this type of organization in Quebec, the Caisse de dépôt et placement. That, in my opinion, is one of the most powerful tools for Quebec's economic development. I think it is an excellent idea for you to be taking this course.

I would like to talk about socially responsible investment.

Do you think the board will have objectives other than achieving the highest possible rate of return? Do you think employees and employers—since it's their money—should be told where the money is being invested, so that it doesn't wind up in countries where, for example, human rights are trampled or children are forced to work, or go to arms manufacturers who fuel war in countries where it is very likely war will break out? In short, is there a provision that stipulates what the board must do when investing in these companies?

À (1000)

[English]

Mr. Bryon Wilfert: Madam Chairman, Madame Picard raises a very important point, and we could go into more detail if she wishes, but yes, there is a policy with regard to the very issues you raise in terms of human rights, ethics issues, and that also is provided in terms of information, both in terms of the information on the website and in the consultations that are made with Canadians every two years. It is increasingly an issue that other pension funds and others are looking at, and there is a specific policy. If the committee would like more detail, we can either provide that in writing to you or we can elaborate, depending on the wishes....

The Chair: You can provide it in writing, and we'll distribute that.

[Translation]

Ms. Pauline Picard: Please.

The Chair: Is that all, Ms. Picard?

Ms. Pauline Picard: Yes. Thank you.

[English]

The Chair: Okay.

Maria, for up to ten minutes.

Ms. Maria Minna (Beaches—East York, Lib.): Thank you.

Firstly, I was glad to read in a recent article--I forget which paper it was in--the OECD referring to our CPP as one of the better plans around the world. Maybe you can expand on what makes it that good and what element of it they find interesting and working, because that's important to understand. Sometimes we tend to be so busy beating ourselves over the head that we don't look at what we're doing, where we're going, and how we can keep it that way.

I have a couple of questions. To what extent will the new system stabilize premiums in the future in order to maintain the kind of investment and sustainability we're looking for in the long term?

In your remarks, Mr. Wilfert, you mentioned that one of the ways we accomplished this was to slow down the expenditures. I'm wondering to what extent that has affected some people, either positively or negatively. Certainly you, and others around here, I'm sure, have constituents coming to your office who are not able to get recognition under CPP for disabilities, or it's much more difficult than it used to be. Some of them are, in my view, credible cases. When you talk about the slowing down of growth, I just wondered how that has affected people. Do we know how that has affected people who are applying for it and what the problems are, which you may be identifying as well? What, if anything, is the department looking at doing in that respect?

On the investment side, I understand, of course, that the reason we changed it was to give us sustainability over the long term. In your speech you talked about quite a lot of years. Do you anticipate in the long term any additional changes to the system that may be needed in order to make it as sustainable as possible, or do you feel that the way it is now is fairly stable and the best mix we could possibly get to make sure that in fact it is sustainable?

One of the issues I keep hearing about from constituents is “Is it really going to be there when I get there and when my children get there?” There's this concern that somehow one piece of their life is going to fall off. I think it would be helpful if you would expand on that.

Mr. Bryon Wilfert: Madam Chairman, I'll just make some brief comments and turn it over to others.

On the issue of the sustainability, as I had indicated, it's a very important point to continue to reinforce. In 1995, the chief actuary had indicated that the fund would be exhausted, basically, by 2015. If you remember, there was a chart that showed the increase would be much more dramatic than it would have otherwise been, had these changes not been made. In other words, we were looking at probably an increase of more than 14% by 2030. So that has been moderated, and the fact is that is why the provinces and the federal government, in 1997, started the discussions in terms of how to deal with this particular issue, because we were concerned about people who were going to be retiring 20 years from now.

It is a question we all face from constituents--that is, whether or not the moneys will be there. I want to again assure the committee that under the proposals, that in fact is the aim and the objective of these changes in the plan.

The issues dealing with this as one of the best plans recognized by the OECD and others are based clearly on the mix that is in the plan, the fact that under the board, the CPPIB, which started, really, investing in 1999, we have outstanding members involved. If I may just indicate, the chair is a former economist and former university professor, business executive Gail Cook-Bennett. We have a retired former senior executive vice-president of the Royal Bank, Joseph Regan, and others. So their expertise is well known, and that is an important mix in terms of providing confidence.

On the issue of CPP and disabilities, this bill does not deal with that. In terms of the issue, that's in a wider context and something I could speak about, but it isn't really germane to the bill itself. As you know, we are looking at that issue as well, and I can assure you that, on any proposed changes that are out there as of August 30 by the minister, we are seeking public input from all groups to make sure that, in terms of accessibility to the plan, the people legitimately qualify and are not going to be disenfranchised because of any proposals. They are only proposals, and will continue to be so.

I'm sure my colleagues will be able to elaborate in more depth on some of the other issues, if you wish.

À (1005)

The Chair: Mr. Mitchell or Mr. Ménard, please, go ahead.

Mr. Jean-Claude Ménard: If I may, I'd just mention that when you talk about stabilizing the contribution rates, the assets right now are approximately equal to 9% of the value of the liabilities. In other words, the assets are worth around two times the annual benefits paid. And because for the next 20 years the contributions will be higher than the expenditures, the fund will increase, I would say, to a funding level of around 25% or 30% of the liabilities. This will help a lot to stabilize the contribution rate for the future.

About the expenditures, I'd just mention that the aging of the population is taken into account in the report, and the legislated contribution rate takes this impact into account.

For the future, there is an actuarial report that, according to the law, should be tabled once every three years, and there are also mechanisms where the provinces, territories, and the federal government look at the plan every three years to make sure that everything is in line.

Ms. Maria Minna: Thank you, Madam Chair.

The Chair: Okay.

Mr. Stoffer, please, and then Mr. Discepola.

Mr. Peter Stoffer (Sackville—Musquodoboit Valley—Eastern Shore, NDP): Madam Chair, thank you very much.

Mr. Wilfert, thank you, as well, and your colleagues here.

I have a couple of concerns, right off the bat. A former prime minister once said that something at arm's length eventually becomes out of reach. In regard to the list of people who are on the board, is anybody from organized labour or organized pension groups part of this board?

Mr. Bryon Wilfert: Madam Chairman, again, I would be more than happy to provide Mr. Stoffer with the list of members of the board. The short answer is no. We have mostly directors. We did consult, and I could certainly comment with regard to what organized labour and others did say.

À (1010)

Mr. Peter Stoffer: Sir, with the greatest of respect, consulting and actually being on the board are two different things.

When Ken Georgetti left British Columbia to become the head of the CLC, many people in the business community in British Columbia said we had just lost our best investor. He handled the labour capital venture funds and did extremely well. I'm thinking, why wouldn't a person of that stature, a person of that reputation, be invited to participate in the board as a full member?

The impression of labour and retired groups is that these are a bunch of economists, a bunch of financial wizards, and nobody is representing our true interest. For example, CARP, the CLC, or other groups of that nature are not on the board. They get to advise. You meet once every two years, so they get to appear before that, or they can submit, at any time, proposals or concerns. But the reality is, they're not on the board.

I feel this is a problem, and I'm wondering what the government or the board is able to do to correct that deficiency.

Mr. Bryon Wilfert: First of all, it doesn't preclude the fact that they can be. The fact is, the federal-provincial finance ministers each appoint a representative to the nominating committee. There's nothing to stop them from in fact doing so. So it is open to them as much as to anyone else.

I think the key, as I said, is that the nominating committee obviously has to identify, since we're talking about significant numbers of dollars here, appropriate expertise and experience. That does not preclude in any way, Mr. Stoffer, any of the suggested candidates that you may have; it's just that, obviously, if we're going to have those kinds of dollars managed, we want to make sure that the most qualified people are on the investment board. But if there are candidates of that nature, certainly they should be brought to the attention of the respective ministers of finance, and I would suggest to you, with their appropriate CVs, they would be evaluated and could therefore be appointed as directors to the Governor in Council after consultations with provincial finance ministers.

Mr. Peter Stoffer: Very good.

With my colleague from the Bloc who discussed ethical funds, my question now is, is it possible that my pension dollars right now could be invested in tobacco companies?

Mr. Bryon Wilfert: Again, Madam Chairman, I'll send this over, because I don't have the specific criteria in front of me. I forgot to bring those--my apologies. However, as to the criteria set out as to the types of companies that they do not invest in...who would like to handle that?

The Chair: Mr. Stoffer, I just would note that at 10:30 we'll be having people from the Canada Pension Plan Investment Board testify, too.

Mr. Peter Stoffer: I just asked the question because they started off the presentation.

Anyone who has been to Bosnia knows that in terms of 85% of that country's landmines, somebody invested in those companies to make those landmines. I understand we're investing in foreign companies, and companies are diversified. One company can own 30 different other companies. How closely are those monitored to ensure that Canadian pension funds, and people who have concerns like that, don't invest in tobacco, don't invest in child labour, don't invest in landmines, for example?

