LS-290E
BILL C-2: THE CANADA PENSION PLAN
INVESTMENT BOARD ACT
Prepared by:
Marion G. Wrobel, Senior Analyst
Richard Domingue, Economics Division
30 September 1997
LEGISLATIVE HISTORY OF BILL C-2
HOUSE OF COMMONS |
SENATE |
Bill Stage |
Date |
Bill Stage |
Date |
First Reading: |
25 September 1997 |
First Reading: |
4 December 1997 |
Second Reading: |
8 October 1997 |
Second Reading: |
16 December 1997 |
Committee Report: |
21 November 1997 |
Committee Report: |
17 December 1997 |
Report Stage: |
1 December 1997 |
Report Stage: |
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Third Reading: |
4 December 1997 |
Third Reading: |
18 December 1997 |
Royal Assent: 18 December 1997
Statutes of Canada 1997, c.40
N.B. Any substantive changes in this Legislative Summary which have
been made since the preceding issue are indicated in bold print.
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TABLE OF CONTENTS
BACKGROUND
CANADA PENSION PLAN
INVESTMENT BOARD (Clauses 1-57)
AMENDMENTS TO THE CANADA PENSION PLAN
(Clauses 58-99)
A.
Contribution Rates
B. Benefits
COMMENTARY
APPENDIX
BILL C-2: THE CANADA PENSION PLAN
INVESTMENT BOARD ACT
BACKGROUND
Bill C-2 proposes amendments to the Canada Pension Plan and would
establish the Canada Pension Plan Investment Board. Tabled in the House of Commons on 25
September 1997, Bill C-2 is the updated version of previous draft legislation that died
when an election was called in April 1997. Compared to the original bill, Bill C-2 would
strengthen the fiduciary obligations of the Board and the conflict-of-interest provisions,
and clarify the process for appointing directors.
The legislation intends to: 1. preserve the CPP and strengthen its
financing by accelerating increases in the contribution rate; 2. improve CPP investment
practices; and 3. reduce costs through tighter administrative policy. This legislation
would follow the agreement reached by the federal government and all provinces except
British Columbia and Saskatchewan. (Any change must be agreed to by two-thirds of the
provinces representing two-thirds of the population of Canada.)
Contributions finance benefits for individuals receiving retirement,
disability or survivor benefits. When contributions for a given year are not sufficient to
cover that years benefits, money is drawn out of the CPP Investment Fund. In 1996,
$1.2 billion had to be drawn from the CPP Investment Fund. As of 31 March 1996, the Fund
held approximately $39 billion. Without changes, demands resulting from current economic
and demographic trends would exhaust the fund in less than 20 years.
Every five years the federal and provincial finance ministers set the
contribution rates for the next 25 years. The 1991 review called for steady increases to
10.1% by 2016. The contribution rate for 1997 is currently set at 5.85%. The Chief Actuary
concluded that the current arrangement, under which the CPP Investment Fund would be
depleted by year 2015 and the contribution rate would reach 14.2% by the year 2030, was
unsustainable.
With Bill C-2, the CPP would move from an almost purely pay-as-you-go
system to one that had fuller funding, but was still far from being fully funded. The CPP
Investment Fund is currently at $39 billion, equal to about two years of benefits. It
should reach $135 billion by year 2007, four to five years' worth of benefits. By
contrast, a fully funded CPP would have accumulated $600 billion in assets by 1995.
The changes proposed in the bill would combine higher contribution
rates in the short run, applied to a larger base, with improved management of assets and
plan administration. The reserve fund would be prudently invested in a diversified
portfolio of securities at arms length from governments. Future borrowings by
governments would be at market rates with the expected average annual real return being
3.8%.
The new benefit and investment measures are planned to come into effect
on 1 January 1998 and the increased contribution rate would be retroactive to 1
January 1997. A number of key benefit provisions would remain unchanged: retirement
benefits of all retired CPP pensioners or anyone over 65 as of 31 December 1997 would not
be affected by the proposed changes and all benefits under the CPP would remain fully
indexed to inflation. The ages of retirement (early: 60, normal: 65 and late: 70) would
remain unchanged.
