NRGO Committee Meeting

STANDING COMMITTEE ON NATURAL RESOURCES AND GOVERNMENT OPERATIONS

COMITÉ PERMANENT DES RESSOURCES NATURELLES ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 4, 1999

• 0934

[English]

The Chairman (Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)): Good morning, everyone. I'm pleased to call to order this Tuesday, May 4, 1999, meeting of the Standing Committee on Natural Resources and Government Operations, as we continue our study of Bill C-78, the Public Sector Pension Investment Board Act.

• 0935

We are pleased to have with us today representatives from the RCMP divisional staff relations. I see Mr. Reg Trowell, Bruce Morrison and others; you have the list. We also have, from the Association of Public Service Alliance Retirees, Jeanne Smith and James Infantino.

The clerk probably suggested that you take a few minutes at the outset to give us a summary of your comments and concerns, and then we'll open the floor to questions. I think we'll go in the order you're listed here on the notice.

Mr. MacDougall, are you speaking for the—-

Mr. Kevin MacDougall (Representative, RCMP Divisional Staff Relations Program): Yes, if I may, Mr. Chairman.

The Chairman: Yes, Mr. MacDougall, please go ahead on behalf of the RCMP divisional staff relations.

Mr. Kevin MacDougall: Thank you. I would like to quickly introduce myself. I'm Kevin MacDougall and I'm a member of the Royal Canadian Mounted Police. I'm the chairperson of the national pay committee, and I'm here in that capacity as well as in the capacity of member of the pension advisory committee and member of the pay council. I would like to quickly give my colleagues an opportunity to introduce themselves and tell you a bit about their background.

Mr. Bruce Morrison (Representative, RCMP Divisional Staff Relations Program): Good morning. I'm Bruce Morrison. Like Kevin, I'm a member of the divisional staff relations representatives. I'm from Vancouver Island, from the Pacific region, where I represent about 5,500 members. Along with Kevin, I am a member of the pay committee and the pension advisory committee.

Mr. Murray Brown (Representative, RCMP Divisional Staff Relations Program): Good morning, Mr. Chair, and committee members. My name is Murray Brown. I'm also a divisional staff relations representative from Atlantic Canada, particularly the province of Nova Scotia. I'm here in a dual role, the second being as part of the national executive committee of the DSRR program.

Mr. Reg Trowell (Representative, RCMP Divisional Staff Relations Program): Thank you, Mr. Chairman, for saving the best till last. My name is Reg Trowell. I'm a staff sergeant with the Royal Canadian Mounted Police, currently posted in Manitoba. I attend here representing the members of the northwest region, which is composed of the Northwest Territories, Nunavut, Saskatchewan, Alberta and Manitoba.

I also wear another hat as the co-chair of the DSRR national executive committee. I would like briefly, before turning it back to Kevin for the detail of our concerns, to point out that the divisional staff relations representatives program represents the 18,000 members of the force from coast to coast. We're 25 years into existence and I guess our processes can simply be described as one of democratically elected representatives, much like you.

The foundation of our program is one of consultation and resolution with whatever level of the force or the government needs to be met with. To that end, it brings us back to the focus of our attendance here, and on behalf of the members we'd like to emphasize our very great concern with the revisions that are coming through this pension reform.

To that end, I would like to turn it over to Kevin MacDougall.

Mr. Kevin MacDougall: Thank you again, Mr. Chairman. As Reg said, our program, the div rep program, is based primarily on consultation and finding solutions to many thorny issues that an organization like the RCMP often faces. As Reg said, we're 18,000 strong, and with that come certain problems inherent to any organization.

In the past we've been used to dealing with these issues privately in a professional environment, not only with members of the Treasury Board Secretariat but with the Solicitor General's department and our senior management of the RCMP. Our presentation here today focuses on seven salient points, but the constant theme is the lack of consultation the government has provided us relative to Bill C-78.

One of the ways we deal with these thorny issues is through the pay council. The pay council has never been consulted on this pension issue. Another way we deal with it is through the pension advisory committee. This is a committee of eight people struck by the Solicitor General of Canada. It began in 1993. I've been a member of that committee since its inception.

Throughout the past six years roughly, we've been studying various pensions throughout Canada. We've been preparing ourselves for the legislation that has been signalled by the government over the years. We've heard about this now for about six years, and then all of a sudden in November we're told that the government is nearing completion of its discussion with PSAC. We knew that PSAC was dealing on this issue since I believe roughly June, but we were told at that time we would be given plenty of opportunity to consult and provide our input to the government prior to the passage of the legislation.

• 0940

In November, we voiced concern in our pension advisory meeting that since these discussions with the public service seemed to be going well, we wanted to be assured that we would be given the opportunity to input, because our needs and wants, as far as pensions are concerned, are dramatically different, I believe, from the public servants' needs and wants.

We were told that nothing would happen to the RCMP pension plan unless a full consultation was given. However, in January, in fact on January 21, we were told by our senior management that the bill had been drafted, there would be no input from the div reps, even though we're the official system of representation for the members—

Mr. John Williams (St. Albert, Ref.): I have a point of order, Mr. Chairman. Div reps—what do you mean by div reps?

Mr. Kevin MacDougall: Div reps? We call them division staff relations representatives. It's the official system of representation that's rooted in legislation, sir.

Mr. John Williams: My apology.

Mr. Kevin MacDougall: No problem. Anyway, we were told on January 21 that the legislation was drafted and we would be given absolutely no opportunity to input. As a result of that, we had various meetings with senior management and they also informed us—in fact, they confirmed it in writing yesterday—that they, as senior management of the RCMP, had been given no opportunity to input. In fact, there has been no “meaningful consultation” with senior management either.

How does that look to members of the RCMP? Our members are from coast to coast and we work hard out there. Pensions are very important to police officers, yet the government is signalling it's about to make dramatic changes to our act; and not only have they not consulted with the representatives of the members, but they haven't provided any meaningful consultation with senior management.

So we're here today to ask you to consider our input, to delay passage of the section of the bill that relates to the RCMP, to give us a chance to provide our input.

Some of the things we would like to see are issues such as those addressing our civilian members. They pay the same premiums as we do, yet they don't enjoy the same benefits in our pension plan and they're all part of the same plan. We would like the opportunity to at least sit down on behalf of our civilian members and provide meaningful discussion with Treasury Board, and then if it doesn't work out, at least we'll be able to go back to them and tell them that this is the reason it didn't work out. We haven't been provided that opportunity.

There are no early retirement provisions for civilian members, even though all regular members of the RCMP enjoy this luxury, and they pay the same premiums.

Regular and civilian members work a lot of overtime. In fact, they work a lot of voluntary overtime, but they work a significant amount of paid overtime. This is not part of the moneys that are factored into the best five or best six years of pension, and we would like to research that with the idea of including overtime and acting pay into salary. Unfortunately, as the standing committee knows, salary is clearly defined in the pending legislation, and we have had no opportunity, even though we've asked, to include acting pay and overtime in salary. They said there would be no changes to the bill, including that.

We find we also would like to outline that there's a potential conflict of interest if the government intends that these moneys be invested in the open market. Our members are on the front line out there. We often are asked to investigate serious frauds, and we wonder about the potential conflicts this will present for our members if they have to investigate a fraud relative to a company in which we have investments.

We don't know if the government has thought this entirely through; we hope they have, but we would like to at least sit down with representatives of the Treasury Board to discuss it.

The other issue that comes to mind is that we are often asked to work on the front line on strikes where employees are on strike, and we are asked to maintain peace and order on the line. In maintaining peace and order, we are often asked to permit replacement workers to go through that line. We ask you, for a moment, to put yourselves in the position of those striking employees if they know we have investments in that company and we are spreading the line so that replacement workers can go in. That would potentially pose a conflict for not only our members but the government.

Finally, the surplus issue. We believe the $2.4 billion in our plan is ours. The government obviously believes it's theirs. We believe that because we've been able to resolve those thorny issues that often face the organization, we can also resolve this issue to everyone's mutual satisfaction. But we have to have time to do that.

Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. MacDougall.

Jeanne, are you going to be speaking for your group? Please, I invite you to start.

• 0945

[Translation]

Ms. Jeanne Smith (President, Association of Public Service Alliance Retirees): Thank you Mr. Chairman for this opportunity to address the committee this morning. Unfortunately, as the time available to prepare our report was very limited, we were unable to have it translated into French. I have been assured that this will be done promptly.

[English]

I am the national president of the Association of Public Service Alliance Retirees and a federal pensioner. This newly formed organization represents retired members of the Public Service Alliance of Canada. The association became a reality at the triennial convention of the Public Service Alliance of Canada in 1997, in keeping with the trend set by most major unions in Canada to put in place organizations that would speak for their retired members. As we get on with the business of recruiting our members, we are cognizant of our immediate responsibility toward each and every one of those members, as well as to those who will retire and become members in the future.

This responsibility, in a nutshell, is to fight for equitable treatment for retirees in all those areas that affect their quality of retired life. This is the reason I am here today. With me today is Mr. James Infantino, a research officer with the Public Service Alliance of Canada. Mr. Infantino is here in the role of technical adviser and, with your permission, will assist me in responding to any questions put forth after my presentation.

I will now provide you with a short summary of the issues addressed in our brief.

First, we are deeply concerned at the speed at which Bill C-78 is being rammed through the parliamentary process.

Secondly, we are concerned with the restricted consultation with the stakeholders and concerned Canadians. We are concerned that the government is determined to unilaterally control pension funds that have direct impact on some 700,000 contributors, pensioners, and survivors of the RCMP, the Canadian Forces, and the federal public service.

We have also in our presentation debunked the myth that federal retirees are fat cats.

Finally, we have identified shortcomings in the legislation, and we are providing recommendations for improvement.

Thank you. We will certainly be pleased to answer your questions.

The Chairman: Thank you, Mrs. Smith.

We'll start the questions with you, John, please.

Mr. John Williams: Thank you, Mr. Chairman.

Before I start my questions I would like to ask if, based on the testimony we heard last night from the legal people, Mr. Chairman, where they pointed out that the pension is not a contractual relationship between the employer and the employee, but is an act of Parliament setting out the terms and conditions of the retirement package for employees of the federal government, including the RCMP and the forces and so on.... I would ask the clerk to contact these legal people who were here yesterday to get clarification for me.

Presumably this would be in written form, because I know you're not going to allow time to bring them back as witnesses, but I'd like a written response, Mr. Chairman, to give me clarification about this Parliament setting out the terms of the retirement package, especially when we find out that the RCMP at the staff relations level, at the senior management level, according to testimony we've just heard, had absolutely no input into the legislation. Parliament therefore is only now hearing about their concerns.

But there is also the fact that the legislation gives the President of the Treasury Board authority to amend the contribution rates. Now, it's this very simple relationship—the President of the Treasury Board is part of the government, who is the employer of these people. Parliament is passing legislation.

Now, I would like to get a clear statement on the legal position from these people, from the lawyers. If this is legislation that dictates the retirement package to these people, why does the legislation give the government, the President of the Treasury Board, authority to amend certain aspects of the legislation? Now Parliament is delegating to the employer certain rights and responsibilities and authorities regarding this pension package. We can't have our cake and eat it too. Either Parliament sets out the legislation saying here's the package, or it is a contractual relationship. It can't be both. I would like to know, since we are devolving powers to the government, to the employer, how it is not a contractual relationship. Perhaps the clerk can contact these people and get a written response for the committee prior to the end of the committee deliberations.

• 0950

The Chairman: Thank you. We will undertake with the clerk do that.

Mr. John Williams: Thank you.

I'm concerned, Mr. MacDougall, about the comments you made: one, that you were told you would have lots of input; two, that you did not have any input; three, that even senior management were not invited to make representations regarding this pension plan. I was concerned also to find that civilians are getting less pension for the same money, paying more and getting less, than the regular uniformed members are. Why is that, and should it be corrected?

Mr. Kevin MacDougall: I believe the main reason for that, sir, is they're not part of the public safety category under the Income Tax Act. So we would have to work toward correcting both acts in order to permit that. As representatives of those civilian members, we don't feel that's fair. Even though they may enjoy other benefits that regular members don't have, I think by and large it is an inferior package for our civilian members.

As far as consultation with the senior management is concerned, we're not permitted to speak on behalf of senior management. However, we asked the question, and in response, in writing, they said they had no meaningful consultation relative to this bill. And we had none.

Mr. John Williams: Yes. Thank you.

Now, staying on this inequity in the retirement compensation package, does Bill C-78 do anything to provide redress and correct that matter, or does it just continue on the same inequity that has existed in the past?

Mr. Kevin MacDougall: Our understanding is that there are no changes to correct that.

Mr. John Williams: Okay. I'm not sure I would grant you that we should allow overtime and the best five years to determine the retirement package, but I would certainly think, if someone is fulfilling a role of greater responsibility, hasn't been promoted but is fulfilling that job and being paid accordingly, that the acting pay be certainly considered as part of that five best years, if it's within the five best years. Do you agree?