Holistically, it's pretty hypocritical of the government to set up an arm's-length agency and at the same time sign a landmine treaty over here saying we're not going to invest in this, but unknowingly are not doing the proper search capabilities and could be investing their own dollars into companies that make landmines, or tobacco, or use child labour.

Mr. Bryon Wilfert: In terms of due diligence, as I indicated earlier, I will certainly provide members of the committee with the criteria.

As you've indicated quite rightly, Madam Chairman, the members will be before the committee at 10:30, and they certainly may be able to expand at that point.

I think it is important, Mr. Stoffer. As I said to Madam Picard, the issues you raise are very important. Increasingly, those issues are ones that Canadians are very much concerned about. Therefore, there will be no attempt, as far as I understand, by this government or by any other, to say one thing and do another.

Mr. Peter Stoffer: Okay. The third paragraph of page 5 of your report, sir, tweaked my interest. It says “Independence from governments in making investment decisions is critical to the CPPIB's success and public confidence in the CPP investment policy”. You say it's critical that it's at arm's length.

Are you indicating, then, that other investments the government makes—like ACOA , other industry, the industry committees, and those groups who invest public dollars into ventures—are not gaining the public confidence? In one instance you say that it is critical for public confidence. Yet in other departments, like Industry Canada and ACOA, they make investments all the time. Yet the same kind of standard that you're holding here does not seem to hold with them. Why did you put this in here?

À (1015)

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): It is not the same kind of investment.

Mr. Peter Stoffer: I know, but it's still taxpayers' dollars, right?

Mr. Discepola, with all respect, you say that independence from government is critical for public confidence. Yet at the same time, in other departments, we invest billions of taxpayers' dollars into companies, and we don't seem concerned about what the public thinks about this.

The Chair: Mr. Wilfert.

Mr. Bryon Wilfert: Thank you, Madam Chair.

Again, Mr. Stoffer raises an interesting point. I would again point out that, in terms of this particular legislation, I emphasize the arm's-length independent status because—and it is different in terms of the types of investments here—we have to be very clear of the interest of the plan members. We also have to give absolute full authority to the board to develop investment policies and strategies that are appropriate to maximize the dollars.

In terms of the other investments Mr. Stoffer referred to—ACOA, and others—I admit that I'm not as familiar with them, as my jurisdiction is particularly with this legislation in the finance department, which doesn't deal with the other ones directly. But it is a different type of investment.

Again, when we say arm's length, I caution all members that we're talking about arm's length in terms of the nature of the investments. But in terms of accountability, it is there in terms of reporting to Parliament, the public, and in access. So, Mr. Stoffer, I share.... There's always the concern when we talk about arm's-length bodies, but as members of Parliament, we are ultimately responsible or accountable. Therefore, these mechanisms are there to ensure that in fact the buck has to stop with those who are elected parliamentarians, rather than with officials—who are not directly accountable, but are clearly accountable through members here.

The Chair: You have some more time—a minute and a half.

Mr. Peter Stoffer: Thank you.

The last question I have is that many small businesses and companies throughout Canada are always finding it difficult to obtain funds of some kind. One of the concerns expressed here is that we're investing over $350 million in foreign countries. So our public pension plan is helping invest in foreign companies, which in essence could be competing with our own companies. So you're giving them an advantage in some way. Now I guess the question in this is why--why invest in foreign companies when so many of our own companies are looking for investment dollars, or to be attracted in this regard?

Also, what screening is done of these foreign companies? When you invest in a foreign company or invest in a foreign asset out there, what is the screening process in order to ensure that that particular foreign company doesn't have a competitive advantage over our own companies, and is not involved in things we would find despicable?

Or is this a question for the next group?

Mr. Bryon Wilfert: If I were speaking politically, I would say it's a question for the next group. But I think we probably can answer part of it. Quite frankly, Madam Chairman, the criteria apply whether the company is domestic or foreign.

In terms of the specific issue you raise, I would turn it over to someone who is probably much more qualified than I am to answer it.

I guess everybody's looking at me, so this is not a good sign.

Mr. Mitchell.

À (1020)

Mr. Bill Mitchell: The people from the CPPIB, who will be appearing before you shortly, could elaborate. But they're certainly into small investments. They have a very active and fast-growing venture capital operation. Private equity and all of these things are directed particularly to small and growing companies. So I think they're doing some of the things you want them to do.

Mr. Peter Stoffer: Are you able to answer what the screening process is specifically for foreign companies?

Mr. Bill Mitchell: Well, the government's policy is that investment policy is determined by the board. There are some general rules that are PBSA--the Pension Benefits Standards Act--rules, which apply to all pension plans, including the CPPIB.

The CPPIB went further than that and has a specific policy on social investing, which it posts on its website. So they have gone further than they are required to do by federal law or by the CPPIB Act.

The Chair: Thank you very much.

Mr. Bill Mitchell: I think they can provide the details of that.

The Chair: Mr. Discepola, for the last ten minutes.

Mr. Nick Discepola: Thank you, Chair. I have basically two questions, one on the asset mix and one on the independence issue.

On the asset mix, the 50%-50%, and then of the equities, 25%-25% foreign, is that something you've chosen, or is that something you're restricted to use? Of the 25% foreign--I guess you can go up to 30% total--would you like to see that increased or changed, and if so, what are the pitfalls of us trying to do that?

Then, I'm wondering if you've built in a prudence level. I think one of the concerns I have is you're projecting $85 billion over 50 years. Your expected rate of return, as you said, was 4% over that 50 years. What happens if the market really, really takes a tumble and the returns aren't there? Have you built in a prudence level, in your calculations?

Mr. Jean-Claude Ménard: First of all, on the criteria that were used to set the asset mix, I want to point out that it is a report based on 75 years, period. So we have to select a prudent asset mix, and we thought 50% in bonds and 50% in equities was prudent.

That doesn't mean that in some years it couldn't be 60% equities, 40% bonds, and in some other years, the reverse.

[Translation]

Mr. Nick Discepola: But you have flexibility. You can change the mix at any time, as you wish, according to your growth forecast or what have you.

Mr. Jean Claude Ménard: Yes. In fact, we regularly meet with Mr. MacNaughton, at least once every three years and sometimes more often than that, and we discuss investment policy with him. The policy does not necessarily cover 75 years, so we tie our long-term projection to the investment objectives or policy of the Canada Pension Plan.

On the question of prudence, the 18^th actuarial report was reviewed by a panel of three independent actuaries, as was the 17^th report. As for the rate of return on investment, the message I got from them was that my forecast of 4.25 per cent was overly pessimistic. Had it been up to them, they would have forecast something higher than 4.25 per cent; they probably would have forecast around 5 per cent.

In fact, looking back on Canadian history over the past 60 years, applying the portfolio I mentioned—50 per cent bonds, 25 per cent Canadian shares and 25 per cent American shares—the real return would be 5 per cent. What's important to understand is that when you are dealing with equity, you have to accept that there is some volatility. Historically, even if there was an average return of 5 per cent as opposed to the forecast 4.25 per cent, there were actually 4 years in that 60-year period where the return was under -10 per cent. There was even about one year out of every three where returns were negative in real terms. So volatility is a feature, but if, in the future, the past 60 years were to repeat themselves, that would be very good for the plan, because there would be an average return of 5 per cent, which is higher than the forecast used. So in that sense, yes, the forecast is prudent, but I would still say that it is our best guess, considering the 75-year horizon we have to cover.

À (1025)

Mr. Nick Discepola: Do you see 30 per cent foreign equity as unduly restrictive or is it something you can live with? Would you like to see it raised? Would you like to have that flexibility or not? My first impression is that that could limit growth. The ultimate goal of the pension fund is the highest possible return on investment.

Mr. Jean Claude Ménard: When you invest in equities, the theory holds that you have to diversify. So, in that sense, foreign content is not to be ignored. There are also domestic needs to be met, so there is an important choice to be made, but I would come back to the basic principle, which is to maximize the rate of return without undue risk.

In terms of the 30-per cent limit on foreign investment, especially in European countries, where there is no such limit, they rarely go beyond 30 per cent. If the objective was to invest 100 per cent in equities, 30 per cent would probably be considered, according to the principles of diversification, too low. But with a balanced portfolio between equities and bonds, I have no strong opinion. I don't think that limits our forecasts based on the actuarial report.

Mr. Nick Discepola: Thank you.

[English]

On the question of independence, Mr. Wilfert, you've gone through your brief and mentioned it several times. I think you see—through Mr. Stoffer's questioning—how difficult it is to be independent, when you've been given so many guidelines as to what that independence should or shouldn't curtail in terms of investments.

I have a more direct question on the independence issue. I want to know if we are guaranteed it in our own legislation. Having lived through the Quebec referendum in 1995—and notwithstanding that Madame Picard thinks that the Quebec model is a great model—I'd like to refresh my colleagues' memories a bit. On the eve of that referendum, the then-premier Parizeau had undertaken to dip into the fund to the tune, I think, of billions and billions of dollars to sustain a falling dollar in the event of a “yes” win.