CANADA
PENSION PLAN INVESTMENT BOARD (Clauses 1 - 57)
Clause 3 would establish the Canada Pension Plan Investment Board. This
would not be an agent of her Majesty, thereby ensuring that the CPP Investment Fund was
managed at arms length from governments.
Clause 5 defines the objects of the Board as being (a) to manage any
amounts transferred to it from the CPP in the best interests of the contributors and
beneficiaries under the Plan, and (b) to invest Board assets with a view to achieving a
maximum rate of return, without undue risk of loss. In managing the fund, the Board would
have to have regard to the factors that might affect the funding of the CPP and the
ability of the CPP to meets its financial obligations.
According to clause 7, the Board would be managed by 12 directors
(including the Chairperson), whose specific duties are defined in clause 8(1). The board
of directors would be required to establish written investment policies, standards and
procedures. It would also be required to establish a code of conduct for officers and
employees of the Board and procedures to identify and resolve potential
conflict-of-interest problems. A committee would be created to monitor these procedures
and the code of conduct.
Clause 10(9) lists the persons who would be disqualified from being
directors (e.g. an agent or employee of the federal or a provincial government, a Member
of Parliament or provincial legislature). Under clause 10(1), each director would be
appointed by the Governor in Council, following the recommendations of the Minister of
Finance. Each director could hold office for up to three years, and could be reappointed.
Under clause 10(4), the Minister would take into account the desirability of having
directors representative of the various regions of Canada and of having a sufficient
number of directors with proven financial ability.
The Minister of Finance would recommend to the Governor in Council,
after consulting with the board of directors and the appropriate provincial Ministers, the
director to be appointed as Chairperson. The Chairperson would be eligible for
reappointment for one or more additional terms of office and removable for cause (clause
12).
Under clause 13 of Bill C-2, the board of directors could appoint
officers and define their duties. A director would not be eligible to be appointed an
officer of the Board. A person would be allowed to hold two or more offices on the Board.
The duty of care that should govern every director and officer of the
Board when exercising their powers is defined in clause 14. They would have to act
honestly and in good faith, exercising the same care, diligence and skill as a reasonably
prudent person would exercise in comparable circumstances.
Clause 16 would allow the indemnification of a director or an officer
of the Board facing a civil, criminal or administrative action, provided that person had
acted honestly and in good faith with a view to the best interests of the Board. Clause 17
would allow the Board to purchase and maintain directors' and officers' insurance.
With respect to conflicts of interest, clause 22(1) states that a
director or officer of the Board would have to disclose the nature and extent of any
interest, if that person was a party to a transaction (including a contract, a guarantee
or an investment) or a proposed transaction with the Board, or if that person was a
director or an officer of an entity that was a party to a transaction or a proposed
transaction, or if that person held a material interest in any such entity.
Under clause 22(5) a director who was in a conflict-of-interest
situation with respect to a transaction would be required to abstain from voting on
resolutions, or participating in discussions to approve the transactions in question.
Under clause 30, the board of directors would establish an Audit
Committee (whose role is defined in clauses 31-33) and an Investment Committee. The Audit
Committee, among other things, would require the Board to implement and maintain internal
control procedures which would have to be reviewed, evaluated and approved by the
Committee. It also would approve the annual financial statements, and meet with the
Boards auditor to discuss them and the auditors report. The Committee would
also be responsible for reviewing all investments and transactions that could adversely
affect the rate of return of the fund.
The Investment Committee, (whose role is defined in clause 34), among
other functions, would approve the engagement of investment managers empowered to invest
the assets of the Board and would meet with the officers and employees of the Board to
discuss the effectiveness of investment policies.
Clause 35 stipulates that directors would have to establish such
investment policies, standards and procedures as would be exercised by a person of
ordinary prudence in dealing with the property of others and that the Board and its
subsidiaries would have to adhere to these. Under clause 53, the Governor in Council could
make regulations subjecting the Board to all or some of the same investment rules set out
in the federal Pension Benefits Standards Act and its regulations which govern
other pension funds in Canada.
The government has indicated that the Board would not be permitted
to hold more than 30% of the voting shares of a single company, nor could it to invest
more than 10% of its assets in the securities of an individual issuer, or more than 15% in
Canadian resource properties. The 20% foreign property limit for pension funds would also
apply. In order to ensure that the funds entry would not disrupt financial markets,
regulations would also require all of the Boards domestic equity investments to be
selected passively, mirroring broad market indexes. This passive approach would be
re-evaluated at the next CPP review in 1999 (as defined in clause 94(1)).