Mr. Kevin MacDougall: Partially, sir. In response to the overtime issue, we discussed that with Treasury Board Secretariat about six years ago, and they didn't have a major problem with it because they felt it would be self-funded, that over a member's lifetime he or she would pay enough premiums into the superannuation fund to permit that, so there'd be no additional pressure on the government. So it's a non-issue as far as funding is concerned, and it is something that members of other police forces enjoy.

Mr. John Williams: Are you saying that people pay a contribution into the retirement plan based on the overtime they earn, not just on the salary?

Mr. Kevin MacDougall: Yes. Even though you don't start collecting pension, or the pensionable years don't matter until you have about 14 or 15 years, from day one our members would be paying 7.5% of their overtime into the fund. And they may be willing to do that, but we need time to cost it out to see if it's a viable option both from a Treasury Board perspective and from a member's perspective.

Mr. John Williams: Maybe this is where the $30 billion surplus would come from.

Mr. Kevin MacDougall: It would certainly help.

Mr. John Williams: We will have to address this, Mr. Chair. Maybe the RCMP have paid for this $30 billion.

I recognize your point regarding conflict of interest and the fact that you are in the front line—and if we have a pension plan that's open and transparent and privatized, Mr. Chair, where, as with a mutual fund, I can see they go at so many shares in the Royal Bank and so many shares in Imperial Oil and so many shares of this, that and the next thing—if you are having to be in the front line, they're on strike and the union's there and it's a bit of melee, and you're defending your pension plan rather than society, I could see the issue definitely being raised.

• 0955

So I think perhaps they have a point that should be investigated more clearly, Mr. Chair. Since we are contacting the legal people, perhaps they should respond to that issue as well.

I think that's all the questions I have at this point in time, Mr. Chairman. I'll pass at this point.

The Chairman: Thank you, Mr. Williams.

Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Thank you, lady and gentlemen.

First of all, I would like to take this opportunity to extend congratulations to the RCMP for all the fine work you do. I wouldn't want that to go unnoticed. I had a few situations in my riding where the RCMP provided invaluable assistance, so what I'm going to say shouldn't be interpreted as any kind of comment that is contrary to the good work of the RCMP.

I would just like to pick up on a couple of your points. It's my understanding—and you can correct me if I'm wrong—that the government entered into discussions with the unions. If the RCMP was not part of that process, I'm disturbed by that, but my understanding is that the RCMP was involved. There was a discussion around the notion of the unions being in a co-management position with the government and therefore sharing in surpluses and deficits. I understand that the negotiations broke down because the union said, yes, we'll talk about that, but sharing the $30 billion surplus has to be part of those discussions.

Our government would really like to talk about and have a co-management situation, but because the surplus is deemed to have been generated in a situation where the Government of Canada was obliged to cover any deficits, the government's view is that the government and the taxpayers of Canada are entitled to the surplus. They wanted the issues uncoupled. They saw them as separate issues, one dealing with the past and the other with the future.

I understood that the minister has an advisory committee and that there are various union members who advise on superannuation issues. Could you discuss exactly how the RCMP is represented or not represented and your views on co-management of the pension fund? I'm not sure who could deal with that.

Mr. Kevin MacDougall: Do you mean for the RCMP?

Mr. Roy Cullen: Yes.

Mr. Kevin MacDougall: For the RCMP we have a pension advisory committee consisting of eight people. It's rooted in legislation, and appointments are made by the Solicitor General of Canada. Bruce and I happen to be members of that. There are three members of that committee representing the needs of the members, three from management, one from the civilian members, and one is a retired member. Our function is to give advice to the minister on any changes to our plan. In fact, the minister's predecessor has written to us in that regard. The legislation clearly points that out.

As far as the discussions with the union or with PSAC are concerned, to my knowledge we weren't part of them. I believe there was someone from the force there from time to time as an observer, but the direction to that person was that they were not to divulge anything to the members of the RCMP, including the pension advisory committee. So when we met in November and asked for an update, all we were told is that it appeared as though the discussions were going well. The content of those discussions was never divulged to the pension advisory committee, and to our knowledge it wasn't divulged to the senior management. Senior management, as I said, wrote us as late as yesterday saying that there has been no meaningful consultation on this issue. As members' representatives, we assure the committee that there has been no consultation with us on this issue.

Mr. Roy Cullen: Ms. Smith, from the point of view of PSAC—and, again, we have many fine public servants doing a lot of good work—was the way I represented the negotiations in terms of co-management an accurate reflection of what took place?

Ms. Jeanne Smith: First of all, let me clarify something. I am here on behalf of the Public Service Alliance retirees, so for any questions with regard to the Public Service Alliance and the acts of workers, I shall defer to Mr. Infantino.

Mr. Roy Cullen: Okay. Could I have it from the perspective of both? Maybe you could speak one after the other.

Ms. Jeanne Smith: Could you pose the question again?

• 1000

Mr. Roy Cullen: Okay. Let me go back. As I understand it, there were discussions between the government and the unions on the issue of the co-management of the pension funds. The government was anxious to enter into those discussions and say that the pension fund would be co-managed, and therefore management and labour would be jointly responsible for any pension surpluses and deficits. But those discussions broke down because the union insisted that the $30-billion surplus be part of that discussion and that it be shared between the unions and the government. Our government resisted that, because in the government's view the risks were not shared equally. If you're going to share the surplus, then the unions should have been sharing in the deficits. They wanted the issues uncoupled. One was looking backwards, and one was looking forward. But the unions said no, it has to be part of the same discussion.

Is that a fair representation of what took place?

Ms. Jeanne Smith: I'm going to defer to Mr. Infantino, because he was at the meetings.

Mr. James Infantino (Technical Adviser, Association of Public Service Alliance Retirees): I provided technical assistance to the Public Service Alliance of Canada during the consultative process relating to public service pension reform.

You're correct, and Mr. MacDougall is correct as well, that right up to November the discussions were going relatively well. There was the sense of an agreement on the joint management and administration of the superannuation plan. On December 10, 1997, the discussions broke down over the issue of the surplus. You're correct. That's an accurate representation of the progression of consultations with regard to that.

Just for clarification purposes, Mr. MacDougall and his group are covered under a separate piece of legislation, the RCMP Superannuation Act, and therefore they were not party to those consultations. The consultations we're discussing now only involved those bargaining agents covered under the Public Service Superannuation Act.

Mr. Roy Cullen: I have another question.

The Chairman: Please continue, Roy.

Mr. Roy Cullen: Yesterday we had three actuaries here, and there were different views. I don't want to try to capture what they said, but one in particular made the comment that when the pension fund was in deficit, the pensioners and the unions were not beating down the door saying, can we help you pay down the deficit? So in terms of whose surplus it is, if you like, how can you justify the union sharing in the surplus when they weren't prepared—maybe they were never asked, but would they have been prepared? That's a hypothetical question, and you're probably going to say, yes, they would have been. But the point is that the Government of Canada covered the deficits in the pension plan. How can the workers now say they're entitled to a share in the surplus?

Ms. Jeanne Smith: The government covered the deficit, but the workers and the pensioners were made to participate in paying back this deficit. There are many things we can now allude to. Let's go back to the 1982 Public Sector Compensation Restraint Act that arbitrarily reduced the indexation benefits, which resulted in a 7% decrease. There are other ways in which pensioners and workers found their benefits reduced. We talked about the Quebec and Canada pension integration formula that reduces pensions at age 65. All this puts money in the kitty.

Let's not forget that public sector workers did not receive an increase in pay for six years. That means that the amount paid out in pensions is somewhat reduced—as a matter of fact, it's greatly reduced—and that all contributed to the surplus.

So when you say the government accepted all the risks, that's not true. I would argue that point.

Mr. Roy Cullen: Let me just pursue that a bit, if I may, Mr. Chairman. If you look at the contribution rates historically, what have been the contribution ratios? Has it been Government of Canada 60%, union 40%? Was it 70%-30% or 80%-20%? What has it been?

Mr. James Infantino: My understanding is that over a period of time the contribution ratio has been approximately 60% for the employer and 40% for the employee. Because of the current integration formula with the Canada Pension Plan and the Quebec Pension Plan, the formula has been reduced to 70%-30% as of 1999.

Mr. Roy Cullen: It's 70% for the Government of Canada and 30% for the employees. But it's also a defined benefit plan, isn't it? If the contributions on a 70%-30% or 60%-40% basis are based on certain actuarial assessments at the time and to cover some defined benefits that are guaranteed by the Government of Canada, defined benefits are not guaranteed by the Government of Canada. Maybe you could elaborate on that, Mr. Infantino.

• 1005

Mr. James Infantino: As Ms. Smith has just explained, in 1982, with the Public Service Compensation Restraint Act, the federal government arbitrarily reduced the indexation provisions for retirees under that legislation, and therefore the notion that benefits are guaranteed under legislation is one we do not accept. Neither of our organizations accepts it.

Mr. Roy Cullen: Yes, but at any point in time, when the benefits are defined and the government has to live up to those benefits, they're guaranteed.

Mr. James Infantino: According to whatever legislation rules at a particular point in time.

Mr. Roy Cullen: Yes.

Mr. James Infantino: There would be nothing preventing this government from introducing legislation tomorrow reducing benefits, just as they're doing with this particular piece of legislation.

Mr. John Williams: Now, there's risky business.

Mr. Roy Cullen: I'll leave some of my colleagues to continue that discussion, because I don't want to monopolize.

The Chairman: We can come back to you, Mr. Cullen, if you'd like, later.

Ghislain, please.

[Translation]

Mr. Ghislain Lebel (Chambly, BQ): This question is for Mr. MacDougall. You said in your presentation that the RCMP works in the provinces and that the provincial governments contribute to the Canada Pension Plan. Some lawyers told us yesterday that there was no privity between an RCMP police officer in New Brunswick and one in this province, for example.

Mr. Kevin MacDougall: That is correct.

Mr. Ghislain Lebel: You do not appear to agree with this. Could you give me some further details?

[English]

Mr. Kevin MacDougall: We believe the provinces and, I believe, over 200 municipalities have contracted with the Solicitor General, and part of the contract is that they will pay all our salaries, or 70% or 90%, whatever the case may be. In that portion of the payment we understand are certain payments to the superannuation fund, and because they take over that responsibility, we believe, and it's certainly up to them, they will lay claim to this $2.4 billion surplus that's in our fund because of the nature of the contract.

The problem here again, in my understanding, is that nobody has had a chance to research this. That's just our initial reaction to what the provinces and municipalities may say to the government.

[Translation]

Mr. Ghislain Lebel: In paragraph six on page 2 of your report in French, you say:

There may be conflicts of interest with respect to possible investments or assets, given the nature of the work of members of the RCMP.

Could you explain what you mean by that, or give us examples?

[English]

Mr. Kevin MacDougall: Then is the gentleman reading from the wrong paragraph, perhaps?

The Chairman: Is there a difference in numbers between the two, English and French, summaries?

Mr. Ghislain Lebel: It's not numbered. It's the last one.

Mr. Kevin MacDougall: Sir, I can answer your question anyway, probably.

Those are two examples I cited; the Bre-X scandal perhaps is one that comes to mind. We were called in as the national police force to investigate the Bre-X alleged fraud, and we wonder how we could possibly do that if we had millions of dollars invested in Bre-X itself. It would be alleged certainly by some of the people, the owners of Bre-X and the directors, that we were in a conflict and couldn't investigate it.

Another situation that comes to light would be the Maple Leaf plant in Edmonton, I believe it was, where they were on strike. If our members were called in to permit replacement workers to go over the line, which at best is an unsavoury task, if they knew we had investments in Maple Leaf Foods, then certainly those workers would have a right to be upset, thinking that we were either too aggressive or whatever.

So we think it could potentially pose a problem for us and requires more study.

• 1010

[Translation]

Mr. Ghislain Lebel: Based on what you say, there is a real problem at the RCMP. Where might it be possible to invest your pension fund, given that you are capable of investigating just about anything or being involved anywhere? I would like to buy your argument, but there's a big problem.

[English]

Mr. Kevin MacDougall: You may have a potential problem investing our pension moneys in the public market, and perhaps, given the time to consult, we'd be able to convince the government that they may not want to do this for the national police force, that they may want to continue on with the funding arrangement we presently have. But we haven't had time to consult yet.

[Translation]

Mr. Ghislain Lebel: I know that there has not yet been any consultation, but in view of what you have just said, the only possibility, for pension funds for RCMP police officers, would be to invest it in Canada Savings Bonds. It's adequate, but is it the best way to make your money grow?

[English]

Mr. Kevin MacDougall: We don't believe it is the most effective way. That's probably why we'd beg the government's indulgence and shore up the fund when needed, as they do now. Again, we're thinking perhaps we'd be able to convince the government that they don't want our moneys invested in the private markets at all, that they would want to protect our members as they have been for the last number of years.

Mr. Ghislain Lebel: I have a question for Madame Jeanne Smith.

[Translation]

Ms. Smith, do you have the statistics? How much money does a Public Service retiree receive, on average? Simply to set things straight for what some of my friends opposite think sometimes. To hear them talk, anyone who gets a pension is very rich.