If we're going to guarantee independence here, is it true or sustained independence, in the sense that no future government intervention is possible—notwithstanding conditions that arise, whether acts of war, insurrection, or anything—as was the case in Quebec in 1995?

Do you follow my concern—

Mr. Bryon Wilfert: I follow your—

Mr. Nick Discepola: —that if a war burst out, all of a sudden they might say, “We need extra funds, so we'll dip into that pension”? Is there protective legislation in there?

Mr. Bryon Wilfert: Unlike the case you cited, I would suggest that the stewardship of this—in terms of appointments and policies, etc.—is joint federal-provincial, as you know. So no government is unilaterally going to be able to do what you've indicated.

Mr. Nick Discepola: How did the Quebec government do it then?

Mr. Bryon Wilfert: I'm talking about the management of this particular board.

Mr. Nick Discepola: But I think they have the same restrictions.... They don't?

Mr. Bryon Wilfert: In terms of where we have come to today, we have unanimous provincial support for the actions we are proposing. To make these changes, you needed the support of the provincial governments. So no one member can in fact unilaterally make a decision that would have negative consequences. In other words, it's a joint federal-provincial.... The federal government couldn't say, unilaterally, “Well, we're going to change this”, or the provincial governments, “Well, we don't like this; we want this done”, without consent.

I just want to add to your question on investments. I think it is important to put in some perspective that, at the end of the calendar year last year, CPP reported annual returns of 6.2%, compared to OMERS' minus 3.4%, and the Ontario Teachers Pension Plan's minus 2.3%, etc.

So even in good times.... CPP has done extremely well. I think this also reinforces the quality of those who are managing the funds. I would also point out that, yes, we know there is volatility in the market: you're going to have some up and some down. But clearly, for the end of last year, it was extremely positive.

À (1030)

Mr. Nick Discepola: There's the burden that if the expected rate of return isn't achieved, there will be a shortfall. Will the government then have to step in and increase rates, or are there other provisions?

Mr. Bryon Wilfert: As a few actuaries have pointed out, those kinds of contingencies are provided for within the legislation. But again, that is why such care and attention was taken in rate setting, timeframe, etc.

I want to reinforcethat we're not going to be coming back here five or ten years from now to revisit this. We want to get it right the first time, which is why so much attention has been taken over the last five years to get to this point.

The Chair: Mr. Mitchell, I'll give you the last comment.

Mr. Bill Mitchell: The contribution rates, the returns on the investment portfolio, and the benefit regime are reviewed tri-annually. Of course, the assumptions on soundness and how long they will be sound are reviewed regularly by the chief actuary. Should he find there are problems--and they could arise with the assumptions--that's a long time to say everything is great and nothing is going to change.

It may well work out that way, but the point I'm making is that it is regularly reviewed, and the chief actuary provides a report about the continuing soundness. Then it's up to governments, the joint stewardship. If changes are needed, they have a number of options for making changes.

Mr. Nick Discepola: But if the fund had a surplus, the actuarial report--much like they have with the EI fund--would say you've taken too much money, so give it back. We could see that occasion arising through the Auditor General reporting if the fund ever became in excess of the requirements.

On my other question, if the government can then all of a sudden decide to take that excess and give it to general revenue, should that be allowed? I don't think so. There's that whole ongoing debate with the EI fund right now.

Mr. Bryon Wilfert: As Mr. Mitchell pointed out, it would be flagged through various reporting mechanisms, including to Parliament. If that occasion were to arise--

Mr. Nick Discepola: It would be a happy one, mind you.

Mr. Bryon Wilfert: I'm sure, and we'd deal with it.

The Chair: That's the end of our time. I'm going to thank our witnesses today, and ask our committee members to stay in place.

Thank you very much, all of you.

Before we go on to our next panel, I have two housekeeping items for the members. First, our pre-budget report is in the blues stage right now. The clerk advises me we only ordered 1,500 English copies and 1,000 French copies. The suggestion is being made right now that we order 2,000 copies in English from the printer. Since we had a motion on that at 1,500, would somebody like to propose that?

Mr. Roy Cullen (Etobicoke North, Lib.): So moved.

The Chair: We're just going up by 500 English copies. The printer thought it was a little low.

(Motion agreed to)

The Chair: I have another item before we sit down.

Our next set of witnesses can approach the table.

The clerk has been contacted about this bill by a seniors group, the Ontario Coalition of Senior Citizens' Organizations. They would like to appear and can be here tomorrow for an hour, prior to us.... We had arranged to do clause-by-clause, but they have asked to appear.

Also, Mr. Harris, are you proposing three witnesses here?

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Yes, we propose three witnesses to appear at the same time as the seniors groups. There's a gentleman by the name of Bernard Dussault, former chief actuary. There's Pierre Arbour, who was quite involved in the Caisse de dépôt in Quebec. He's written a book called Québec Inc. and the Temptation of State Capitalism , which talks about government involvement in pension plans. There's also Bill Robson from the C.D. Howe Institute.

À (1035)

The Chair: Have these people been contacted by your offices or someone's offices, Mr. Harris?

Mr. Richard Harris: They're in the process of being contacted, as we and the clerk track them down.

The Chair: Okay, and you're proposing that they be put in with the seniors panel for one hour only, just before we do clause-by-clause tomorrow?

Mr. Richard Harris: That would....

Mr. Scott Reid: I think we're proposing that they get the opportunity to present, and make their views known on this piece of legislation. Whether that happens tomorrow or whether it takes an hour is not really the point from our perspective.

I think we saw that just as we were getting to a particularly interesting question, our time ran out. Given the fact that we are dealing, in this bill, with the entire pension savings of many millions of Canadians, I'm not sure that something as arbitrary as the need to have everybody make all their comments within 60 minutes—3,600 seconds—makes that much sense.

The Chair: I'm just repeating what Mr. Harris had advised me earlier.

Mr. Scott Reid: Okay.

The Chair: I'm sorry. That's what you had advised me earlier, Mr. Harris.

Mr. Richard Harris: We would like to have these people come to make a presentation. We think it's important, because the witnesses who we have today represent the government, on the one hand, and the investment board, on the other hand—which we really appreciate. I'm sure that so much of the discussion will be on the upside of this today...for good reasons. We'd like to hear....

The Chair: Okay.

While we have the numbers here, I'll take Mr. Stoffer and Mr. Wilfert. Then we'll bring it to a conclusion.

Mr. Stoffer.

Mr. Peter Stoffer: Excuse my ignorance on this, but have Mr. Ken Georgetti of CLC and Mr. Jim Stanford of the CAW been invited to participate in the debate?

The Chair: No. Their names were not put forward by anybody.

Mr. Peter Stoffer: May I have the opportunity to do that now?

The Chair: Well, we weren't having a future business meeting. This wasn't a search for more names, Mr. Stoffer. Instead, these people were put forward to the clerk on Friday.

This committee has already voted on doing the clause-by-clause. There is some need for the legislation to get through the House before Christmas.

You could put other names up today, if you wish.

Mr. Peter Stoffer: Okay.

The Chair: I'll now hear from Mr. Wilfert.

Mr. Bryon Wilfert: Madam Chair, the timing issue is important, of course. I would point out again, I have no difficulty with the witnesses, as long as their comments are germane to the legislation. As sometimes occurs, the comments of people who come here may or may not necessarily be germane to the legislation. We're talking about transfer of funds and governance issues. I know there are other issues people may want to talk about, but in terms of the specifics of the legislation, I just want to feel comfortable that in fact the discussion will be on the specific three areas outlined in this legislation.

Mr. Richard Harris: As a matter of fact, these areas are very front and centre.

Mr. Bryon Wilfert: I thank Mr. Harris for this, Madam Chair.

The Chair: Okay. I had the clerk contact the seniors group last Friday, when I became aware of them, to make sure they understood the subject matter of the bill, so that we weren't getting into extraneous....They say they do understand this.

Is it the decision to see among this group the witnesses who would like to appear within an hour tomorrow? And we will still go to the clause-by-clause...? If there are more than three witnesses, how about spending an hour and a half, then clause-by-clause, and then the hour and a half after that? So up to an hour and a half in case there are more.

The names I have here are the Ontario Coalition of Senior Citizens' Organizations, then Bernard Dussault, Pierre Arbour, Bill Robson, Ken Georgetti, and Jim Stanford.

If more than two of the witnesses are available, we will go to an hour and a half meeting. If there are under two, we will do an hour. The clerk has been advised to try to reach them tomorrow. If Mr. Stoffer or Mr. Reid wish to give any assistance to the clerk, they can feel free to do so. But the clerk will go ahead and try to reach them.

Then we will move back to clause-by-clause. We will still do this so that the bill could potentially be reported to the House later in the week.

With that, I'm going to move on to our second....

Yes, Mr. Stoffer.