New provisions would guarantee that the Board was accountable to the
public as well as governments. In addition, it would report its investment results
regularly to Canadians. Clause 39(1) would require the Board and its subsidiaries to keep
books of account and records, to maintain financial and management control, and to keep a
record of the investments held (including the book value and the market value of each
investment). Under clause 39(4), the Board would have to publish annual financial
statements (including a balance sheet, a statement of income, a statement of change in net
assets and a statement of investment portfolio). The Board would have 90 days after the
end of each financial year to provide the Minister of Finance and the Minister of each
province with that report (see clause 51(1)). The Board would be required to have a
quarterly financial statement prepared and provided within 45 days after the end of the
three-month period (see clause 50), as well as having an annual auditors report
prepared (clause 51). The auditor of the Board would be appointed annually by the
directors (clause 42(1)). Clauses 47 to 48 would allow the Minister of Finance to demand a
special examination to determine if the systems and practices defined under clause
39(1)(b) were maintained in a manner that provided reasonable assurance that the assets
were safeguarded and controlled, that the financial, human and physical resources were
managed economically and efficiently, and that the operations were carried out
effectively. Once the report was completed, the auditor would have to submit it to the
Minister of Finance and the appropriate provincial Ministers.
Under clause 54, every director, officer, employee, agent or auditor
that prepared, signed, approved or concurred in any statement or report that contained any
false or deceptive information would be guilty of an offence. In the case of a natural
person the fine could not exceed $100,000 or 12 months' imprisonment. In any other case,
the fine could not exceed $500,000.
Under clause 52, the Board would have to hold a public meeting once
every two years in each participating province to discuss the Boards most recent
annual report and allow interested persons an opportunity to comment.
AMENDMENTS TO THE
CANADA PENSION PLAN (Clauses 58 - 99)
A. Contribution Rates
The total CPP contribution rate (employer and employee) for 1997 is
currently 5.85%, scheduled to grow to 10.10% in 2016. The Chief Actuary has reported that
under the present system contributions would have to increase to 14.2% by the year 2030 to
pay for that years benefits.
Bill C-2 would increase the 1997 contribution rate to 6% (clause 58).
The increased contribution would have to be paid at the time of tax filing, and interest
would be charged where sufficient contributions had not been made by the balance-due day.
Future rates would also be increased, as set out in the Schedule attached to the bill.
They would reach a high of 9.9% in 2003, at which point they would be frozen for
subsequent years (clause 59). Under the current schedule, contribution rates would be
7.35% in 2003.
The CPP contribution rate would be applied to earnings, up to the
Years Maximum Pensionable Earnings (YMPE); however, the first 10% of these earnings,
the Years Basic Exemption (YBE), would be exempt from contributions, even though
pension income would still be based on an amount including this exemption. This is in
contrast to most private sector plans, where any income that earns pension credits is
subject to a contribution. Under existing legislation, the YMPE and the YBE both grow as
average wages increase. This bill would freeze the YBE at its current level of $3,500
(clause 61) while the YMPE would continue to grow in future years. Thus Bill C-2 would
increase the base upon which the contribution rate is applied.
The purpose of these proposed changes is to increase the size of the
CPP reserve fund, which currently stands at about $39 billion, or two years of benefits.
The changes in this bill would cause the fund to grow to an amount representing between
four and five years of benefits by the year 2007. While the changes would move the CPP
closer to being fully funded, it will still be far from having that status.
B.
Benefits
Benefits would generally be left unchanged, although some adjustments
would be made to the method by which they are calculated, as well as to their
administration, to reduce costs by about 9% by 2030.
Retirement Benefits: Under existing legislation, the method of
calculating these benefits is based on the last three years of contributions prior to
retirement, which under clause 68 would be changed to the last five years prior to
retirement. This would be more consistent with the way other pensions are calculated. If
wages grow every year, this new calculation would have the effect of reducing future
pension benefits. This new method of calculation would also apply to the earnings-related
portion of the disability and survivors benefits. The changes would be phased in over two
years and would not affect individuals aged 65 years in 1997 or those currently receiving
disability or survivor benefits.