Ms. Jeanne Smith: I can give you the statistics.

Mr. Ghislain Lebel: Yes.

Ms. Jeanne Smith: The average is $15,530 per year for a federal Public Service retiree with approximately 23 years of service.

Mr. Ghislain Lebel: After 23 years of service, it's not exactly the lap of luxury.

Ms. Jeanne Smith: A woman with 20 years of service on average receives $9,682 per year.

Mr. Ghislain Lebel: A woman with 20 years of service?

Ms. Jeanne Smith: All these statistics are in the report from the Public Service for the year ending 31 March 1999. There are also statistics on the amounts of the pensions for members of Parliament.

Mr. Ghislain Lebel: If I have understood properly, when we come to interpret...

Ms. Jeanne Smith: The comparisons are interesting.

Mr. Ghislain Lebel: ...we are not exactly rolling in money here. I even wonder if with $9,000 and $15,000 we might not be below the poverty line.

Thank you for this information. It's very useful.

[English]

The Chairman: Thank you, Ghislain.

Tony Ianno, please.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Thank you. Thank you very much for coming on such short notice.

I have a couple of questions regarding the surplus. Mr. Infantino, since you were involved with the process, at least from a technical perspective, with PSAC, are you aware of any plans where a government anywhere around the world guarantees in a legislative plan the deficits and of course the benefits to its members...but shares in the surplus but not in the deficit?

Mr. James Infantino: First of all, I would challenge your preamble that in fact this government guarantees the benefits under the current legislation, as we've just mentioned to your colleague.

Secondly, I was in the gallery yesterday during discussion with the actuaries, and one of the actuaries made a reference to a court decision concerning Ontario Hydro and CUPE 1000, involving a dispute over pension entitlement. Ultimately, there was an agreement on sharing the surplus.

Mr. Tony Ianno: None of the three could mention anywhere around the world where that took place, correct? Are you aware of that?

Mr. James Infantino: I'm not aware of any myself, no.

• 1015

Mr. Tony Ianno: Okay. I'll deal with your first point in regard to the guaranteed benefits. You're saying that the government does not guarantee the benefits, correct? Can you explain to me what that means?

Mr. James Infantino: Again, we thought we'd explained it.

Mr. Tony Ianno: Yes, could you do it again? I don't understand.

Mr. James Infantino: Okay. We'll use an example of the 1982 Public Service Compensation Restraint Act. Previous to that legislation retirees were guaranteed indexation based on 100% of the rate of inflation of the previous year. Under that legislation the indexation benefit, which we thought was guaranteed and which many retirees and contributors thought was guaranteed, was arbitrarily reduced to 6.5% and 5.5%, which was significantly less than the inflation rates at that particular period of time.

Mr. Tony Ianno: What were the inflation rates in 1982?

Mr. James Infantino: First of all, the legislation applied to indexation rates beyond 1982 for 1983 and 1984. My understanding, based on inflation rates, is that the total shortfall as a result of it was a 7% reduction in benefits.

Mr. Tony Ianno: So everything was guaranteed for 93% except for the one change in two years, is that correct?

Mr. James Infantino: That's correct.

Mr. Tony Ianno: I see. And ever since, everything has been guaranteed 100%?

Mr. James Infantino: Until this point in time, yes.

Mr. Tony Ianno: Right, okay.

In effect, in 1983, 1984 and 1982, when the inflation was high and people were losing their homes and with all the other situations that were taking place with high interest rates—what were they, 24% or 21%, 22%?

Mr. James Infantino: I believe that's accurate.

Mr. Tony Ianno: And the government was guaranteeing, according to your statistics of course, 93% of the pensions at the time, because it was reduced because of de-indexing. How many other private pensions have indexing as one of the attributes of the plan?

Mr. James Infantino: I'm sorry, I have the statistics here from Human Resources, Government of Canada, but it would take me awhile to figure them out.

Mr. Tony Ianno: But do you know many that have the indexing?

Mr. James Infantino: Yes, I can cite automatically that any collective agreement covering auto workers and negotiated by the Canadian Union of Auto Workers is guaranteed 100% at the rate of inflation.

Mr. Tony Ianno: And when did that come into play on the indexing?

Mr. James Infantino: That has been in effect for as long as I can remember.

Mr. Tony Ianno: So that's 20 years or so?

Mr. James Infantino: Approximately.

Mr. Tony Ianno: Ms. Smith, what is the difference between the PSAC retirees' union group and the FSNA?

Ms. Jeanne Smith: The Federal Superannuates National Association, until we became a reality, was the only group that had as a membership retired public sector workers. That includes of course the members of all the federal sector unions, the RCMP, the military, and senior management, former deputy ministers. So anyone who has worked for the federal government in any capacity is entitled to join the Federal Superannuates National Association. We are strictly attached to the constitution of the Public Service Alliance of Canada and our membership is restricted to retired members of the Public Service Alliance.

Mr. Tony Ianno: How many paid-up members do you have?

Ms. Jeanne Smith: We've been signing them up since a little less than a year ago, and so far we have 1,300 members signed up.

Mr. Tony Ianno: How many total retirees are there?

Ms. Jeanne Smith: That varies. Members of the Public Service Alliance, if you'll just—

Mr. Tony Ianno: Sure.

Ms. Jeanne Smith: This is strictly a guesstimate, but we could probably look at about 100,000 potential members.

Mr. Tony Ianno: And do you know how many the FSNA has?

Ms. Jeanne Smith: They have about 100,000 members, but of course a larger portion of their membership at this time are spouses because they accept spouses as members, we don't; we accept only the actual retired members of the alliance. But it's my understanding that they have somewhere between 40,000 and 50,000 actual former federal workers from all aspects of the federal government, and the remainder, which is about 112,000 members, are spouses.

• 1020

Mr. Tony Ianno: I see. Thank you.

I understand, Mr. Infantino, that while you were going through the procedure in the last year, everything was going well until December or so. Aside from the issue of the surplus, is most of what PSAC wanted in terms of the benefits included in this bill?

Mr. James Infantino: Actually, none of them are.

Mr. Tony Ianno: Oh, none of them are.

Mr. James Infantino: Again, it was a process where we were looking for a total package in order to agree to.... Until December 10, when the discussions broke down over the issue of surplus, we had part and parcel agreed to joint management of the administration of the pension and participation in a nomination committee to an investment committee.

Mr. Tony Ianno: So the government, then, is contributing from the six best years to the five best years, and it's going to cost them close to $1 billion. Are they doing that without the unions wanting it?

Mr. James Infantino: During the discussions that was one aspect that was proposed by the employer. You're correct, that is incorporated in Bill C-71.

Mr. Tony Ianno: So why would the government, if it's ramming this through, contribute $1 billion on that basis? I don't understand.

Ms. Jeanne Smith: It's called dangling carrots.

Mr. Tony Ianno: I see. I guess the reduction in the premiums for life insurance by 25% wasn't asked for by the unions either.

Mr. James Infantino: That was also an aspect of the discussions. But I will remind you that approximately 90% of the contributions for supplemental death benefits are contributed by the employee.

Mr. Tony Ianno: Is the 25% reduction in premiums for the employee one and the same with what you just stated about the 90%?

Mr. James Infantino: My understanding is that in terms of the cost, the employee will continue to pay a similar portion.

Mr. Tony Ianno: You mean the 25% reduction.

Mr. James Infantino: Yes.

Mr. Tony Ianno: I see. The employee didn't ask for that. It was the government that offered that.

Mr. James Infantino: That was part of the consultations in terms of coming up with an appropriate package of reforms.

Mr. Tony Ianno: Right. So if I understand correctly, it was the government that offered the 25% reduction to the employees. It wasn't the union asking for it. Is that correct?

Mr. James Infantino: No, that's not correct. We had consultations on all of these issues. It was a consultative process. Until a point in time prior to December 10, that was part of the aspects we were moving toward.

Mr. Tony Ianno: I'm not a union organizer, so perhaps you can help me through this process. The union didn't ask for anything. The employer offered everything. Then somewhere in between the word “consultation” fits in and somehow fudges the two. Am I correct?

Mr. James Infantino: As I say, a consultation process is a process of give and take. The employer would put forward a proposal, we would put forward a counterproposal, and it would move along. That's the way the issue of the supplementary death benefit plan as contained in Bill C-71 was formed.

Mr. Tony Ianno: Let me try one more time. The union didn't ask for anything. It was the government that offered it. Is that correct?

Mr. James Infantino: No, that's not correct.

Mr. Tony Ianno: Can you explain to me what is correct?

Mr. James Infantino: What is correct is that in accordance with the unanimous report that was submitted to the Treasury Board minister in December 1996, there was an agreement to engage in consultations on various aspects of the superannuation plan. One of the aspects that emerged was the issue of the supplementary death benefit plan and what we could do in terms of administering that, and there's a significant surplus in that aspect.

Mr. Tony Ianno: That unanimous report that was given to the Treasury Board, to the government, was presented by whom?

Mr. James Infantino: It was presented by the Advisory Committee on the Public Service Superannuation Act.

Mr. Tony Ianno: Who is that made up of?

Mr. James Infantino: It is made up of employer and employee representatives and retiree representatives.

Mr. Tony Ianno: Is there an equal balance?

Mr. James Infantino: Yes.

Mr. Tony Ianno: So it was probably a fair assessment.

Mr. James Infantino: Yes.

Mr. Tony Ianno: So the government, in effect, has presented in this bill what that balanced committee asked for. Is that correct?

Mr. James Infantino: If you read the recommendations of that report, there was a lot more than—

Mr. Tony Ianno: I understand, but I'm just dealing with the one issue right now. I have to start with a base. If the premium reduction of 25% is one of them, if that committee presented it, and if the government is now presenting it in this bill, I want to know if that part of it is one and the same.

• 1025

Mr. James Infantino: That's correct.

Mr. Tony Ianno: Okay. With regard to the best six years versus the best five years, was that presented by that same advisory committee?

Mr. James Infantino: No, the advisory committee didn't deal with the specifics of the legislation.

Mr. Tony Ianno: No, I'm not talking about the legislation; I'm talking about the demands, the issues in the consultation process.

Mr. James Infantino: The proposals for public service pension reform are what the advisory committee recommended, and then a consultative process got into the details of each of the aspects.

Mr. Tony Ianno: Was it the advisory committee that presented the proposal with regard to the best six years and the best five years?

Mr. James Infantino: No.

Mr. Tony Ianno: Did the government do it on its own?

Mr. James Infantino: It was part of the consultative process that followed the presentation of the report, yes.

Mr. Tony Ianno: Again, you lose me when you say the consultative process. Consultative means that there are two groups sitting down and going through it.

Mr. James Infantino: Yes, and that's exactly what happened during 1998.

Mr. Tony Ianno: You have the Treasury Board.

Mr. James Infantino: Yes.

Mr. Tony Ianno: Who is the other part of the consultative process?

Mr. James Infantino: It was bargaining agent and pensioner representatives, and not necessarily the same—

Mr. Tony Ianno: Were there union reps?

Mr. James Infantino: Yes.

Mr. Tony Ianno: So the union reps along with the Treasury Board officials decided that this was something good.

Mr. James Infantino: Yes.

Mr. Tony Ianno: So the unions had their representation. Now, in this bill the government is presenting what the union representatives asked for. Is that correct?

Mr. James Infantino: That's one aspect of it, yes.

Mr. Tony Ianno: Of course. Now it's two we've gotten to. Let me see what else was there.

The Chairman: Tony, I can come back to you.

Mr. Tony Ianno: Okay. I'll continue later. Thank you.

The Chairman: John Williams, please.

Mr. John Williams: Thank you, Mr. Chair.

I noted Mr. Infantino's point about it being a give and take process, Mr. Chair. The government gave a little improvement to the pension plan. It said pick your best five instead of best six, it improved the dental plan and a couple of other little things, and it took the $30 billion. So, definitely, it was a give and take process there.

Getting back to the 1982 situation, Mr. Infantino, the government introduced legislation to limit the indexation.

Sorry, I should have said Parliament. The members on the opposite side always try to talk about the government. Our legal beagles told us last night that this was Parliament, not government, but it seems to me this is government legislation that's being proposed and rammed through the House of Commons.

Mr. Ianno put up a kind of bleeding heart rationale, because people were losing their houses and so on, but you still had your pension, or most of it.

This legislation that was introduced in 1982 was prospective legislation. It said that from this point forward you will be limited to a maximum amount of indexation regardless of what inflation is. If inflation was 25%, you were limited. If inflation was 7%, you were still limited to the same amount. In your opinion, were you participating in the risk of the pension plan, the viability and the financial health of the pension plan, by virtue of that?

Mr. James Infantino: Yes.

Mr. John Williams: Now, you also mentioned that the auto workers have a fully indexed pension plan. Am I correct?

Mr. James Infantino: I mentioned that to my understanding that is the case.

Mr. John Williams: The auto industry went through a fairly rough time during the last recession. Auto companies were losing money by the billions of dollars. Did they unilaterally change the indexation of the pension plan when they were hemorrhaging large amounts of cash?