À (1040)

Mr. Peter Stoffer: Just on a point of interest--sorry again for my ignorance--I apologize for our chief critic not being here, but as you know, he's tied up.

The Chair: I know he's very busy.

Mr. Peter Stoffer: May I ask a simple question? Why does this bill have to be rushed through by the end of the year? I ask that because two names just popped into my head, and I could come up with a bunch more.

The Chair: Mr. Stoffer, I would just let you know that this bill was introduced last spring.

Mr. Peter Stoffer: I realize that.

The Chair: And last spring there were no names coming forward from you either.

Mr. Peter Stoffer: That's understandable, Madam. Again I apologize for my ignorance on that, but why is there a rush to get it done before Christmas?

The Chair: Last spring this was up. All of my critics know they can come with witnesses.

Let's go forward with our 10:30 meeting.

Mr. Scott Reid: Madam Chair, last spring there was the second reading in the House. I stood up in the House and delivered a speech in which I expressed considerable concern with aspects of this bill. Last spring the government made a decision to prorogue, for its own reasons, and made the decision that this bill was not important enough to alter that decision. The government made a decision to not bring forward this bill immediately upon the reconvening of the House, but took its time.

I think the argument that somehow the government has been pushing this with all due diligence, when in fact it waited for a number of years before bringing it forward--

The Chair: Excuse me, Mr. Reid. Mr. Harris and I had a discussion about this, and we have accommodated your request.

Mr. Scott Reid: I brought forward two witnesses, who I think would be good witnesses. The suggestion that somehow there's an obligation.... We would like to find them and contact them, but the fact is these are not people I know personally.

The Chair: You have made that point.

Mr. Scott Reid: I'm making it now publicly, so it will be on the record. It seems to me the goal is to push this forward at this extraordinarily fast rate, without listening to witnesses who have something useful to say if they cannot meet the arbitrary deadline of being here tomorrow, or having them say everything worth saying within an hour or perhaps 90 minutes. It seems to me that has nothing to do with producing a worthwhile and safe pension system for Canada, and has everything to do with taking a piece of faulty legislation and pushing it through while we're under cover of the Romanow report and all the attention it will be getting, and the Kyoto accord. This is abundantly clear.

We ought to deal with this by allowing all those who have something worthwhile to say to speak and by inviting them here, so we can produce the best and safest pension retirement system for Canadian seniors and all of us who will eventually come to depend upon the Canada Pension Plan. That should be our only consideration.

If we need to adjust the amount of time we spend sitting here and reading, by perhaps sitting late or on weekends, we should do that.

The Chair: Thank you very much.

Mr. Wilfert is next and then Ms. Minna. Then we'll go on to our witnesses.

Mr. Bryon Wilfert: I will just re-emphasize that the legislation was introduced June 6. It was debated in the House, as Mr. Reid knows, because we debated each other on this particular piece of legislation. It was reintroduced this fall, and during that intervening time any members of the committee were quite free to provide witnesses.

I take Mr. Harris at his word, and that of the chair. There were consultations, and clearly witnesses were proposed. Therefore, with all due respect to Mr. Reid, that information being so, we met and outlined a course of action. It is my understanding that the witnesses, which I have no difficulty with, are coming tomorrow. Then if it's the will of the committee, we will then deal with clause-by-clause. I assume that is still the course you have set, in terms of the committee's wishes.

I'm a bit surprised that Mr. Reid would raise this issue now, because if there were additional witnesses over the summer, he could certainly have communicated that to either the chair or the clerk.

À (1045)

The Chair: Thank you very much.

Madame Picard, go ahead please.

[Translation]

Ms. Pauline Picard: Excuse me, Madam Chair.

Madam Chair, I am in favour of the bill, but I also agree with Mr. Reid, in that I don't know whether I missed something, but I didn't get the impression that much of an effort was made to hear witnesses who could, whether positively or negatively, raise questions about this bill.

This bill is often held out as based on the Caisse de dépôt et placement du Québec. As far as I know, no witness has come to tell us how the Caisse de dépôt et placement du Québec works, and the same thing goes for the Ontario Teachers Fund.

I agree that we may be missing some information we need to make enlightened decisions when it comes time for clause-by-clause study.

[English]

The Chair: Your colleague was the one who agreed to this timetable the other night. We did it at the end. Just to inform you, he was in the room.

I am going to--

Mr. Scott Reid: Just one point, Madam Chair--

The Chair: With respect, we are 15 minutes over time, and we do have witnesses before us.

Mr. Scott Reid: I understand that, Madam Chair, but I don't get to set the agenda for this committee. And speaking of agendas, it's worth pointing out that the decision to do this in the manner at that meeting last Wednesday was not on the written agenda. It occurred only after the member for the Canadian Alliance had left the room. I think that should be noted. So when this pretence of open consultation goes on, I think we have to understand the context that it's in.

The Chair: Yes, there were four people who could be there from the Canadian Alliance, and as you--

Mr. Scott Reid: I understand that. Nonetheless, this decision was made when no Canadian Alliance member was in the room, and it was not on the agenda, and that should be noted, because this pretence of openness is simply not an accurate reflection of the record.

The Chair: Yes, and I'm sorry, Mr. Reid, and as soon as your Canadian Alliance....

I personally met with your vice-chair representative on this point, and I reiterate today that this is what he advised me and what I had put on the record.

Would you verify that please, Mr. Harris, that this was our discussion?

Mr. Scott Reid: The meeting last Wednesday....

The Chair: Mr. Harris, it's just fine. I'd like to go on. We're talking about having witnesses, but we are holding up the witnesses we have before us. So let's go ahead.

Our witnesses are John MacNaughton, the president and chief executive officer, and Gail Cook-Bennett, the chairperson of the board of directors of the Canada Pension Plan Investment Board. Thank you for patience while we were just doing some housekeeping details. We will go 15 minutes later to make up for this time.

Thank you very much. Who would like to commence the presentation?

Ms. Gail Cook-Bennett (Chairperson, Board of Directors, Canada Pension Plan Investment Board): I will, Madam Chair.

The Chair: I understand you both have about a nine-minute presentation. Please go ahead, Madam.

Ms. Gail Cook-Bennett: Madam Chair and members of the finance committee, we are delighted to be here today to participate in your discussion of Bill C-3. In my capacity as chair of the CPP Investment Board, I will speak to governance issues, and John MacNaughton, our president and chief executive officer, will speak to investment strategy, performance, and operations. We look forward to a spirited discussion following the remarks.

As you know, the CPP Investment Board has been operating now for four years. Its mandate is to invest CPP funds that are not needed to pay current benefits. As you heard earlier, the chief actuary has estimated that contributions will exceed benefits until the year 2021. After that, some investment income will be needed to help pay CPP benefits.

The fact that the CPP Investment Board is not expected to direct investment income to the Canada Pension Plan for about 20 years is key to understanding the investment strategy that we are undertaking--and Mr. MacNaughton will speak further to that later.

By way of history and background, the first dollar was invested in March 1999, and the initial strategy was to invest all the cashflow into equities to balance the plan's large government bond portfolio. In June 2001, the CPP Investment Board diversified into private equities and will be adding real estate and infrastructure assets.

Why the emphasis on equities? We believe equities will outperform bonds over the long term, despite the highly volatile nature of the stock market in the short term. Mr. MacNaughton will comment further on that. In the meantime, let me make a few observations on our governance as it relates to the effective management of all the CPP assets that are contemplated in Bill C-3.

Our governance model is built on two fundamental principles: first, the investment professionals must be able to make their decisions without political interference; and second, there must be full accountability and reporting to Parliament, the provinces, and the people of Canada.

Our legislation is very carefully crafted to give life and balance to these two principles. For example, the legislation requires the board to have a sufficient number of directors with proven financial ability or relevant work experience--in other words, a knowledgeable board.

You heard earlier how the directors were appointed. This is an innovative process involving both the federal and provincial governments. As a result of this process, the board consists of professionals with accounting, actuarial, economic, and investment credentials. They're experienced in the public and private sectors, and they bring to the board table informed opinions on public and private sector governance. These directors are not only independent, they are independently minded.

The CPP Investment Board legislation gives the board powers that reinforce the buffer zone between governments and the investment professionals. These powers include, for example, the board's responsibility to appoint the chief executive officer, as well as to approve policies that frame management's discretion in making decisions. The board appoints the internal and external auditors, who report directly to the audit committee of the board, and we review and approve management selection of external investment managers.

Despite all these powers, government can check on what is being done with the public's money. Indeed, the federal finance minister is required to authorize a special examination of the CPP Investment Board's books, records, systems, and practices every six years. This will occur in consultation with the provinces within the next two years. The federal finance minister also has the authority to appoint a firm of auditors to conduct a special audit at his discretion.

Our political and public accountability is especially important at a time when some Canadians may worry about equity markets. I can assure you that the directors and management are committed to full and timely disclosure, whether the short-term news is good or bad.

Let me spell out our accountability in more detail.