Death Benefit: The death benefit is paid to the estate of a
deceased beneficiary. It is currently set at six months of benefits, to a maximum of
$3,580. Bill C-2 would reduce the maximum benefit to $2,500, at which level it would be
frozen for all future years (clause 75(2)).
Disability Benefits: Bill C-2 would tighten the eligibility
rules for disability benefits by linking these to a stronger attachment to the labour
force. The rule proposed in clause 69 is that individuals would have to have made CPP
contributions in four of the last six years in order to be eligible for disability
benefits. Currently, an individual must have contributed to the CPP in two of the last
three years, or five of the last ten years.
Retirement Pensions for Disability Recipients: Individuals
receiving CPP disability benefits have those benefits converted into retirement benefits
at age 65. Benefits are currently based on the Years Maximum Pensionable Earnings in
the year when the individual turns 65, not when the individual became disabled. Clause 71
would base the retirement pension on the YMPE at the time of disablement, indexed for
prices, This is consistent with the manner in which other CPP benefits are established.
The change would only apply to individuals currently under 65 years of age. If wages grew
over time at a faster rate than prices, the provisions in the bill would tend to reduce
the retirement benefits of contributors who had received disability benefits prior to age
65.
Combined Pensions: It is possible for individuals to receive two
types of CPP benefits concurrently, a survivor benefit coupled with either a retirement
benefit or a disability benefit. Bill C-2 would affect the way in which these benefits are
combined. It would essentially return to the less generous pre-1987 rules.
Persons aged 65 and over who are eligible for both a retirement and a
survivor benefit now receive the full amount of both benefits up to the amount of the
maximum retirement pension, currently $736.81 per month. Under clause 76(1), the combined
benefit would be calculated as the sum of the larger of the two benefits plus 60% of the
smaller benefit, subject to the same maximum.
The benefit system is more complicated for those eligible for both the
survivors benefit and a disability benefit. Both benefits contain a flat rate component
and an earnings-based component. Currently, beneficiaries receive the larger of the two
flat rate components plus the two income-related benefits. The total benefit is subject to
a ceiling, calculated as the maximum retirement benefit plus the larger of the two flat
rate components. Clause 76(2) of the bill would change the combination of the two benefits
so that it would consist of the larger flat rate portion, plus the larger earnings-related
portion, plus 60% of the smaller earnings-related portion. The ceiling would be equal to
the maximum disability benefit, currently $883.10 per month.
These changes would not apply to current beneficiaries; but only to
those who received benefits in the future. In addition, the changes would not apply to the
calculation of disability benefits or survivor benefits, but only to the way in which the
benefits were combined when an individual was entitled to more than one benefit.
COMMENTARY
Provisions contained in Bill C-2 could have a significant
intergenerational impact, and affect job creation, as well as bond and equity markets.
Many experts and witnesses will claim that intergenerational inequity
would be generated by the proposed provisions, arguing that, under the new regime, younger
generations would be transferring additional money to seniors. Some, like Malcolm
Hamilton, from William M. Mercer, have said that the CPP reform would be a bad deal for
the young. Others, like William Robson of the C.D. Howe Institute, argue that younger
workers would be forced to pour money into a plan that would provide lower returns than
they could get from any private retirement savings plan. Others argue that todays
seniors should not be insulated from the sweeping revisions and should pay some of the
cost of repairing the CPP regime; for example, a partial indexation of benefits for the
next 20 years would reduce contribution rates.
A self-employed individual earning the maximum pensionable earnings
($35,800) now pays about $1,890 in annual contributions. Once the new CPP regime was fully
in place in 2003, that individual would see contributions rise to about $3,270. The
employers' contribution for an employee at this income level would go from $945 per year
to $1,635. Many see this increase as a "job killer" and are likely to demand
that EI premiums be reduced in order to counterbalance the negative impact of the new
contribution rates on jobs.
In the past, many business groups and private pension experts, while
supportive of an increased contribution rate, urged that CPP benefits be reduced. The
Association of Canadian Pension Management has recommended reduced indexation in order to
lower the contribution rate.
Others, like the C.D. Howe Institute and the Fraser Institute, propose
a new and radical approach: a mandatory personal savings program whereby money would be
managed and invested by each individual. