HUMA Committee Report

The proposed reform to the EI premium rate-setting process entails the establishment of a new Crown corporation, called the Canada Employment Insurance Financing Board (hereafter referred to as the Board). This Board would be responsible for:

• managing a reserve; and
• setting the EI premium rate each year, on a one-year go-forward basis, to ensure that premium revenues are sufficient to cover EI program costs, that the reserve is maintained at its legislated level, and that any advances made from the Consolidated Revenue Fund in situations where the reserve is insufficient to cover program costs are repaid.

The Canada Employment Insurance Financing Board

The Board would be established as a parent Crown corporation listed under Part I, Schedule III of the Financial Administration Act and located in the National Capital Region. Its mandate and powers (discussed further in the next section of our report), are outlined in sections 4 and 5 of the proposed Canada Employment Insurance Board Financing Act. The Board’s mandate is limited to setting the premium rate under section 66 of the Employment Insurance Act, maintaining and managing a “reserve” (discussed in the next section of our report) and managing funds paid to it under section 77.1 of the Act (i.e., interim and final payments to and by the Board). The Board may only borrow money from the federal government.

The Board would be managed by a board of directors made up of seven directors, including the chairperson. Each director would be appointed by the Governor in Council and hold office during good behaviour for a term not exceeding four years. Directors would be eligible for reappointment. Board directors would be selected from a list of candidates proposed by a nominating committee consisting of a chairperson appointed by the Minister of Human Resources and Social Development (hereafter referred to as the Minister), and the Canada Employment Insurance Commissioners representing employers and employees.

The board of directors shall, after consulting with the Minister, appoint a chief executive officer (who cannot be a director) who would be responsible for the day-to-day operations of the Board. In addition, the board of directors must appoint a Fellow of the Canadian Institute of Actuaries as the chief actuary of the Board. The chief actuary’s
primary responsibility would be to forecast an EI premium rate (by October 31 of each year) in accordance with section 66 of the Employment Insurance Act for the following year, as well as forecast the fair market value of the “reserve” at the end of the following year.

The board of directors must establish three committees — an audit committee, an investment committee and a human resources committee. Among other duties, the audit committee shall require the Board’s management to implement and maintain appropriate internal control procedures, and review all investments and transactions that could adversely affect the return on the Board’s investments, as brought to the committee’s attention by the Board’s auditor or officers.⁴ The investment committee must, among other duties, approve the engagement of investment managers empowered with discretionary authority to invest the assets of the Board.⁵ In addition to other duties, the human resources committee shall approve candidates for senior positions reporting to the chief executive officer, and develop and recommend selection criteria for the position of chief actuary.⁶

Subject to regulations, the board of directors must establish and, the Board must adhere to, investment policies, standards and procedures that a person of ordinary prudence would implement in dealing with the property of others.⁷ The Board’s financial year is the period beginning on April 1 in one calendar year and ending on March 31 in the next calendar year (note that the premium rate is set for a calendar year).

The Board shall cause books on account and a record of investments to be kept, internal audits to be conducted, and financial statements to be reported quarterly and annually. Among other things, these statements must include a statement of the investment portfolio and the change in net assets for the financial year.

The Board shall also cause an annual auditor’s report to be prepared and the Minister shall cause a special examination to be carried out at least once every five years.⁸

The Board must prepare an annual report (within 90 days of the end of each financial year) and provide it to the Minister and the President of the Treasury Board. This report must contain, among other things, the required financial statements for the financial year, the annual auditor’s report and a statement of the Board’s objectives for the financial year and the extent to which these objectives were met.

On the day the Board sets the EI premium rate, it must make public a premium rate-setting report that sets out a detailed analysis in support of that rate, including any information that was provided to the board of directors under section 14(3) of the proposed Canada Employment Insurance Financing Board Act and information provided to the Board by the Minister under the proposed section 66.1(1) of the Employment Insurance Act.

The Reserve

As noted above, the Board would be responsible for managing a reserve. It is worth noting that the legal wording regarding the creation of this reserve conveys a sense of choice rather than an obligation, as the legislation states specifically that “there may be paid out of the Consolidated Revenue Fund, on the requisition of the Minister of Finance, an amount of two billion dollars to the Board.”⁹ Thereafter, the value of this reserve would be equal to the Board’s financial assets less its financial liabilities.

According to the proposed subsection 66(5) of the Employment Insurance Act, the size of this reserve would be effectively capped at two billion dollars and indexed annually beginning in 2009, on a compound basis, in accordance with regulations.¹⁰ In setting the premium rate for the following year, the Board would be required to establish a rate that, among other things, respects this cap.

The proposed Canada Employment Insurance Financing Board Act places restrictions on the types of banks and bank accounts that may be used for the purposes of managing this reserve. The Board would only be allowed to have accounts with banks listed under Schedule 1 of the Bank Act. Moreover, the Governor in Council may, on the recommendation of the Minister of Finance, make recommendations prescribing the types of account that the Board may have and the financial institutions with which it may have those accounts.¹¹

Subject to regulations, the board of directors must establish, and the Board must adhere to, investment policies, standards and procedures that a person of ordinary prudence would implement in dealing with the property of others. Moreover, according to section 24 of the proposed Canada Employment Insurance Financing Board Act, every investment manager who invests the assets of the Board must do so in accordance with the proposed Act and the Board’s investment policies, standards and procedures.¹²

Premium Rate Setting

The Board would set a premium rate for each year such that premium revenues are just sufficient to cover the cost of payments made under subsection 77(1) of the Employment Insurance Act in that year, repay advances made in accordance with subsection 80(2) of the Employment Insurance Act in that year, and ensure that the forecast fair market value of the Board’s reserve at the end of that year is equal to the indexed value, beginning in 2009, of the two billion dollars that may be paid to the Board, as indicated above. The Board must set the premium rate for the following year on or before November 14 in a year.¹³

The Board must consider a myriad of factors and information in setting the premium rate. This includes, for example, information provided by the Minister (e.g., forecast change in payments made under paragraphs 77(1)(a), (b) and (c) of the Employment Insurance Act as a consequence of changes announced by the Minister on or before September 30 in a year and forecast costs related to EI administration); the Minister of Finance (e.g., most current forecast values of economic variables that are relevant to the determination of the premium rate and the estimated amounts credited to the Employment Insurance Account under sections 73 to 75 of the Employment Insurance Act); the difference between amounts credited to and charged to the Employment Insurance Account;¹⁴ and investment
income earned by the Board. The Board would not be permitted to consider the balance in the Employment Insurance Account when setting the rate for a year, a characteristic of the rate-setting process that was criticized during our hearings.

The Board would not be allowed to set a premium rate in any given year that is more than 0.15 per cent (i.e., 15 cents per $100 of insurable earnings) higher or lower than the rate in the previous year. However, according to the proposed subsections 66(8) and 66.3(1) of the Employment Insurance Act, the Governor in Council may substitute a premium rate which exceeds the allowed maximum change in the premium rate set by the Board if it considers it to be in the public interest to do so. This is different from the current Act which limits the rate set by the Governor in Council to a maximum
year-to-year increase or decrease of 15 cents per $100 of insurable earnings.

In the event that amounts credited to the Employment Insurance Account after December 31, 2008 and the amount of the Board’s reserve are not sufficient to pay for amounts authorized to be charged to the Account, the Minister of Finance may, at the request of the Minister, authorize an advance to the Employment Insurance Account from the Consolidated Revenue Fund. The advance shall be repaid in the time and manner and on the terms and conditions that the Minister of Finance may establish.