À (1050)

As a crown corporation, the CPP investment board is accountable to Parliament through the federal Minister of Finance. As the investment company for the Canada Pension Plan, it is accountable to federal and provincial finance ministers, with whom quarterly and annual financial statements and press releases are filed. As the investor of CPP funds, we're accountable to the public through quarterly and annual reports and public meetings.

Those are the legislated requirements. We have gone considerably further. This disclosure policy approved by the board of directors states:

“Canadians have the right to know why, how and where we invest their Canada Pension Plan money, who makes the investment decisions, what assets are owned on their behalf, and how the investments are performing.”

Extensive information is published on the website, including the investment strategy, quarterly results, and current assets under management. We believe that no pension fund in Canada reveals as much as we do and as often. The president holds a conference call with the news media immediately after the quarterly results are approved by the directors, and this call is audio-cast on the website so that interested Canadians can tune in.

On a final point, there has been widespread debate about ethical standards in the public and private sector. Our board is proactive on ethical issues. We accept the responsibility imposed by legislation to approve policies and procedures that actually shape corporate culture on proper conduct and transparency. For example, directors and employees must pre-clear personal securities trading. They must report their securities trading to the external auditor, who reports their compliance with this requirement to the audit committee.

Last May we invited three eminent specialists on private and public sector ethical conduct to review our code of conduct and conflict of interest policies and procedures. They liked what we're doing, urged us to continue to strive for high standards, and suggested we think about retaining a part-time adviser on conflicts of interest and conduct. A discussion paper on this subject is posted on our website and will be continually updated as our views evolve.

In summary, the federal and provincial governments were innovative in creating a sturdy governance model, which we have strengthened.

With your permission, Madam Chair, I'll ask Mr. MacNaughton to elaborate on our current and future investment strategy.

À (1055)

The Chair: Mr. MacNaughton, please go ahead, sir.

Mr. John MacNaughton (President and Chief Executive Officer, Canada Pension Plan Investment Board): Thank you, Madam Chair.

I have a prepared text I'd be prepared to share with members, but if you wish to divert to questions, I'd be happy to do that as well.

The Chair: You will still get questions and answers after the presentation of your text.

Mr. John MacNaughton: Thank you.

I would reiterate our chair's comment. We're very pleased to be here today to share this information with you.

I want to assure everybody at the outset that we are well advanced in our preparations to receive the assets of the Canada Pension Plan and take care of them, if that's the wish of Parliament.

We have an outstanding team of investment, operational, and financial professionals who've been developing our strategies, policies, systems, and controls in anticipation of Bill C-3 being approved. Currently, about 35 people are on our staff. We spend less than $20 million annually on investment management and administration. We're committed to being a highly professional organization that works cost-effectively.

There are many aspects of our operations and strategy that we could discuss today. I look forward to responding to your questions and making additional comments at that time. Beforehand, I want to make three points that do shape our investment strategy and may be of interest to you.

The first point is we are a cash-rich investor. No other investor in Canada is in our position of having several billions of net new dollars to invest every year. We are entering a period when other pension funds may have to sell assets to rebalance their portfolios or to acquire cash to pay benefits. This means we should have flexibility in acquiring assets at attractive prices, relative to future values and the Canada Pension Plan's long-term financial needs.

Second, as Dr. Cook-Bennett has noted, we have a period of approximately 20 years before we're expected to pay any investment income to the Canada Pension Plan. This means we can invest quite differently from other pension funds that must generate current investment income to pay pension benefits today.

Think for a moment of how a 35-year-old Canadian with lots of cash might invest for the future as compared to a 65-year-old who has diminishing cash and needs income today, next month, and next year. Their needs are dramatically different and the investment strategy should be as well. At the CPP Investment Board, we're in the fortunate position of being the 35-year-old with time and money on our side. We require an investment strategy based on a payback over decades, not months, or even years.

The third differentiating factor is that in the last three years markets have been a buying opportunity for an investor with lots of cash and a long investment horizon.

Understanding these three points makes it possible to stay calm and focused during periods of unusual market volatility, with resulting multi-billion-dollar portfolio gains and losses in periods as short as a few months. Let's now look at what the three factors mean to our portfolio strategy.

The first factor is about being cash rich. We expect to receive between $6 billion and $8 billion in new cash a year. If Bill C-3 is approved, next year we will also receive the CPP cash reserve that is currently valued at about $6 billion.

Human Resources Development Canada and the Department of Finance will tell us how much cash the Canada Pension Plan needs to pay current benefits. Our systems will ensure sufficient money is always available to make the pension payments. Otherwise, all cashflows will be invested in capital markets to earn the returns necessary to contribute to the financial strength and long-term viability of the Canada Pension Plan.

Our biggest challenge in this period will be investing 70% of new cash in Canada in compliance with the foreign property rule. We've hired investment specialists, called “transition managers”, to help us gain market exposure without bidding up prices or incurring unnecessary costs.

Second, what are the implications of the minimum twenty-year investment horizon? Our mandate set out in the legislation is to ensure the long-term health of the Canada Pension Plan by investing CPP assets to maximize investment returns without undue risk of loss. If we do not need to contribute funds to the CPP for 20 years, we can obviously assume higher investment risk to earn higher investment returns.

What's the risk return trade-off? Historical data provide clues about future long-term returns. In fact, the chief actuary has made certain assumptions about prospective long-term returns for bonds and equities. He discussed them a few moments ago. Based on his assumptions, if we were to invest all CPP assets in Canadian government bonds, they might earn a real return after inflation of 3.8% over the long term.

Á (1100)

If we were to invest the assets 50% in bonds and 50% in equities, the expected long-term return might be about 4.2%. If we were to invest all the assets in equities, the expected returns over the long term might be even higher, something like 4.6%. We would earn investment income from the marketplace as companies improve their profits in growing economies at home and abroad. So despite the short-term market volatility, over the long term, equities offer the best returns for the risks assumed.

The chief actuary has estimated that transferring all of the CPP assets to our care could add something like $72 billion in value over 50 years--maybe even higher, based on the number I heard a few moments ago. He assumes that we would invest all new cash, including the cash reserve and equities, until the asset mix reached 50% equities and 50% bonds. He also assumes that the asset mix would be maintained over the long term.

Whether his assumption on asset mix is the appropriate one for the long term requires further study. Today, large maturing public sector pension plans typically invest about two-thirds of their assets in equities, including private equity and inflation-sensitive assets such as real estate, infrastructure, and natural resources.

I stress here that we are not a typical pension fund. First, the Canada Pension Plan is not fully funded, nor is it intended to be. It's a modified pay-as-you-go scheme. Assets are currently about 10% of liabilities, and, according to Mr. Ménard, are expected to exceed 20% within 20 years.

Does the CPP investment board currently have a specific investment target? No. The chief actuary has assumptions about expected performance of Canadian and foreign equities in his recent report on the financial health of the Canada Pension Plan. Based on his assumptions, our equity portfolio would be expected to earn a 4.6% rate of return over the long term. Added to that is a 3% inflation rate, implying something like a 7.6% nominal rate over this period. Remember that these are expected returns in the future and therefore are projections.

We believe we can best achieve and even exceed the target with a diversified portfolio by committing to equities that trade on stock exchanges, and to private equities, where the long-term returns should be higher, as well as to real estate, infrastructure, and other large capital asset pools such as energy resources. In addition, a portion of our assets will remain in government bonds.

These two point--strong cashflows and a long minimum investment period--differentiate the CPP investment board from virtually all institutional investors. But you might ask, is this a good time to invest in the stock market? In our view, it may be one of the best buy-in periods in the past century. A falling market is a boon to a cash-rich and patient investor. We began investing in stocks in 1999. In our first fiscal year, the market boomed. Since then, it has been in its longest decline since the crash of 1929.

The most severe and prolonged market slumps were in 1929 and in 1973-74. What would have happened if an investor in our position had begun to invest in those markets a year prior to the decline setting in and continued to invest for 20 years? We did an analysis to replicate those two periods by putting cash into the market at the pace we are doing today, 70% in Canada and 30% outside of Canada. The analysis confirmed that a patient and cash-rich investor would lose money in the initial years, as we're doing presently, but would do well in subsequent years, as we expect to do.

Let me share some evidence. After 20 years, the 1929 experience translated into a 7.4% average annual nominal rate of return, and the 1973-74 experience into a 12.7% return. We also looked at these periods to see what would have happened if we'd invested only in government bonds. In both periods, equities earned more than bonds, specifically 7.4% versus 4.7% in the first period, for a spread of 2.7%, and then 12.7% versus 11% in the second period, for a still sizable spread of 1.7%.

Let's put that 1.7% into perspective. It would have translated into several billions of dollars, compounded over the years.

Á (1105)

For example, with assets starting at $20 billion, the difference between bonds and equities would add to something like $58 billion after 20 years, enough to pay well over two million pensions at today's benefit levels, adjusted for inflation.

As an institution with long-term positive cashflows and long timeframes, we see an opportunity to build a large and profitable investment portfolio. We appreciate, however, that it's difficult for many Canadians to hear four times a year about gains and losses in the value of their CPP assets, and it's especially unnerving when we report two consecutive quarters of equity losses, as we did recently.

Let me take a moment to put in perspective what we mean by losses. We haven't had losses in the sense of cash forgone; rather, what we reported in the six months of the current fiscal year was a $4 billion decline in the value of equities. The shares remain in our portfolio, and I'm talking here about the shares of large, solid, and profitable companies, like the Royal Bank, General Electric, General Motors, Loblaws, and Manulife.

Since September 30, our equity portfolio has regained a good deal of its value. In fact, markets have had positive returns now for seven consecutive weeks.

Let's put this equity component in perspective, by putting it back into the consolidated portfolio of the total CPP, which is what we focus on and what we're required by our legislation to focus on.

During the past three and a half years since the CPP Investment Board was created, the total CPP assets have grown from $44 billion to $55 billion at the mid-point of the current fiscal year. During that time, the consolidated assets have generated impressive income, and returns as high as 7% in 2001 and even 5.7% in the fiscal year ending March 31, 2002. The first half of the current fiscal year, from April 1 to September 30, is the first time the CPP assets have produced negative overall results, with a net loss or decline in value of $1.5 billion, for a minus 2.2% return.

I dare say the overall results compare very well with other public sector pension funds, which, like the CPP, have experienced declining equity markets for three consecutive years, offset by fixed-income gains. Still, I share with you our knowledge that seniors worry that short-term performance will affect their pension benefits. It won't. As I mentioned, contributions are expected to exceed benefits for at least 20 years, and the chief actuary has shared his projections with you for the next 75 years.

At the CPP Investment Board, our mandate is to invest for a different generation--the younger generation. We are investing to pay the pensions of today's younger workers when they start to retire in 20 years. By sticking to our long-term strategy of investing in capital markets, the Canada Pension Plan has a high probability of being in a stronger position in 20 years and beyond than it is today.

On a final comment, the vision of the federal and provincial governments in refocusing the Canada Pension Plan and creating the CPP Investment Board has captured the attention of other countries concerned about their aging populations. Canada is a role model in setting up an arm's-length corporation, staffed by investment professionals, to invest state pension funds over the long term.

Dr. Cook-Bennett and I are honoured to serve as the founding chair and president, respectively, of this innovative organization, and to be entrusted with putting pension assets to work for the benefit of future generations.

Thank you for your interest in these remarks. I look forward to answering your questions.

Á (1110)

The Chair: Thank you very much to both of you for your presentations.

We'll go to Mr. Reid for up to ten minutes, sir.

Mr. Scott Reid: Thank you, Madam Chair.

My first question is for Mrs. Cook-Bennett, and then I'll return to Mr. McNaughton. You must have been in the audience when Mr. Discepola raised an interesting question--we ran out of time--regarding the possibility of money being transferred from the CPP investment fund to general revenues, should it run a substantial surplus that is not required to meet its legislative requirements.

Does this bill, as it's currently written, and the prior legislation prevent that from happening, or is that a conceivable scenario?

Ms. Gail Cook-Bennett: I think there are a number of different layers of issues here in getting to what I think is the underlying concern. The idea, in my understanding, is the federal and provincial governments clearly wanted to have a strong and stable social program, which is the Canada Pension Plan. Their intention when they set it up and as communicated to us, and as all the governance structures around the CPP Investment Board would indicate, was that this be the objective.

The fear that's underlying all of this, of course, is about whether it is really independent and accountable. In order to do anything with that surplus or to siphon off funds other than those required for the payment of benefits, you would need to use the amending formula with the federal and provincial program.

I'm not a lawyer, but that is my understanding; that to get a change such as the one you're contemplating today you have to have two-thirds of the participating provinces with two-thirds of the population.

Mr. Scott Reid: What I'm thinking of here, by way of parallel situations, is that, for example, in 1980 the then manager of investments at the Caisse de dépôts et placements, Eric Kierans, resigned when the Minister of Finance of Quebec, who at the time was Jean Campeau, instructed the Caisse de dépôts to essentially make a purchase of Quebec government bonds at a preferred rate of interest. That sort of thing could not happen--is that correct?

Ms. Gail Cook-Bennett: That would not happen with the existing structure, with the existing board of directors. Indeed, it would not be lawful under our act to do so. We would be in violation of the act if we used the portfolio for anything other than its object, which is to act in the interests of the beneficiaries and contributors and to maximize returns without undue risk.

Mr. Scott Reid: So that also precludes, as things stand, taking into account so-called ethical investments or any consideration other than maximizing the rate of return within defined risk parameters?

Ms. Gail Cook-Bennett: That has to be our focus. If you want to pursue this question with our chief executive officer, there are approaches to active investing whereby some of the concerns that might be reflected in social investing are in fact used by any active manager. Political risk, for example, is a common one that's taken into consideration. The advocacy of environmental standards for individual companies is taken into consideration sometimes. But in terms of the overall object, we cannot use the portfolio for any other reason than the two I've given.

Á (1115)

Mr. Scott Reid: Mr. MacNaughton, I would be interested in hearing your comments on this, but as well I would start by addressing another issue.

You mentioned you had hired experts to allow you to determine how to avoid bidding up prices. This is a problem that bedevils all--there aren't that many--very large investment groups. I mentioned CalPERS earlier in my questions to another witness. My understanding is that CalPERS is around a quarter of the size in the American market, relatively speaking, that the Canada Pension Plan would be in the Canadian market, more or less. Therefore I would assume that, if anything, the problem of bidding up assets as you move into them, and of course also causing the prices to fall as you attempt to move out of them--the liquidity problem--would be a tremendous issue. I wonder if you know what effect that has on your rate of return, or would have on a potential rate of return once the pension plan is fully invested within its proposed parameters, and to what degree you've been able to reduce it. I'd be interested in knowing how you have been able to reduce it as well.

Mr. John MacNaughton: The question you're raising is a very important one for us as investment managers. The process of transition management includes efforts to gain exposure to markets or reduce exposure to markets, without impacting upon them or without impacting upon them unnecessarily.

There are two aspects to transition costs. One is observable, such as commissions, and the other is not observable. It is the change in the bid-ask spread. It is really the issue you're addressing.

Canadian capital markets are small. It doesn't only affect us, it affects all investors. Mitigating the costs is something we spend a lot of time on. We believe we've been effective to date, but we're constantly vigilant. There are procedures for doing what are called “crosses”, identifying other large investors who wish to be sellers when we're buyers. We've done some transactions directly with other large pension funds. In those cases, there is a zero market impact. They are actually at the midpoint of the bid-ask spread. There are other ways to patiently accumulate positions so we take time when time is required.

Having said that, all investors should be cognizant of the impact of their actions on the market because there is a potential cost in being indifferent to them.

Mr. Scott Reid: Have you ever been able to quantify it? Are studies done on this sort of thing? Have studies been done for the CPP on the impact it has?

Mr. John MacNaughton: We have obtained some data from firms who specialize in this area. It's a little bit of art, as well as science. It's something that's relatively new. Traditionally, managers have been more preoccupied with commissions than they have been with market impact. They think that if they get the commissions under control everything is fine, when in fact the market impact can be far greater than the commission cost by itself. I would say we don't have any definitive data because I don't believe any exists.

One of the things I might share with the committee is we believe, notwithstanding the fact that there are some disadvantageous aspects to market impact, there's also a benefit to being a regular participant in markets. We believe that over time, because of our position with all this new cash, we will actually have more data on market impact than any investor in Canada. With this information, we will be able to work to our advantage by providing liquidity to those who need it and not only being a taker of liquidity. It's a sword that cuts both ways once we have a better understanding of it.

Mr. Scott Reid: Do I have time for any further questions, Madam Chair?

The Chair: Yes, you do. You have two minutes more.

Mr. Scott Reid: You've also talked about going into assets that are not publicly traded. Real estate is one. I'm assuming, in some cases, start-up capital would be one. I might be wrong.

My understanding of the experience of Caisse de dépôt et placement du Québec and some of the other overseas examples of government-run, central-provident funds attempting to invest in these types of assets suggests that the record is not what one would have hoped for. In general, there's tremendous risk involved, risk at a number of levels.

I'm being very cautious as I say this. I think at one of the levels there's a risk of political interference. I absolutely do not think it applies to you. I want to clearly state that. Nonetheless, there is a problem. You're now dealing with something where the safety of being able to check against publicly traded assets is an in-built security. It is of tremendous value to a public pension fund.

Knowing the history of, for example, the Caisse de dépôt et placement when it invested directly in companies, I'm thinking of the Steinberg investment that lost close to half a billion dollars, Brascan, Domtar, and some of the real estate investments that have turned out very poorly. Is there some additional security you have built into the way you're doing investments that they did not have? This is to both of you.