Mr. James Infantino: Actually, they would be prohibited from doing that without consulting the bargaining agents, because the pension plan is in fact part of their collective agreement. That would be a violation of the collective agreement.

Mr. John Williams: So when the employer was going through a rough patch financially, they maintained 100% of their obligation to the employees' pension plan.

Mr. James Infantino: That's my understanding, yes.

Mr. John Williams: But the same is not the case for the public service pension plan, because when the employer was going through a rough patch, they said, whoops, we changed the rules. You're going to get less, and you will participate in the risk.

Mr. James Infantino: That's correct.

Mr. John Williams: Ms. Smith, I now turn to the rather delicate subject of conjugal relationships and cohabitation. I don't speak lightly of this matter, but nonetheless it has to be addressed.

• 1030

For people who are living in a common-law relationship, survivor benefits will only continue provided there was a cohabitation conjugal relationship. Unfortunately, people near the near the end of their lives can be hospitalized, so the relationship may not necessarily be cohabitational or conjugal. The way the act reads, there are no survivor benefits. Are you happy with that?

Ms. Jeanne Smith: No.

Mr. John Williams: What do you suggest should happen?

Ms. Jeanne Smith: I believe each case should be reviewed on its own merits. The unfortunate happenings in people's lives, generally in advanced years, are beyond the control of the people. That has to be taken into consideration. I believe the benefits should be extended to those people.

Mr. John Williams: They are extended, provided the relationship is conjugal and there is cohabitation.

Ms. Jeanne Smith: If they find themselves removed from being under the same roof by virtue of illness, that's still considered cohabitation in my book.

Mr. John Williams: We know from medical experience that conjugal doesn't take place because of medical situations. What we heard yesterday, unfortunately, from the legal representations at this committee was it would be okay because you could go to court and they would, no doubt, be sympathetic to your case. Therefore we're going to turn it over to the courts again to define the legislation and make the rules. Are you happy with that?

Ms. Jeanne Smith: No. I think that's putting something in the justice system that most properly belongs in the common sense area of any plan. It's not difficult for a couple to prove certain aspects of their relationship.

Mr. John Williams: So you're suggesting conjugal and cohabitation are the two defining points to be changed.

Ms. Jeanne Smith: Of course, and I think cohabitation is the key. When people live together for a certain time, whether they have a conjugal relationship or not is beside the point. Nobody is asked to prove that. We're looking at people who cohabit. Once that's established, I believe it should be respected.

Mr. John Williams: Therefore, you're saying as long as there is a dependency relationship it should be considered. An example is two sisters living together. One maybe provides the home care and one provides the income. Would that be a dependency that should be considered?

Ms. Jeanne Smith: It's very interesting you should put this question to me, because we just had a founding convention a week ago and our organization, through resolutions, passed some position papers. One of them was a definition of the family, based on changes that are occurring in society with respect to the stereotypical family. That's changing visibly everywhere. That is something we have addressed.

We understand the first comeback is to ask where is the money going to come from? But first you have to establish principles, and we have, as an organization, established those principles. Whether one agrees with them or not, that is the position of our organization. We will be pursuing them throughout all the benefit packages that affect our membership in the future.

So in answer to your question, although I realize there are vast ramifications to all this, we agree that cohabitation is the key. Understandably there has to be an established pattern, a certain recognized time for that to be valid and so on. But in answer to your question, on behalf of my organization, we agree with that.

Mr. John Williams: Cohabitation would mean, since it's not defined in the act—

Ms. Jeanne Smith: It could be a mother and a very disabled adult child, as an example.

Mr. John Williams: —living under the same roof.

Ms. Jeanne Smith: That's right.

Mr. John Williams: But if one member, let's say a spouse, is hospitalized for a long period of time, that needs to be covered off in the legislation, because you would still consider it to be a cohabitation relationship.

Ms. Jeanne Smith: Certainly. I can use my personal case. My husband was hospitalized for five years prior to his death. At no time did it ever occur to me he was no longer my cohabitee under the law.

• 1035

Mr. John Williams: That's my point precisely. Yet the legislation would suggest that if your husband was hospitalized for five years, it wasn't cohabitation under the normal definition of the word because you weren't under the same roof. One would assume there wasn't an ongoing conjugal relationship, therefore you wouldn't be entitled to survivor benefits under this act. I think that is a travesty.

Ms. Jeanne Smith: It's a travesty. I couldn't agree with you more.

Mr. John Williams: Thank you.

The Chairman: I hope we can have that point clarified, because I think there's a misunderstanding there. I will come back to it.

I have Roy next, but do you mind if Tony goes ahead of you?

Mr. Roy Cullen: Yes, go ahead.

Mr. Tony Ianno: On that point, can you explain to me where in the legislation it changes from the existing legislation to this one that states the question Mr. Williams is referring to?

Ms. Jeanne Smith: I have the legislation but I haven't had time to peruse it in detail.

Mr. Tony Ianno: So you're not aware of where this change has taken place that Mr. Williams is speculating on. Is that correct?

Ms. Jeanne Smith: I can defer to Mr. Williams.

Mr. Tony Ianno: So you're not aware of anything that has changed.

Ms. Jeanne Smith: I am not aware of the specific change in the wording in that respect but—

Mr. Tony Ianno: So it's Mr. Williams' interpretation.

Ms. Jeanne Smith: But if you're talking about an improved bill and the wording hasn't changed, then it's not an improvement.

Mr. Tony Ianno: I see. Thank you very much.

The Chairman: Roy.

Mr. Roy Cullen: I'd like to come back to Mr. Infantino. The point he made is the most cogent argument I've heard so far on this issue of the sharing of risk or the surplus. I ducked the question because I wanted to think about it, and now I want to come back to it. It seems to me it really makes a strong case for co-management of these funds.

If, as you indicate, in 1982 the government decided to limit the indexation provisions under the plan and you had a co-management arrangement at that point—a 60-40 sort of contribution ratio in 1982 or somewhere in that vicinity—presumably an issue would have come before the management committee saying “With inflation the way it is, we have some decisions to make, ladies and gentlemen”. If it were shared management, the union would have said “We share in surplus and we share in deficits”. So the proposition would have been on the table to either create a deficit in the plan, financed by both stakeholder groups, or make some decisions around indexation.

As I understand it, in 1987, five years later, the deficit started to emerge in the plan. So if the indexation provisions had not been dealt with in 1982, the deficit would have been larger, maybe significantly larger. I'm guessing, but I suspect they would have been humongously large in 1987 if those decisions had not been made. Presumably an actuary would have come before the investment board, which was co-managed, and said “Ladies and gentlemen, we have some decisions to make”.

It would have been appropriate for the union to have been part of that and to have shared in any future deficits or surpluses. I know it's hypothetical, but I put it to you that if that decision had been before a co-managed board, it would have been a tough decision for the union leaders to make to say “No, forget it, we'll keep the indexation provisions as they are and we'll co-share in the future deficits”, which were almost inevitable at that time.

Mr. John Williams: I have a point of order, Mr. Chairman. I think the member is getting into the realm of the hypothetical, even by his own admission.

The Chairman: Pardon me. That isn't a point of order, Mr. Williams.

Please proceed, Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chairman. If we dealt at these committees with everything that was fact and offered no opinions, we wouldn't get a lot of business done. I put that out to you and you can comment.

It seems to me, whatever happens, we need to move to a co-managed situation, so the union participates in all decisions. I understand your point that the government guarantees all the benefits, but by the stroke of a pen, as you correctly point out, they can change that.

• 1040

I wonder if you could comment on what I said. Do you take any exception to what I say?

Mr. James Infantino: No, I do not, not at all, not in the least. As a matter of fact, our organization has been advocating the co-management of the public service pension arrangements for many years, and we've done that continuously through the Advisory Committee on the Public Service Superannuation Act.

You will see, if you read that report on the administration, the 1996 report, the unanimous report that we submitted to Treasury Board, that in fact was part and parcel of the proposals we were making. And right up until December 10, 1998, we thought we had some agreement and were moving in that direction, just as Mr. MacDougall indicated.

My own personal opinion is that discussions were going well, but....

Mr. Roy Cullen: Well, I wish you all the best of luck with that. I can speak for myself, and I would certainly support, under the right conditions, a co-managed arrangement so the pensioners and unions could be involved in those critical decisions, because they're very serious ones and they have broad implications. They should share in the decisions and share in the responsibilities.

Mr. James Infantino: During the next set of witnesses, you'll have one witness who perhaps can comment on that for other jurisdictions, so I'd advise you to avail yourselves of his advice.

Mr. Roy Cullen: Good. Thank you.

The Chairman: Thank you, Mr. Cullen.

Tony, then John, and Ghislain.

Mr. Tony Ianno: Thanks.

The Chairman: We'll make this last round brief so we can wind up by 11 a.m.

Mr. Tony Ianno: Okay, just to follow up, Mr. Infantino, with the last points that I was getting at in terms of the dental plan for the retirees, was that recommended by that advisory committee?

Mr. James Infantino: Again, no.

Mr. Tony Ianno: No. So it was the government that offered it on its own?

Mr. James Infantino: It was part of the consultative process that succeeded the tabling of the advisory committee report.

Mr. Tony Ianno: So it was the advisory committee, which is shared equally by employer and employee, that recommended it to the Treasury Board.

Mr. James Infantino: Well, the consultative group that was shared—

Mr. Tony Ianno: That's the consultative group, right—it has union members as part of it—that recommended it to the Treasury Board. Correct?

Mr. James Infantino: It was part—

Mr. Tony Ianno: It was the union reps who are part of the advisory committee who were participating in the consultative process who gave it to the Treasury Board. Correct?

Mr. James Infantino: Yes, correct.

Mr. Tony Ianno: So I've mentioned three things that the consultative process, which meant the employees and the unions, asked for that the government is introducing in this bill. Correct?

Mr. James Infantino: Yes, that's correct.

Mr. Tony Ianno: All right. Is there anything else that this consultative group recommended to the Treasury Board that was not included?

Mr. James Infantino: Well, first of all, as I mentioned, we talked about joint management of the administration of the plan. That was in fact part of the consultative group's discussions and there was progress in that area.

Mr. Tony Ianno: Until the unions basically stepped away from the table.

Mr. James Infantino: Until both parties could not reach an agreement on the issue of disposition of the existing actuarial surplus, yes.

Mr. Tony Ianno: Right, okay. So in other words, basically most of the benefits, other than the decision on the surplus that the union disagreed with, are in this bill.

Mr. James Infantino: Well, I would say that the dental plan, the supplementary death benefit issue, and the—

Mr. Tony Ianno: And the six years to five years issue.

Mr. James Infantino: Six or five years are relatively minor in comparison with the overall major issues that were subject to discussion at that particular period of time.

Mr. Tony Ianno: Would you recommend the government take those off the table and still proceed with the bill, since they're minor?

Mr. James Infantino: Well, obviously—

Mr. Tony Ianno: Just a billion or two.

Mr. James Infantino: You're right. No, obviously I'm not going to recommend that.

Mr. Tony Ianno: Okay, because it's a billion-plus dollars.

Mr. James Infantino: Sure it is.

Mr. Tony Ianno: As people say, a billion dollars is major when it's Canadian taxpayers' money.

Mr. James Infantino: Correct.

Mr. Tony Ianno: Even the Reform Party might agree with this one. Do you agree, Mr. Williams?

The Chairman: I think we'll wind up, Tony.

Mr. Tony Ianno: Sorry, I just wanted to ask in terms of the RCMP.... Sorry, I haven't asked many questions, but they're interrelated. Basically, regarding the surpluses, as Mr. Infantino mentioned, no one can seem to show where a government that guarantees the deficit will then split the surplus. Are you aware of any other jurisdiction that does that?

Mr. Kevin MacDougall: No, I'm afraid I'm not.

• 1045

Mr. Tony Ianno: Okay. My second question is in regard to the conflict between investigating and private investments, etc. Aside from the fact that it's an arm's-length investment board that is being set up—the advisory committee that you are a part of will recommend to the solicitor some names that will then be chosen by the group to be on an independent investment board—do you believe that any of your members would somehow colour their profession, the work they do, that they love to do, because of the investment board?

Mr. Kevin MacDougall: Absolutely not.

Mr. Tony Ianno: Okay. I didn't think so.

Mr. Kevin MacDougall: But I do believe that the—

Mr. Tony Ianno: The interpretation, the perception....

Mr. Kevin MacDougall: No, but the employees who are on strike or the owners of a particular company might have concerns in that regard. I believe our employees would work as—

Mr. Tony Ianno: I agree totally.

The Chairman: Thank you, Tony.

Ghislain, then John. And we'll wind it up there. Ghislain, please.

[Translation]

Mr. Ghislain Lebel: My question is for Ms. Smith. When there are cuts in the Public Service and early retirements, like the 45,000 terminations in recent years, there are early departure incentives for people who retire early. Are these departure incentives taken from the retirement fund or from government assets?

[English]

Mr. James Infantino: During the downsizing period in the federal government there were two incentive packages offered to the employees: an incentive departure package, a sort of lump-sum amount, as well as early retirement incentives. The first amount cannot be taken out of the superannuation plan, so that was not taken. In the second type, there was a separate funding arrangement for the amounts that were applied to the early retirement provisions that were in effect during that period of time.

[Translation]

Mr. Ghislain Lebel: Were these amounts taken from the superannuation fund?

Ms. Jeanne Smith: No, they were not taken from the superannuation fund.

Mr. Ghislain Lebel: He said yes.

Ms. Jeanne Smith: He said it was separate.

Mr. James Infantino: There was a separate fund.

[English]

Ms. Jeanne Smith: But did it come out of the pension fund?

Mr. James Infantino: No.

[Translation]

Ms. Jeanne Smith: No, it was a fund that was completely separate from the superannuation fund.

Mr. Ghislain Lebel: Okay. Thank you.

[English]

The Chairman: Thank you, Ghislain.

The last word goes to John Williams.

Mr. John Williams: Thank you. It's not so much a question, but it's about what came up in the earlier discussion, getting back to the legal representations that were made to us last night. I would ask the clerk to get clarification from the legal people who were here last night that the bill contemplates providing survivor benefits to relationships beyond married relationships. Basically they're all lumped into the concepts of conjugal and cohabitation. Provided a conjugal relationship and cohabitation exist at the time of the death of the pensioner, survivor benefits continue on.

“Conjugal” is not defined in the bill as far as I'm aware. “Cohabitation” is not defined in the bill as far as I'm aware. But the bill says that a conjugal relationship has to have existed for at least a year immediately prior to the death of the retiree before survivor benefits carry on.

Now, we've had one witness today say that in her particular personal experience, albeit I understand that she was married to her husband, had that been a common law relationship or any other type of relationship contemplated by this bill other than marriage.... Here we had a situation in which, as Ms. Smith pointed out, her husband was in hospital for five years—not living under the same roof, by legal definition. She perceived that the relationship hadn't changed, but it was proven that he didn't live under the same roof, and one would perhaps say there was no conjugal relationship. Therefore, had she been in a common law relationship rather than marriage, in my interpretation of that, she would have been denied survivor benefits.

I would like to get that clarified, because I recall quite specifically that the legal experts said, well, you know, we can sort that out in court, and we would assume that everything is fine. But when it comes right down to the bill, it specifically says the converse. And now we would be relying upon the courts to interpret one thing as meaning the opposite under certain circumstances, and who knows where that ball of wax would end up by the time the Charter of Rights and the Supreme Court got involved.

• 1050

So I would like to have the legal people explain to us quite specifically where in the bill that type of situation, which unfortunately happens more often than we would care for, where one person in the relationship is hospitalized or institutionalized.... The bill, in my opinion, would not qualify them. And how does the bill guarantee these people survivor benefits without their having to resort to the courts?

The Chairman: We'll try to get that question to them this afternoon, John.

Mr. Tony Ianno: I have a point of order, Mr. Chair.

The Chairman: Was there a point of order?

Mr. Tony Ianno: Yes. First of all, they did answer that question yesterday and they—

Mr. John Williams: And they said to resort to the courts.

Mr. Tony Ianno: —said that each case would be individual, and that they haven't had a situation of the nature that Mr. Williams hypothesized on.

The Chairman: That notwithstanding—

Mr. Tony Ianno: He just asked again, and I would reiterate—

The Chairman: Yes, I think that's what we'll do.

Mr. Tony Ianno: Let's not leave the impression that somehow they didn't answer, because they said legally married, common-law spouse, and situations in which the community is the witness of how that works under rare circumstances.

The Chairman: It's really not a point of order, Tony; it's for debate. But we'll put the questions as requested by the member, notwithstanding that there may have been comments in response to that yesterday.

Were there comments from any of the witnesses to Mr. Williams' points?

If not, then a very short one to you, Mr. Ianno. Then we'll recess for a few minutes and get to our next session.

Mr. Tony Ianno: Thank you, Mr. Chair. I have one very minor one on the part about the RCMP. In Quebec they have that situation already, don't they, with the caisse and all the rest? Have they ever faced that problem? I'm just curious.

Mr. Kevin MacDougall: With the caisse to unionize?

Mr. Tony Ianno: No, with the Quebec police, I gather. I don't know specifically. But are they part of the plan that gets invested by an investment board?

Mr. Kevin MacDougall: I believe they are.

Mr. Tony Ianno: And have you ever heard of any problem there?

Mr. Kevin MacDougall: No, not to my knowledge. Our point was that we're the final police force that is often called upon to do these investigations. But I believe all the police forces—and I stand to be corrected—have investments in public markets.

Mr. Tony Ianno: Thank you very much, sir.

I have one last point, to Ms. Smith. Regarding the widows or female participants, the average, in my understanding, is close to $10,000 on the pension, plus, I guess, the CPP and old age. Is that correct?

Ms. Jeanne Smith: Well, at age 65, you must understand, they lose their CPP because of the Quebec-Canada Pension Plan integrated formula. So at age 65 their pensions are reduced.

Mr. Tony Ianno: Does it depends on whether they're at $52,000 net income? Is that the one?

Ms. Jeanne Smith: No. For any person who receives a federal pension, at age 65 it's automatically reduced by virtue of the formula that exists, and what it does is hurt many retirees. I can give you an example of a person who retired when he was almost 65, and when he turned 65 his pension was reduced by $650. Of course he receives the old age pension. But that's $407 or $411, so he's $240 poorer at age 65.

I have had many of my members call me and say “I get a very small pension—my pension is worth $700 a month—and they've just taken the equivalent of my Canada Pension off my pension because I've just turned 65.” So there are many inadequacies in the pension legislation as it stands. And this has been one of our arguments all along, that before you just glom on to $30 billion of surplus to go and do whatever you want to do with it, you might look at the people who receive pensions to see if the quality of their lives and their lot can be improved.

This is one of the things we've said all along, that there are some very, very poor federal pensioners in this country. That in itself is a travesty. When you have three plans that collectively have some $30 billion surplus in them, I think there's room for improvement with respect to the people who receive pensions, if that answers your question.

Mr. Tony Ianno: Are you aware of the formula from the five years to three years, and the average?

Ms. Jeanne Smith: I'm not. I'll defer to Mr. Infantino.

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Mr. James Infantino: Last year the federal government amended the CPP benefit calculation formula and Bill C-71 contains a reciprocal offset provision to take into account the change in the benefit formula.

Mr. Tony Ianno: Just to make it better for people in terms of when they're retiring.

Mr. James Infantino: That would be an improvement, yes.

Mr. Tony Ianno: Thank you very much.

The Chairman: Thank you, Tony.

On behalf of all members, we would like to thank our presenters this morning for their assistance in helping us to understand better their perspective on Bill C-78.

I want to remind colleagues we're not going to adjourn right now; we're going to recess for about two minutes and then we're going to be inviting up to the table Keith Ambachtsheer, John Por, and Carl Otto, if they're out there in the gallery.

Again, thank you for your participation. We'll just recess for a couple of minutes.

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The Chairman: I'd like to bring us back to order after this brief recess. We're continuing our work on Bill C-78, the Public Sector Pension Investment Board Act.

We're pleased to have with us Keith Ambachtsheer, John Por and Carl Otto, all of whom have agreed to help us understand the impacts, if any, of changes the federal government is contemplating in this legislation in how the fund is managed and the effects on capital markets and so on and so forth.

Thank you for coming. We're going to use the same order that you're listed in on the notice: Mr. Ambachtsheer, then Mr. Por, then Mr. Otto. If you would be so kind as to open with a few remarks each, of a few minutes each, then we'll go to questions.

Thank you again, and I invite you, Mr. Ambachtsheer, to start us off.

Mr. Keith P. Ambachtsheer (Individual Presentation): Thank you, Mr. Chairman. It's a pleasure to be here.

I really am going to say very little. I think our role here is more one of responding to questions and concerns that the members may have about the investment side of this endeavour.

Let me just say very briefly that I was an adviser to the start-up of the CPP Investment Board, and that process is unfolding I believe as it should, looking at about a two-year perspective. And so conceptually I have no concerns that this new endeavour can also start up and operate as long as people use their common sense and are sensible about defining the mission for the organization, and about paying attention to good governance.

In terms of concerns related to capital markets, the simple reason there should be any at all is because of the 20% foreign property rule, and I think this increasingly becomes a major issue now as we see other major funds starting up. I think if this committee were to lend its weight to other committees in terms of resolving that now is the time for this rule to be removed, I think it would be very helpful.

Thank you.

The Chairman: Thank you.

A few comments, Mr. Por, to start us off.

Mr. John Por (Individual Presentation): I cannot promise I will be that quick.

We served as adviser to the Kirby committee on the governance of pension funds, most notably large public sector pension funds. About a year ago we appeared as witnesses. What I would like to do today is to table those statements I tabled before, and then I would like to share some of the lessons we learned as an organization about dealing with large public sector pension boards. So there will be about four major lessons I would like to share with you.

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The number one lesson we learned is that investment organizations, if unchecked, tend to grow and to grow fast. The reason for this is that the investment profession has a portfolio-centred, bottom-up perspective—i.e., portfolio managers or investment managers try to achieve total value-added by the sum of the portfolio value-added. In this perspective direct costs, and the risk and cost of complexity, are very rarely factored high. We found that without strong leadership and clear vision at the top, portfolios and staff will mushroom without compensating gains. Boards in general have not been able to provide this leadership and vision for reasons that appear to lie in the nature of group decision-making and not in the qualification of the individual board members.

So this is one lesson, that unless there are efforts to make sure this investment organization will remain in certain bounds, they will tend to grow fast.

The second one we found was that for large funds, and the superannuation fund will be a very large fund, it's very difficult to consistently add value—that is, to achieve an investment return in the asset class that would be above a relevant asset class index. It is therefore, we found, imperative that a strategy of doing what we would call an investment philosophy is discussed, agreed upon, and implemented for the investment organization in question. A key role of the board is to ensure that such a philosophy is in fact put in place, rigorously followed, and periodically reviewed in light of actual experience.

So that's the second lesson, that there has to be a communicable and articulated investment philosophy that points the way to how we could actually add value.

The third one is that if we put together just good individuals to form a board, effective boards do not seem to just happen. While most pension board members, especially those appointed on the basis of proven investment acumen and experience, believe they have requisite knowledge to oversee large-scale investment operations, this in fact is not the case. There are very few individuals who can actually claim they have overseen that kind of large-scale investment operations. Very few individuals have the actual experience in this area, and significant board orientation is necessary.

We also found that once appointed, however, boards do not devote the necessary effort to orient themselves as a decision-making body. I'm not trying to single out any particular board; of the 60 or 50 boards we dealt with, this is a general trend.

Finally, what we found was a key, and probably the most important board function, is the hiring, overseeing and monitoring of the CEO of the pension system. Again, our experience suggests that unless the boards seriously consider and clearly identify those restricted key criteria that a prospective candidate should meet in order to be successful in discharging the CEO's function, there will be problems, because in the political process ensuing finding that CEO there will be trade-offs made and those critical, key success factors may not be implemented in hiring the CEO.

Thank you very much.

The Chairman: Thank you for that synopsis.

Mr. Otto, please, do you have a few remarks you'd like to make before we go to questions?

Mr. Carl Otto (Individual Presentation): Thank you, just a few.

I understand that the impact on capital markets, Mr. Chairman, is probably on the minds of most of you, and let me give you a thumbnail sketch of the size of the equity market, which is your main concern.

The TSE 300 has a market capitalization of $630 billion. That is a float capitalization; excluded from that are the control blocks, so if Power Corporation owns a big block of Great-West Life, that block is excluded. Or if Bell Canada owns a big block of Northern Telecom, that is not included. If you include that in the total capitalization you would be talking total capitalization of $850 billion. That compares to about $11 trillion in the United States, so we're about one-eighth of that. The average trading volume varies greatly, we'll say 100 million shares with an average price of the stock of about $15; so it's $1.5 billion a day, which is quite the respectable number. If you were to multiply that by 20, you could easily arrive at $30 billion a month. So an inflow of $1 billion a month or 3% of total trading volume would not be a disturbing factor—and that brings me to the second point of my brief remarks—if done properly.

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In my professional opinion, the only way to start a fund of this size is to go the index route. Go the index route, because you then spread the money according to the weight of each stock in the TSE 300 index. Seven percent of the money will go to Bell Canada, which has a huge trading volume, and only 0.75% will go to potash of Saskatchewan, for instance. The smaller the companies are, the less you invest in them. But it does give you a total exposure to the market at a cost substantially less than if you go the active route. And active managers tend to have 50-70 securities. They tend to overweight the mid-cap securities, and that causes a strain in trading.

I think, with those brief introductory comments, I'd much rather respond to your questions, ladies and gentlemen.

[Translation]

My French is as bad as my English, but if someone has questions to ask in French, please go ahead.

[English]

The Chairman: You're too modest.

Thank you, Mr. Otto, and thank you to all of you for those succinct opening remarks.

We'll start, Mr. Williams, with you.

Mr. John Williams: Thank you, Mr. Chairman.

If the government takes the $30 billion out of this plan, which they intend to do, it's still going to leave about $100 billion in the plan, which is going to be over a number of years invested in the private capital markets. And you mentioned that the entire TSE, excluding control blocks, is at $630 billion. So let's put that at about 15% of the entire stock market capitalization that would be owned by this particular fund when it's fully invested in the private sector.

I'm reminded of Mr. Greenspan's comment a couple of years ago about irrational exuberance. At that time, Mr. Chairman, I think the stock market was going to hit 7,000 points. The New York stock exchange was coming up to 7,000 points. And it's interesting to note in the Globe and Mail this morning that the Dow Jones has now gone over 11,000. So much for Mr. Greenspan's irrational exuberance, or I wonder what he would say today.

There are wild swings in the stock market. We think of the 1970s, when the stock market was continually depressed. We think of the 1990s, when exuberance has taken over. Who knows what the next decade will do?

If a fund of this magnitude, $100 billion, is subject to large changes in market evaluation—I'm not talking about daily swings; I'm talking about five- and ten-year swings—is there a potential of significant market loss that would have to be made up by the taxpayer?

Why don't we start with Mr. Otto and get the opinion of all three on this question, Mr. Chair?

Mr. Carl Otto: I think it's a very good question and the answer is clearly yes. Whether the loss is serious depends on the time horizon. If I understand the liabilities of that fund correctly, your time horizon is very long. And the interim fluctuation of the capital base is relatively less important than the growing stream of dividend income.

I'd like to spend half a minute on that, Mr. Chairman, because it is not understood that with the dividend stream growing at 6% compounded per annum, in the United States we haven't had a dividend cut of the S & P 500 in 35 years. In Canada, it's the same dividend stream, but not quite as smooth. This dividend stream is more stable than the rate of return from treasury bills, if measured statistically. So if in your thought process of that you think of that growing stream of dividends as something certain to service the needs of the pensioners, what the value of the underlying plant is, on a short-term basis, is less relevant than that.

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In summary, I share your concerns. Clearly there will be wide fluctuations. You could lose 20% of the market value on a temporary basis, without question, and there are very few people, if any, who can say when that is going to happen. But if the portfolio is built in such a way that you optimize the growth of dividend income, which can be done on an index basis as well as on an active basis, you'll be all right.

The Chairman: Mr. Por.

Mr. John Por: But if we accept that for the moment, and we ask why it is that most pension funds actually invest in equities.... The only reason they invest in equities is because they believe that for the time horizon that is relevant for a pension fund, equities will outperform other asset classes.

There are two points to remember: the long run, and other asset classes. So if we accept the fact that these funds are there to fund liabilities that are very, very long in nature, the only asset class that in the long run can guarantee.... If the capital market histories are any indication for the future—we have to accept that—in the long run, equities will outperform other vehicles like bonds. Bonds tend to behave similarly to liabilities, at the expense of short-term volatility or short-term unfunded liability, which could be managed by an actuarial process. You don't really have to prop it up right away. Secondly, if you believe that in the long run equities outperform bonds, that is if you hold that view, there are no other asset classes you could consider.

Mr. Keith Ambachtsheer: There's a saying that those who do not learn from history are bound to repeat it. I think your question needs to be looked at in the context of a decade-type approach. If we were having this conversation in the 1920s, we would still be making the statement that equities over the previous 100 years have done relatively well, yet we would be looking at a decade of very serious economic and capital market difficulties.

To a lesser degree, if we were having this conversation in the 1960s—20 years of unprecedented economic growth, low inflation experience, relatively high stock prices—and we went heavily into equities, we would have been faced with the 1970s, which was not a very good decade for equities. So as we sit here at the end of this century peering into the next century, what might the future hold?

While it is true that financial markets get priced so there's a risk premium, if equities are the riskiest, they ought to, over the long term, have the highest return. Nevertheless, my personal view is that there is some irrational exuberance out there today, because Carl's dividend yield today is 1.5%. You need to spend $100 today to buy $1.50 of dividends. So even if those dividends grow very nicely, as I think they will, there is nevertheless a question of how those dividends might be valued 10 or 15 years from now.

The cloud I see on the horizon is effectively relevant to the conversation in this room. It's the aging process. There's a whole question, as we move from capital accumulation to capital “decumulation” 15, 20 years from now in these retirement systems, about what the prices might be out there. I suspect that 10 years from now you'll be able to buy $1.50 worth of dividends for less than $100. But that's my personal view, and it can certainly be debated.

Mr. John Williams: This is a new plan starting up, and all the new contributions are going to go into the new plan, which will go into capital markets at the rate of about $2 billion a year—I think that's the number. I could be incorrect on that, Mr. Chairman, but let's assume it's $2 billion. When we do get into, as you say, Mr. Ambachtsheer, the 1970s-type of issue or the 1930s-type of scenario, would it be prudent to keep throwing $2 billion a year into capital markets when they are in a long-term decline? What kind of investment policy would we have when we have $2 billion of new cash every year to invest? What should we do with it?

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Mr. Otto.

Mr. Carl Otto: If I may answer by quoting Warren Buffett, he said, if you are a consumer of hamburgers and you're not a beef producer, are you hoping for higher beef prices or lower beef prices? That's an easy one. And if you're a net saver and put money away in the stock market for the next 10 to 15 years, are you hoping for higher or lower stock prices? Most people get that one wrong.

I fully agree with Keith, we hope we're going to see this exuberance blown out of the market, and that with your dollar-averaging process, you'll have a billion or a couple of billion dollars a month spread out over every day, so as not to have a market impact. What you pray for is lower markets. And if they happen, you should be as happy as my wife is when she goes shopping at Eaton's when they have a sale.

Mr. John Williams: Mr. Ambachtsheer, what do you say? Do you agree with that?

Mr. Keith Ambachtsheer: Carl is correct. There could be nothing better for retirement systems generally. If you think of it in the context of future cashflows that are going to be invested, it's far, far better to buy those equities at 50¢ than at $1, because you'll do better in terms of current dividend yield and you'll presumably have the same long-term growth rates.

So yes, I'm with Carl on that one.

Mr. John Williams: You have just mentioned that within the last decade we've gone through a fairly significant amount of capital accumulation as we, the baby boomers, are in our most affluent years. With retirement looming ahead, we want to acquire capital. We save. We invest. And then we will turn to, I think your word was “disaccumulation”, and we start having to live off that capital accumulation. Baby boomers of the next generation are going to have to pay more for the CPP, they're less affluent than we are, and so on. Therefore, the capital markets are going to perhaps lose their inflationary factor, because the money isn't going to flow in any more.

Therefore, it's not improbable that we could be looking at anemic markets over a longer period compared to what we have seen in the recent past—I mean the last 10, 15, 20 years.

Keith what do you say? Then we'll get John to comment?

Mr. Keith Ambachtsheer: I just want to make the connection between the financial markets, retirement savings, and wealth creation. Often people think of those as completely disconnected. You have the financial saving over here, you have the real economy over there, and never the twain shall meet. I also do believe that disciplined retirement savings forces wealth creation. In other words, it creates an expectation that those savings will be turned into wealth creation processes. So it's a linked process.

Mr. John Williams: Does that inflate the capital markets?

Mr. Keith Ambachtsheer: Another way of looking at it is that it potentially reduces the cost of capital. In other words, it creates investment capital that, if used productively, can create more wealth. And ultimately, down the road, this is just shuffling pieces of paper unless there really is more productivity—if I can use that word, which is political these days—that gets fed into how much wealth we create 15 to 20 years from now. This is tied to that process. And it is volatile.

The Chairman: Mr. Por, do you want to jump in on that?

Mr. John Por: That's a key point. We can theorize, but actually we do not know what will happen, and most definitely we will never know when it will happen. That means that if either of us could know what will happen in a given time with the capital markets, instead of serving as witnesses to you, we could make much more money just predicting these things and making our own investment decisions. So whenever you look at an issue like this, you can never really say with certainty what will happen.

Keith actually has a view, which I do not necessarily not share. But, yes, the next 10 years will probably be worse for equities than the last 10 years were. But that debate will just affect whether you get into a 60% equity and 40% bond rate, as opposed to a 40% equity and a 60% bond rate. So the issue is what the ideal asset mix should be at a given point in time, which can unfortunately only be right in hindsight.

I think what I'm trying to say here is that unless we accept the fact that capital markets in the long run will outpace the other available methodologies to grow a pension system...you cannot avoid going to the capital markets; the issue is to what degree and when.

Mr. John Williams: May I have another question?

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The Chairman: Okay. I don't know if anybody else has questions. I haven't seen any indication of questions yet from others. John is on a bit of a roll, so we'll let him finish and try to be flexible here.

Go ahead, John.

Mr. John Williams: Is this a short roll or a long roll, Mr. Chairman?

The Chairman: For the moment, we'll do a short roll.

Mr. John Williams: Mr. Por, you raised four issues. The first one was that staff can mushroom without the proper constraints built into the management of the plan, and government tends to have this propensity to grow and mushroom without constraint. How can we ensure that what you have seen as a human tendency will not happen; that the productivity of the management of the plan will not get lost in bureaucracy and so on and so forth, and it will stay focused to ensure it will do the best it can for the participants of the plan?

Mr. John Por: I never said governments—

Mr. John Williams: No, I said that.

Mr. John Por: Having said I didn't say that, yes, there is a tendency for governments to grow—except the Canadian government. One thing we can do is debate, for a large fund like this, what are the limits of what you can achieve with an asset class?

There is a problem we find sponsors getting into with an asset class. Whether it's real estate, alternative investments, managed futures, or whatever, that have certain characteristics, they will be entered into to learn more about them. Usually these asset classes are viewed to be riskier than other asset classes, so we tend not to enter these asset classes in a big way, so you put in 1%, 2%, 3% of your assets. Basically you incur all the costs managing those asset classes because they tend to be managed at a much higher cost than other asset classes, without actually the gains in benefits. Even if there is a terrific return of 1% of your portfolio, at the end of the day it will show up as the third decimal point, etc.

So one of the things an investment philosophy should address is what kind of diversification we should be striving for, and what we expect an asset class to deliver at what cost.

We're working with very large pension funds and they quote this investment philosophy or statement of investment principles. That's one thing.

The last point I tried to make in this presentation is that what kind of management the board puts in place is really very important. Unless management has the view that there are limited opportunities to add value, you can actually run a very cost-efficient portfolio within most asset classes—index management or enhanced index management, which would be very cost-effective, does not need a lot of staff. Then there will be some portfolios, not necessarily a lot, when you try to add more value, but there has to be a crystal clear view why they're entering into those asset classes.

An example is the California teachers' fund, which had a real estate portfolio. The California teachers' pension fund is roughly $80 billion. If they decide to enter the real estate market with 5% to 6% of their portfolio, which would make a meaningful impact, they would be running a huge real estate portfolio. They are clearly not very well positioned to keep staff to work on it because if a good staff is coming up through the ranks, they will leave you or they leave the fund within about a year or two.

Our view has become that unless there is an investment philosophy addressing diversification, value-added strategies, costs and investment consequences, this growth will happen.

The Chairman: Mr. Ambachtsheer.

Mr. Keith Ambachtsheer: Everything John says is true, but let me add that I just co-authored a book last year called Pension Fund Excellence: Creating Value for Stakeholders. It's a global book about these kinds of issues. It's no accident to me that the case study chapter, which describes best practices, is actually on Ontario teachers. The point here is that we in Canada know how to do this right.

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It's really a matter of focus, will, and quality of governance that will deal with the kinds of practical issues John is describing. If you're large, of course you will be passively managed to a large degree. But at the margin, the question is where can you add value? In a good governance management process, that's what it's trying to do. We know how to do these things. There are no mysteries here.

The Chairman: Thank you.

Marlene.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): I want to touch on the issue of good governance. In many cases good governance is not just an issue of what procedures and processes have been put into place within the organization. It also has to do with the external governance of that organization.

Have you had the opportunity, given the issues you've raised, to determine what needs to be addressed within the organization, in terms of the management team, the board of directors, and the CEO that would be managing the investment fund? Has the legislation adequately addressed the issue of external governance? If we take into account the issues Mr. Por has raised, as to what needs to be in place to ensure the organization doesn't mushroom, etc., has the issue of external governance been adequately addressed within the legislation?

I'll give you an example. The legislation requires an annual report be tabled. That's an example of external governance. Have you looked at that issue? If you have, what are your views as to the adequacy of the measures that have been put into place in Bill C-78, to ensure there is adequate external governance of the management of that fund?

Mr. John Por: First of all, I would like to address what Keith said. Yes, there are some funds. The teachers' fund is one that was actually more successful in addressing these issues than other funds. Just because in Canada, of the $200 billion, say $60 billion is managed this way, it doesn't mean we know how to do these things. It means the teachers in the past few years were able to run a better ship than others. That's a point I would like to make.

Secondly, it really depends. Sure, the legislation says there should be external reporting. The legislation actually specified—and maybe Carl could comment in detail on it—what kind of reporting should be done. I think the legislation either should have been much more comprehensive or shouldn't have said anything at all.