Á (1120)

Mr. John MacNaughton: There are a couple of things. Firstly, we are committing to private equity because we believe that over the long term it will produce better returns than public equity. There's what's called an illiquidity discount, which we estimate to be about 300 basis points, which accrues to an investor who has the ability to be patient and not need the ability to liquidate his investments on short notice. With the 20-year time horizon we're talking about, we don't need that liquidity, because private investments liquidate themselves over a period of anywhere from eight to twelve years. So we think we have a competitive advantage in being able to commit to private equity and be a patient investor.

We are investing in private equity not by making the individual investment decisions ourselves, but by investing through general partners who raise funds in which we are one of the investors and in which they put their own capital. So they make the individual investment decisions, and we negotiate the relationships with those general partners that we think will do good work.

To put it in perspective, in the close to two years now that we've been interested in this area, we've received submissions from approximately a thousand general partners in Canada, the United States, and around the world, and we've invested or made commitments to approximately 30 of them. So there are a lot out there, and we have a very clearly defined process for ensuring that the expertise exists, and also, importantly, that the interests of the general partners are very tightly aligned with those of the limited partners, which includes us. That's how we try to avoid problems of any description, and hopefully we'll be successful in that regard.

Mr. Scott Reid: Thank you.

The Chair: Thank you very much, Mr. Reid.

Madame Picard, you have up to ten minutes.

[Translation]

Ms. Pauline Picard: Thank you, Madam Chair.

I would like to ask Ms. Bennett a question. I was very interested by what you had to say about ethical principles. You said that the disclosure policy was approved by the board of directors and you also said the following:

Canadians have the right to know why, how and where we invest their Canada Pension Plan money, who makes the investment decisions, what assets are owned on their behalf, and how the investments are performing.

You said that you had an investment strategy, that you were going to inform Canadians of the quarterly results and current assets under management, and that you were going to hold public meetings and all that.

I would like to know what recourse Canadians would have should your investment strategy lead you to make ethically questionable investments that didn't suit them. How would they go about it?

[English]

Ms. Gail Cook-Bennett: That's a very interesting question. I would say primarily it's through elected representatives, but what we're trying to do and the reason we have that disclosure policy, and why it's so strong, is that we believe the more information we can get out there, the more people who are informed and will be able to make representations on behalf of the person who might not have access to a website or a computer to get access to a website. So we regard our mission as providing the information out there so that whether it's journalists, actuaries, or accountants, they can look at what we're doing. We see that as not only beneficial to Canadians, but to us, because the more people who are watching us, the less that can go wrong.

In terms of an individual Canadian who doesn't like something, they can come to a public meeting, and we record the minutes of the public meeting and put that on our website. There are comments there that have been raised by individuals, and we go back and look at many of those. In cases where they are just philosophically different, there's not much we can do about it.

What we like to say is that we would hope that our board of directors, acting on behalf of the beneficiaries and contributors, is making decisions similar to what Canadians would make, if they had the same information as the board of directors has.

So the short answer is I think it's an excellent question. There are a number of different avenues by which this can happen, but to take all the millions of Canadians and say they have direct access.... Well, they do, to the website, if they can get it; they do to their elected representatives. But what's important is to get a complex subject made a little simpler so that some of the key, more informed groups can have the debate.

Á (1125)

[Translation]

Ms. Pauline Picard: Thank you very much.

[English]

The Chair: Mr. Murphy.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Madam Chairman.

My first question is for Mr. MacNaughton. It deals with the issue of CPP disability. I want to pose the question on how this relates to the whole operation. It's a little different. The CPP invests more of a fund, the exposure, but it wouldn't administer the program. It's a discretionary issue, whereas the CPP retirement fund is basically non-discretionary.

Normally, in a private plan, if they were offering this product you'd see it separately funded, separately priced, whereas in the CPP plan it's not. How does this relate in the whole scheme of things?

Mr. John MacNaughton: The whole topic of benefit design, contribution rate, and so on is handled by people and organizations separate from us, so I can't comment in very much detail. We are charged uniquely with managing a pool of assets, and they're not segregated based on whether they're for retirement purposes or disability purposes.

Mr. Shawn Murphy: How do you actuarially account for it when you neither administer it nor do you really set the guidelines?

Mr. John MacNaughton: Well, this is part of the division of responsibilities, I think, to provide checks and balances. And the actuarial calculations are made by the chief actuary every three years and then reviewed by the external review group, and then those are, in each case, reported to Parliament.

Mr. Shawn Murphy: Are these assessments, the unfunded liabilities under the CPP disability component, accounted for separately?

Mr. John MacNaughton: It's my understanding they're integrated into the overall calculations, but I'm not the best person to ask that question to.

Mr. Shawn Murphy: So you're comfortable with that arrangement?

Mr. John MacNaughton: We have been cross-examined by the peer group reviewing the chief actuary's work and we've been consulted by him during the process of his work, so I believe the answer is yes, although I do want to caution that forming a judgment on that question is not part of our responsibility. Ours is the investment management responsibility.

Mr. Shawn Murphy: I'd like to deal with the question of investment decisions, Madam Chair.

Is there any type of a regional focus whatsoever in any of your investment decisions? I know you have very serious prudential and fiduciary responsibilities and your basic focus has to be return on capital, but you are yourself under restrictions from a Canada-wide basis with the foreign property rule, the 70% rule, so you can't venture out into the international markets other than with your 30%. And the Quebec plan, of course, is under a regional focus. From my experience, there is a focus in Toronto; that seems to be the financial capital.

Á (1130)

Mr. John MacNaughton: The answer is we are willing to invest anywhere where we see attractive opportunities, but there's no regional focus in how we allocate the funds.

Mr. Shawn Murphy: Thank you.

The Chair: Okay, Mr. Stoffer.

Mr. Peter Stoffer: Thank you very much, Madam Chair, and thanks to the two of you for your presentation.

It's very complicated and quite technical. You have one jurisdiction, the federal government, paying out the fund, and you have another one investing the fund. So I have a simple question. Is my Canada Pension Plan fund money, as we speak now, invested in any way, shape, or form in a tobacco company?

Mr. John MacNaughton: The answer is yes, it is. The securities in which we invest are all listed on our website, and we update the list quarterly.

Mr. Peter Stoffer: Who puts in guidelines for an ethical screen?

Mr. John MacNaughton: We have a social investing policy, which is on the website. We can have that printed out and prepared for members of the committee tomorrow. In it we say a number of things. If you would like, I'd be pleased to share with you a summary. In it we reiterate the legislation, which says we're to maximize returns without undue risk, and we're not to use the portfolio for any purpose that's incompatible with this purpose.

As it relates to screening, I would say our view is that screening works for individuals who have very clear views of what they'd like to do with their own money. It works for groups of like-minded people, who share views. But it does not work for 16 million Canadians, who have different views on virtually every topic—as you will know better than we do. So we do not screen investments for religious reasons, for political reasons, for social policy reasons, to include or exclude them. We believe that would be incompatible with our mandate.

Having said that, we believe that companies that exhibit good labour practices and good environmental records, and so on, generally are better investments over the long term. So as investment criteria, some of these things get taken into account. We basically follow the position of the Government of Canada, and say we will invest in the securities of any legal business in Canada. We don't believe we should have the authority to make decisions that are different from the Government of Canada, and what it deems to be a legal business. So that's a first principle.

The second principle is that we will invest in the securities of any country with whom Canada maintains normal relationships—in other words, which is not on the proscribed list of the Government of Canada. We believe decisions in this regard should be made by the government, not by us as investment managers.

A couple of other things I would share, the first of which is that screening—which has been a popular approach of certain social investment organizations over the years—is now actually declining in popularity in favour of engagement. In it social investment advocates are saying, in many cases, “Don't sell your shares; keep them, and vote your proxies to support good practices.” One of the good practices that we believe is gaining wide currency—not just in Canada, but around the world—is disclosure by companies of their compliance with various social investing criteria, and so on. So our policy includes a commitment to cast our proxies in favour of this kind of disclosure.

Mr. Peter Stoffer: I thank you.

So in essence.... Madam Chair, and the two fine people here, my problem is that I see the government spending millions and millions of taxpayers' dollars trying to get people to quit smoking. Then, on the other hand, these same people's tax dollars or pension money is assisting the tobacco companies' profits. That's the difficulty and problem I have.

I'm sure that if the vast majority of Canadians who don't own websites were told this point-blank, they'd be very upset. It's not just tobacco companies, but it could inadvertently be a company making landmines.

If you're investing in foreign companies, what is the screen...? Companies are very diversified; one company can own a hundred other companies. I don't know if you would have the time or resources to investigate the identity of each and every identity these companies own. Without knowing this, you could inadvertently be investing Canadian taxpayers' money in a company that makes landmines. Technically, you could do this; that's the difficulty I have.