But we find it's paramount that the board have a report done by an independent agent in a proper monitoring and reporting system, to make sure the board is accountable. The details of that reporting could be put together and worked on by my colleague Keith, Carl, us, or whatever. It's very important that the reporting be relevant, but we have found that if you try to be very comprehensive in this reporting, you just get lost in the detail.

Ms. Marlene Jennings: Am I to understand, or properly conclude, that the measures actually described within Bill C-78 for external reporting and governance, in your view, are not adequate? I'm asking you, Mr. Por. I'm going to ask Mr. Otto and—

Mr. John Por: I wouldn't make that broad a statement. It depends.

Ms. Marlene Jennings: What statement would you make?

Mr. John Por: Eventually the board should come up with a reporting and monitoring system, part of which would be directed to a committee, or whatever they would have to report to, on whether the operations are cost-effective and effective.

Ms. Marlene Jennings: You don't see the need for that to be in the legislation—the broad strokes or guidelines as to the nature of the external governance.

If we take another sector—for instance, let's take policing—in Canada we have a tradition of external governance, civilian governance, of police. The legislation that normally creates the police force also has in it a whole mechanism that sets up the external body—who is qualified to be appointed to that external body; what its mandate is; what powers it has; whether or not it has executory powers over certain aspects of policing, the police organization, etc. In many cases, the experience has been that if the broad strokes are not adequate, then the external governance is not adequate because you've built in the failure right there.

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So the point I'm trying to get from you, and ultimately from Mr. Otto and Mr. Ambachtsheer, is whether or not it is adequate, or does something else need to be done? Because that's going to determine what kind of reporting the internal organization that's being audited or being reviewed is going to provide and, in many cases, what kind of procedures internally are going to be put into place in order to be able to provide that report.

Mr. John Por: You're asking very good, specific questions which I cannot answer in detail because I haven't really read the legislation with that specific question in mind. But if you ask me—

Ms. Marlene Jennings: I will ask you to read the legislation with that specific question in mind and send us your thoughts in writing as quickly as possible, because that's really important. And if you feel the dispositions within the legislation are not adequate, once you've had a chance to review it and reflect on it, I would suggest you recommend some specific amendments. Thank you.

Mr. Otto, same question.

Mr. Carl Otto: I'm so glad you asked it. It's a very good bill. It's a bill that's better than most other bills and quite workable.

Ms. Marlene Jennings: Thank you.

Mr. Carl Otto: Nothing is ever so good that it couldn't be improved. And as far as external governance is concerned, a number of things were missed. In section 35 the only required reporting refers to book values and market values. There is no reference made to income reporting, to comparative income reporting, to growth of income reporting. There is no reference made to performance, rates of reporting, performance presentation standards as recognized by the AIMR, the American research institute, which is as powerful as the chartered accountant profession.

The same is true in subsection 35(5). We refer to the handbook of the Canadian Institute of Chartered Accountants. It should also refer to the generally accepted principles for performance presentation standards, which also mean that attribution reports have to be made. In other words, if you have a wonderful year in your equity portfolio and the portfolio made 20% instead of 15% for the market, you want to know where that is, whether you were lucky with one out of a hundred stocks or whether the portfolio was well done throughout. That's called an attribution report.

Whether or not that should be in the legislation or it should be understood is not up to me to say. I would have said to take out the reference to “market value” and “book value” and just say, “financially meaningful reporting should be made”. Or if you want to be specific, then definitely the income reporting and the generally accepted principles for performance presentation standards of the Association of Investment Management and Research should be incorporated.

The same applies to paragraph 48(4)(d):

a statement of the Board's objectives for the financial year and a statement of the extent to which the Board met those objectives;

Clearly, the rate of return history should be there and suggested corrections to any rate of return shortfalls vis-à-vis the benchmarks could be there.

Again, I plead ignorance of the legal language in clause 51. You say that every director who prepares or signs a report that contains any false information is guilty of an offence and liable for $500,000. I would have thought you should add in there, “who knowingly or carelessly signs”, otherwise nobody will ever want to become a director of that organization. If you as a director had signed and approved an auditor's report and then it turns out the auditor's report was wrong after you received the management report from the auditor, after the audit committee had gone over it...I would think your lawyers would want to think about that one.

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Mr. John Williams: On a point of order, Mr. Chairman, was that clause 54?

Mr. Carl Otto: It was clause 51.

You can see from the very minor points I have to raise about the external governance that it's a superb bill.

The Chairman: Thank you, Marlene. I can come back to you later.

Ms. Marlene Jennings: I would just like to ask him...because I don't take dictation, so I can't take notes quickly.

Mr. Carl Otto: I promised Mr. Williams a note on that subject, and I'll give you my views in writing.

Ms. Marlene Jennings: Thank you. I'd appreciate that.

The Chairman: We'll go to John, then Keith.

Mr. John Por: One thing is that if you put in too many details, what would be the correct measurement system, for example? These things are changing. Keith Ambachtsheer talked of a measurement service four, five, or six years ago. Had we discussed this bill.... The cost-effective measurement system had not been in operation then. It would be very important not to restrict yourself to what you measure, but to have relevant measures. And at a given point in time, the professions could always tell you what the relevant measure is.

The Chairman: Keith.

Mr. Keith Ambachtsheer: I will leave this with the committee today, Marlene. It is a study entitled, Moving to a `Fiduciary' CPP Investment Policy: Two Possible Paths. I'm the author of it, and it came out of the work I did with the CPP Investment Board start-up.

It discusses the role of information transparency disclosure, but it does so generically. It doesn't promote my service. Nevertheless, it's much more important, rather than getting specific, to say that it is obligatory that this new investment agency report on a best practice basis. That way you're always current; you're never tying it to what may be the best practice in one particular year, but there is a professional obligation to always reflect best practice disclosure. I think that's what should be in the bill.

The Chairman: Thank you, Marlene.

Ghislain, the floor is yours.

[Translation]

Mr. Ghislain Lebel: That's very interesting, but I would like to ask Mr. Ambachtsheer whether the study is available in French. Otherwise, the committee will have to have it translated. May I request that?

[English]

The Chairman: Yes. I will get it from Keith in French, or we will get it for you in French.

Mr. Keith Ambachtsheer: Unfortunately, this particular document has not been translated into French.

The Chairman: Ghislain, we'll try to do that. Was that your comment? Okay.

We will have Gerry, John, then Tony.

Mr. Gerry Byrne (Humber—St. Barbe—Baie Verte, Lib.): I just want to direct a question to Mr. Otto. I want to talk a little bit about the nature of the investment strategy that would be employed there.

You made it clear in your opening statement that you would advocate a passive strategy to begin with. Could you discuss the nature of those types of investments and whether or not in a relatively short period of time, after such a fund were established using markets, you would advocate to keep moving to a more active strategy? If so, how would you describe that active strategy?

Mr. Carl Otto: With regard to the first part of your question, what paths of strategy, you have to be careful in the selection of your benchmark.

For instance, it would be my recommendation that you do not take this newly created Standard & Poor's TSE-60 index. You would end up with 20% of your portfolio in Bell Canada and Northern Telecom, which would break all rules of prudence, in my opinion. The broader the index the better, so the 300 makes sense.

You have to be careful with your choice of benchmark indices that you replicate in the United States. The Standard & Poor's 500 is a superb index, but currently as we all seem to agree with Mr. Greenspan and Mr. Williams over there, because of a handful of mega-capitalization stocks, grossly overpriced, the mid-cap 400 index of Standard & Poor's is not overpriced and has a higher yield, etc.

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So you have to be careful in those indices. You have to remember that most portfolio managers underperform the index. We can prove that through actuarial studies, through books. We can prove that very few portfolio managers outperform the index in the long run. So the emperor has no clothes. Plus, they turn over the accounts very heavily, which causes you high brokerage costs and high impact costs. All that you don't have in an index fund, because you have index revisions only once a year, usually.

Is there a role for active managers? Yes, there is a role in the less efficient parts of the market, in the emerging markets sector. There is in the small-cap U.S. universe. Certain managers have been excellent for decades in the high-tech small-cap market here in Canada. There are people like Warren Buffett who go a totally undiversified route when they see a good company that is well run and grows at a compound rate of 8% per annum in earnings and dividends. You take big bets in that and you can afford to have such a manager, because you know you're indexed. You're just adding on to the margin.

Does that answer your question?

Mr. Gerry Byrne: I think so. So basically, no matter what, over the course of time you'd advocate maintaining a more passive position, with occasionally some active elements as an aside.

Mr. Carl Otto: That would be better than most other pension funds in Canada.

Mr. Gerry Byrne: Thank you.

The Chairman: Do you have any comments, Keith or John?

Mr. Keith Ambachtsheer: Speaking to the same question at a somewhat more generic level, this paper argued two kinds of governance processes as possibilities. One process was legislated governance, which would effectively legislate the fund to be passive. The other I would call the independent governance model, which basically charges a board to make that part of its ongoing decision process.

In this paper I lean towards independent governance for the reason that if you put things in legislation, what may make sense one year may not make sense the next year. Markets are dynamic. Things change. It's far better to leave these kinds of judgments on whether or not it should be 80% passive, 20% active, or 90%-10% in the hands of a board and a management team that is charged with being accountable for making those kinds of decisions.

In other words, they ought to be expert decisions rather than being legislated from outside the decisions.

Mr. Gerry Byrne: Thank you.

The Chairman: John, do you have anything to add?

Mr. John Por: No.

The Chairman: Thank you, Gerry. Let's have John.

Mr. John Williams: Thank you, Mr. Chairman.

Moving on to the realm of foreign equities, a pension plan such as this would be restricted to the 20% foreign content rule. Am I right in saying that?

There already is a reasonable amount of pressure on the government to revisit that rule, with the potential of increasing the amount of foreign content. With the size of this plan being largely contained to the Canadian capital market, that would add pressure to the government to revisit that decision.

When it comes to pension funds being invested in foreign equities, these funds are untaxed capital that is being invested in creating jobs abroad in areas where capital market regulation perhaps is not as good as it is here in Canada, and hence there is a higher risk. But of course it has a higher return if you're successful—not always a higher return, because of high risk. We've seen that quite a number of people have lost their shirts in the Asian market in the last little while. One would hardly call that high return, but it was definitely a high risk and it has proved to be so.

Taking a plan of this magnitude, where the government side has made all kinds of efforts to underline the fact that it's underwritten by the taxpayer, do you feel it's wise to invest a large amount in foreign markets that are perhaps less well regulated than a Canadian market?

Mr. Keith Ambachtsheer: One way of looking at this is that retrospectively, we can say with certainty that the return differential between a Canadian stock portfolio and a global stock portfolio has been significant over the last 15 years. Why? It's largely due to the fact that our market is made up in a very specific, peculiar way. It has directly or indirectly almost 50% exposure to resources, which in the general scheme of things just haven't done well over this time period. The idea that you would expose the Canadian taxpayers, who already have this exposure through the way our economy is structured, once again through this investment program seems to me like doubling up on the risk.

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It's far less risky, in fact, to have a diversified global equity portfolio, where bad things in Asia get offset by good things in Europe, than it is to concentrate all of the assets into what effectively is, both in the financial markets context and in the economic context, 2% of the whole. It's less risky, not more risky.

The Chairman: Are there any other comments?

Mr. John Por: I grew up in Hungary, and the Hungarian government went like this: Why are we competing in cars? Why don't we just have one car factory? It's not very risky; we can actually make sure that everybody will have the same car, we can control the cost, and everybody will be happy.

I don't know what happened in the meantime, but that kind of reasoning about the market economies, not really being good, somehow went by the wayside. We either believe in capital markets as a tool of efficiently allocating capital—

Mr. John Williams: We know markets in some countries are very poorly regulated. You read the financial papers and you find out it was lack of market regulation that in large measure contributed to the crisis of the Asian flu, where banks weren't...the margins, bad debts weren't being recognized, and so on. So market regulation in areas where there's high return but high risk...and I appreciate Keith's point of doubling up on the risk because we're so resource-oriented here in Canada, but at least we have a market that is as well regulated as any.

My point is, in markets that are poorly regulated, is a fund of this magnitude, underwritten by the taxpayers of Canada, where we're creating jobs in another part of the world with untaxed money that's made here in Canada, beneficial?

Mr. John Por: I understand the concern. The question is, who should make that decision and to what degree? I think if you let anybody invest money anywhere in Canada, probably just a very small portion of this kind of money would go to emerging markets that are poorly regulated. I tend to believe a huge portion of that money would go to markets that are equally or better regulated than ours. That's first.

Secondly—and I think this was Keith's point—why don't we have that decision left to a board that is composed of individuals who can make that kind of decision on what kind of risk we should take, rather than actually enshrining in the legislation that basically, by definition, the government would make that decision? That's the only point we're trying to make.