The other difficulty I have, Madam Chair, is using Canadian taxpayers' money to invest in a foreign company who may directly compete with our own companies within Canada. I just find this a challenge. It's very competitive out there, and Canadian companies need, I guess, all the positive generations from our own governments possible. Because in the end—with great respect—it's not you folks who will answer to the Canadian people if this investment fund goes for a dump, or invests in companies that destroy the planet, or destroy people's health. It's we as politicians who have to wear it. That is the challenge I have in this regard. So how do we get around this?

You said to Mr. Murphy that you will go where there are attractive opportunities. I've heard that said many times before. Attractive opportunities can mean you can make a lot of money in a particular area. What it does to the environment, or what it does to child labour, or what it does to people's health are important, but are another side, because you have to concentrate on making a profit and making a return on our investment. The governments can worry about the other stuff. Am I fair in this statement?

Á (1135)

Mr. John MacNaughton: My response, and I think our chair's response, would be that we are governed by the legislation, and the legislation is very clear what our mandate is: it's to maximize investment returns without undue risk of loss.

Mr. Peter Stoffer: And I appreciate that honesty. That's the concern I have. What you just said is very true and very factual, but I'm sure many other Canadians have a problem with it, because investment means not just a return of your initial dollar; it also means that dollar is going to ensure it doesn't hurt my neighbour, or doesn't hurt another country, or doesn't hurt anything. That's the concern I have.

My other question on this, and this one is based on ignorance--

The Chair: Mr. Stoffer, Ms. Cook-Bennett wanted to add to your answer before you go on to your next question.

Ms. Gail Cook-Bennett: I wish to focus directly on your concerns. There seem to be two types of concerns. The first one is the tobacco company. I think that would fall into the category Mr. McNaughton mentioned: tobacco companies are legal. What power, therefore, do we as investors on behalf of Canadians have to do anything about that?

Secondly, you raised a trade issue. There are different philosophical positions on it, and your view is shared by many but not by a lot. When you multiply the number of issues there are of a generic nature such as this, that is probably why the drafters of the legislation asked us to focus on what we could do well, as opposed to what we couldn't do well; there are other fora for dealing with those.

Mr. Peter Stoffer: I appreciate that comment, but yes, tobacco companies are legal. And the United States didn't ratify the landmine treaty either, so there are companies in the United States that develop landmines. We could be investing in those companies, and Canadians may not know about it. It's a legal thing to do, yet we signed a treaty to the world saying we would ban landmines. At the same time, we could inadvertently be investing in those companies that legally make landmines in the United States. But that's another thing.

The next question I have is based strictly on ignorance and has nothing to do with the two of you personally.

Sir, you were with the Royal Bank before, is that correct?

Mr. John MacNaughton: No.

Mr. Peter Stoffer: Oh, I'm sorry.

Mr. John MacNaughton: One of our directors was formerly an officer of the Royal Bank.

Mr. Peter Stoffer: Okay. Is it possible, then--and again, just out of ignorance and not to be accusatory in any way--is it possible that he, being on the board of directors, can make a recommendation for an investment that may inadvertently favour the Royal Bank?

Mr. John MacNaughton: The answer is no, but I'll let our chair expand.

Ms. Gail Cook-Bennett: My experience from the very first board of directors meeting we had was that the group around the table were excessively cautious about any hint of conflict of interest.

You will understand that when you start out with a piece of paper and pencil, and that's it--the piece of legislation and 12 people sitting around a board table--you don't have all your policies in order, but I can assure you that this group is really sensitive to these issues. Indeed, that's why we brought in outsiders, not because we had any concern that what we had done was not leading edge; rather, we felt there might be skeptics out there who might wonder. So we brought people in and had them have a look at it.

The procedure, as a matter of fact, is sufficiently stringent that there are times when I would prefer that more people stayed in the room than went out of the room when issues like this came up, but people are very sensitive and don't want their integrity undermined.

Mr. Peter Stoffer: My last question, Madam Chair, deals with a very simplistic statement. Can I go back to my constituents and tell a 35-year-old shipbuilder that his Canada Pension Plan will be there in 30 years?

Mr. John MacNaughton: Yes.

Á (1140)

Mr. Peter Stoffer: Thank you very much.

The Chair: Mr. Discepola, please.

Mr. Nick Discepola: I just have a housekeeping question. What is the duration of your mandate? Is it appointed by order in council?

Mrs. Gail Cook-Bennett: Yes. When they started off, some board members had three-year appointments and some had two; then, if the person is reappointed, it's for another three years.

The directors have a maximum of three terms, and the board chair, for some reason, has the option of another three years. So the maximum for the chair is twelve, and the maximum for a director is nine.

Mr. John MacNaughton: If I could just supplement that, speaking as an employee, as with other employees we're there until we choose to leave or are asked to leave.

Mr. Nick Discepola: Then there is some continuity there.

Before Mr. Stoffer leaves, let me say I'm a bit confused with his line of questioning. I share his concerns on some investments with those companies that abuse human rights, or tobacco companies.

The one issue I would like some clarification on is your comments on how if you decide to invest in company A, which is a foreign-owned company, you're hurting Canadian business. That was the inference, and I'm confused by that, because I don't understand how it can occur. You're trading in publicly traded securities, which means anybody can buy the shares. You're not giving a foreign-owned company a loan at preferential rates to the detriment of a Canadian company. Am I correct in that? If you don't buy the shares somebody else is going to buy them because they're attractive to buy. So that concern I don't share.

But the concern on investing in tobacco or other companies that detract from human rights, for example, I'm torn about. Because as a legislator we don't like to see that. But if the legislation tells you and gives you carte blanche to be able to invest and get the best rate of return for your people, who are Canadian taxpayers after all, with the lowest risk or with a prudent amount of risk, how do we balance that as members of Parliament? How do we allow you to do that? Do we just look at it if the scenario comes up, or do you do look at companies as an ongoing investment strategy?

You answered Mr. Murphy's question that you don't care about which region it is, you look at investment returns. So do you care about what kind of business a company may participate in before you invest in them?

Mr. John MacNaughton: I think I'm being repetitive here, but we are guided by the legislation, which we believe is the starting point for our decision-making. And in the context of mandate that's set out in the legislation we try to identify companies that we feel will help us to advance the mandate.

We do believe that companies that exhibit good behaviour on many of these things will, over the long term, perform better than those that don't. So to that extent we take these issues into account, but it's as an investment consideration.

Mr. Nick Discepola: But if we didn't want you to invest in Nike because they have child labour, or some other company like that, it's a weakness in the legislation from a policy point of view among members of Parliament, then, if that's one of our concerns. I see that.

Ms. Gail Cook-Bennett: I wouldn't say it was a weakness. I would say it was a decision that was made in a balance.

Mr. Nick Discepola: But I don't see that balance. That's what I'm trying to say.

Ms. Gail Cook-Bennett: You don't see that balance.

Mr. Nick Discepola: Because it seems to me that the need several years ago was that we wanted to maximize the returns and ensure that the pension will be there for future generations. But in the case where it starts getting self-funding to a certain degree, or increased to 30% or 20% like some of the projections, then the temptation might be to invest in some companies that parliamentarians wouldn't like. So what do we do in that case?

Mr. John MacNaughton: It's an issue that many wrestle with. And a conclusion that is broadly embraced is that the fiduciary duty must prevail. And the fiduciary duty says that when you have responsibility for care of other people's assets, you must invest them in their best interests and not pursuant to your own predispositions.

Á (1145)

Mr. Nick Discepola: Maybe that's the best.

Mr. John MacNaughton: It's a long-tested principle, both in common law and in governance of organizations. So that's really what's embedded in the legislation.

Mr. Nick Discepola: Thank you.

The Chair: I'm going to let you, Mr. Pillitteri, do your last question next.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you. I think it was partially answered, but I'll go ahead anyway.

The fact is that you're guided by legislation. In other words, by putting in obstacles in this legislation as to who you could have invested in or not, your hands would have been tied. Is it the type of message that we want to make around the world? And for you it would lead to an exhausting search to see if there were any dealings these companies you'll be investing in were involved in that in practice we would not accept as parliamentarians. Or would you have accepted a mandate where someone could have said to you that you could invest in most things, but certain companies you could not invest in? Would it have been too much of an interference within the legislation? Would it have tied your hands?

Mr. John MacNaughton: Investment constraints never increase expected returns. Because if they increased investment returns then you wouldn't be constrained, you'd just go and do it. So investment constraints always have a cost to them.

If legislators decide that there are additional limitations that should be placed on pension funds in Canada generally, then all pension funds would have to live within those directives.

My comment is that once you start on the road of saying what people shouldn't invest in, if you're going to be responsive to everyone who has a view on what's unacceptable to them, there's nothing left. And it would include government bonds, by the way, because people don't approve of everything that governments do. So there would be nothing left if we started on that road and everybody's concerns were registered.

Mr. Gary Pillitteri: Thank you.

The Chair: Thank you to both the witnesses and colleagues.

The clerk does have all the phone numbers, so I thank you for your assistance on that.

We are adjourned until 3:30 tomorrow.