Mr. John Williams: How do we stop a fiasco such as the Orange County pension board, I think it was, where—I'll use this term—a rogue manager invested billions in the hedge and futures market and lost virtually all of it and bankrupted the plan? How do we stop that and guarantee—and guarantee with a capital G—that could never happen? It happened in the United States; it happened in the state of California. It was a government plan managed on behalf of thousands upon thousands of employees, and it was bankrupted. In a market that is very well regulated, how can we guarantee that will never happen?

Mr. John Por: Again, on that specific case, basically you had somebody who did something very successfully for a number of months or years. Those governance principles that Keith and I promote should have been in place. They were not in place, therefore that individual was running a highly risky investment portfolio without the board actually overseeing his activities and understanding what he was doing.

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So we usually suggest that if there is a good monetary system with adequate policies that govern these things within a board...you cannot guarantee it 100%. Life is based on the statistical principle that there is no such thing as an absolute certainty, but I would be very much surprised if most Canadian pension funds could get into that problem.

Mr. John Williams: I'll come back to you, Mr. Otto, because I know you have something to say.

I think also of that hedge fund in New York—and its name escapes me at the moment—that really had a serious potential to upset the capital markets last year when it ran into serious difficulties by betting the wrong way on Italian bonds and Russian bonds. Here we have a fund that's privatized; maximization of return is likely high on its mandate. And you have mentioned, Mr. Por, the fact that it's hard to add value beyond the index. But they will try—it's human nature to try—and they will get into hedge funds and futures and these esoteric investments that have been materializing during these last few years. If they bet the wrong way and they bet the bank, as that fund did and as the guy in California did, we are really in a tough time, and the taxpayer is really going to have to cough up big time in that scenario.

How do we ensure that it doesn't happen?

Mr. Keith Ambachtsheer: If you look at the instances that you mentioned, the other one you have to put in there is Barings, a 150-year-old bank.

Mr. John Williams: Poof! It's gone.

Mr. Keith Ambachtsheer: To me, what's interesting is that here you have two apparently completely different situations, Barings Bank over here and Orange County over here, yet the issue was exactly the same. It was a lack of good governance in both situations.

Mr. John Williams: Lack of good governance on the hedge fund in New York?

Mr. Keith Ambachtsheer: It's the same thing, except the irony there was that that money actually was funded by Wall Street itself, out of their own pockets, so at least it was their money that blew up. But again, why did these people go into a fund that said right up front, we will not tell you what we're doing, we will not give you any disclosure, trust us? So again the message is that's not good enough.

Mr. John Williams: In fact, I think it was Mr. Otto who said that the bill should...well, you didn't specifically say the bill should have it spelled out completely, but I think the point is that transparency is paramount, guaranteed, must be open and subject to accountability, and if there's any hint that this isn't as full and open as absolutely possible, you increase the risk. Do you all agree with that? Mr. Otto?

Mr. Carl Otto: I would go one step further. There's one word I especially objected to in the legislation. I would have liked to see the term “maximized” return exchanged for “optimized” return. But that's probably semantics.

I had the privilege—and my old firm still has—of running substantial amounts of money for foreign governments, where we had complete discretion, and I didn't feel comfortable with that degree of discretion. So we implemented a system where Price Waterhouse came in twice a year and audited not only the assets and the income, but also the process, the procedures, and wrote a critical report—never to us directly—to the client, who then discussed with us how we could tighten our.... That report included not only assets; it included brokerage expenses, brokerage as a percentage of trade value, impact, impact cost measurement, you name it, rate of return. They audited to make sure that our rate of return...reporting to the client were in line with generally accepted AIMR principles, etc. Expensive? Yes. Worth it? Yes.

Nothing is guaranteed, there's no guarantee in it, but if you put in those kinds of controls—and you're talking fractions, thousands of a percentage point—you should sleep reasonably well.

The Chairman: Thank you, John.

Tony.

Mr. Tony Ianno: Thank you very much for your insight. It's certainly appreciated.

I gather that the Reform was going towards an investment fund. They'd like to leave it in a black box—

Mr. John Williams: I never said that at all.

Mr. Tony Ianno: The conversation between Mr. Williams and me was that they'd like to leave it as is...and I guess the question they were raising in terms of the example of two or three that maybe didn't work out well, in terms of investment boards that did the pension funds around the world.

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What is the track record of investment boards, if you take into account transparency and other issues that were just related? What is the general track record?

Mr. Keith Ambachtsheer: One way to answer that question is that through the firm that John was kind enough to mention, Cost Effectiveness Measurement Inc., which I co-founded in 1991, we now monitor, if you like, the cost-effectiveness of the management of something like $2 trillion globally. This is a global service, so we actually have funds in Canada, U.S., the Netherlands. When you do research on that database in terms of what seems to produce the best results, there are three statistical factors that come out.

One, increasingly, is size. This is a business where bigger is better. In our database, bigger funds produce more of what we call risk-adjusted net value-added than smaller funds, and that's partially simply related to unit costs. A large fund can run at 10 to 15 basis points; that's one-tenth of one percent per year. For example, in the mutual fund industry, where something like 2% is not uncommon as an annual management fee, that's a huge advantage that large funds have over smaller funds, or expensive funds.

Another one is proportion passively managed. In our database, the higher the proportion that's passively managed, the better the funds do.

A third one is a more complex matrix that measures the quality of the organizational design and governance of the organization. And we find the higher that quality level, the better the funds do.

So there is, if you like, a quantitative measure of the three key drivers of what puts funds to the top of the list in our database.

Mr. Tony Ianno: But the question I was asking is, if you take the overall system in terms of pension funds, what kind of return on a long-term basis...? Mr. Otto was discussing it in terms of it being better than treasury bills or bonds. Is it possible that the investment board, over a long period of time, aside from unusual acts that are beyond anyone's control, generally will form at a reasonable rate?

Mr. Keith Ambachtsheer: The big question is the equity risk premium, because effectively in the long-term sense, that's what you can capture through this kind of diversified program, rather than just being 100% in bonds. Now, historically, that gap between stock returns and bond returns has been 5% per year on average for something like 70 years. That's a huge advantage. The question today going forward, as we've already discussed this morning, is whether that 5% is still there, and this is now in the eye of the beholder. When I do my numbers, the answer is no, it's not there any more; it's more like 2% or 1.5% today going forward.

Is it worth while to pick up that kind of gap in the long term? Absolutely. Then the question is, well, what kind of volatility is this going to generate on the way through? None of us knows.

So it is to some degree a leap, but I would also argue it's not more of a leap than any of us operating in a capitalist society take, where risk taking is what produces wealth, and really creating a vehicle here that participates in that process rather than sitting outside of it.

Mr. John Por: Just to add to this, that's the first I would have said. The question is really this. If we actually accept the fact that we do have an asset mix that deviates from the liability mix, i.e., we have equity, the next question is to ask, are the boards by and large successful—and I'm talking about large public sector pension boards—in implementing an investment strategy that would add value over and above that policy? Now, Keith is in the business of actually answering that question, and looking at his data and looking at the boards I'm dealing with, the answer is that usually they hover around the index performance. So basically it's very rare that you could find these large funds that very significantly underperform, but it's very rare when they significantly overperform.

So the answer to that question is that if we accept the cost, if we accept the risks embedded in our decision that we have to go to equity markets, yes, probably the long rate of return will be better—within limits, but better than if we had just put the money in a treasury bill portfolio.

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Mr. Tony Ianno: Mr. Otto, do you want to add anything? Okay.

The other part I'm looking at is that it's a choice of diversification. A lot of this attention has been on equity markets, and of course you mentioned the 20% foreign potential. Some of the other pension funds, the Ontario teachers and some of the others, are also into a percentage of real estate development; I don't know if they have some of the other emerging markets, whether it be by the MDS-type funds or other things of that nature.

What I'm getting at is this. With a good mix, I guess the potential is that, as you were saying, if one part of the global economy goes down and the other one goes up, also what we've found over the years—and maybe you can speak further on this—is that sometimes the real estate may have a hit in some part of a country but something else may take off. I guess a good diversification in the make-up of a board so that there is some expertise in different parts and not just equities alone, I would assume, is important.

Do you have any comments on that?

Mr. Keith Ambachtsheer: One comment I would make is that I wouldn't want too much specific expertise on the board. John will speak to this as well. What you find, if you end up with investment experts on the board, is that they're not doing governance; they want to manage the money. So it's in fact far better to have broad-minded, long-term individuals who focus on how we create a quality organization. I want them to be the board members, and I also want them to hire a team of experts to implement whatever the board decides the right policy is. So it's very important to distinguish between those two.

It raises a related question of compensation policy. One of the reasons I believe the Ontario teachers' fund has risen to the top as a global best practice organization in its class is that its board decided right up front that it would have a compensation policy that would allow it to compete for the best people with, if you like, the sell side of the street. Now, they haven't always been successful; in fact they've lost some of their good people recently to Trimark. Nevertheless, they have a chance of attracting and keeping top-quality people in terms of managing the real estate portfolio, the merchant banking portfolio, the various other portfolios. So that's what I hope will happen with this endeavour.

Mr. John Por: I just want to say do not put investment experts on the board, because then you have ten people who have ten completely different views. The staff will have to listen to this, and eventually the staff will do what they think the board would want them to do, because actually the staff is reporting to the board, and their income, career, etc., depend on the board. That's number one.

Number two, just building on what Keith said, interestingly, the conventional wisdom is that, yes, we have to pay for this talent and we have to actually compete with Wall Street or Bay Street, whatever. There are two things on this.

First of all, you cannot compete with Bay Street and Wall Street. At the end of the day, no matter what you do, eventually people who are considered to be good, or at least have a short-term track record, will leave you. So our suggestion to our clients is always to run something that you can actually run without stars, because chances are you're not going to keep the stars.

Having said this, I think you have to pay enough, which actually keeps conscientious, good people who don't want to get into the sell side of the business. But there is no very sharp correlation between very high salaries and high compensation and investment performance. That's a very tenuous relationship, which we really do not know that well.

Mr. Tony Ianno: Could you describe a little further...? Mr. Ambachtsheer said someone long-term and all the rest, in terms of the type of person to go on the board. Could you give some examples, not of real persons, but of the type of person you would want to see on the board?

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Mr. John Por: These were my briefing notes when we talked about the CPP.

First of all, you look at the role of the board. They have to understand the pension system, the inherent risk, and the participating financial interests. They have to set the governance structure, i.e., they have to set distinct, clear, and understandable accountabilities as to who is doing what. They have to select and evaluate key senior staff to ensure that the staff capabilities are commensurate with the size and complexity of the operations. I don't want to go through all of this. So there is a list.

What we said at the time, and I think we still believe in it, is that basically the board should be able to make decisions independent of the specific interests of any constituencies. So you have to compose the board of those who are not self-interested. Some of the trustees should have work experience that entails overseeing large, sophisticated organizations. Actually, investment professionals are notably better at this. You need people who say, if I invest in this asset class, my costs will go up like this and I will lose most of my people within two years. So they have to understand this.

The majority of the trustees should possess senior decision-making experience, which is not necessarily investment related. They are dealing with huge amounts of money, which means that the people they are going to hire will have high salaries. You don't want trustees who only think, this bastard is making four times as much money as I do. Unfortunately, in large public sector pension funds, that's a factor.

Some of the trustees should come from a background that understands recent professional developments in money management, such as the people who read his stuff, our stuff, etc. Some of the trustees should come from backgrounds that understand the necessity and the effect of formulating long-term policies, i.e., just because something happened in the last year doesn't mean we have to react to it. In the case of a pension board, you need people who understand liabilities as well as assets and how they move together.

So this is the list we prepared for the CPP. I don't think I would change that list, and I would be more than happy to leave that list here for future consideration.

The Chairman: Thank you.

Does anyone else have anything to add?

Mr. Keith Ambachtsheer: I think it's good stuff. I'm with John on all of those points.

My observation is that as you travel around the world and look at governance structures in this industry, it's worth while being sensitive to the fact that you have at least a couple of axes in board composition. One is skill sets and the other notion is representativeness. What you find, especially with a lot of public retirement systems, is that some people represent the pensioners, other people represent someone else, and other people represent someone else. My observation is that if you carry that representativeness too far, you end up damaging what you're really looking for in terms of the right composite skill set.

Another point I would make is that you don't want 12 clones sitting on a board. You want people who have complementary skill sets and who can work together in a collegial environment. That's what you're looking for.

Mr. Tony Ianno: Thank you.

The Chairman: Is that all, Tony?

Mr. Tony Ianno: Yes.

The Chairman: On behalf of the committee, thank you, gentlemen, for spending some time with us this morning. Your knowledge is obviously extensive, and we appreciate that you have shared that with us.

Just before we adjourn, I want to remind colleagues that at 3.30 p.m. tomorrow we have before us the Professional Institute of the Public Service and the Social Science Employees Association. On Thursday at 8.30 a.m., in Room 371 of the West Block, the Honourable Ralph Goodale will appear with regard to the main estimates for NRCan. As well, we will continue our study of Canadian Forces management practices as an international trade issue. At 11 a.m. on Thursday we're going to begin clause-by-clause consideration of Bill C-78 in a room to be announced.

So with that, thank you all. We're adjourned.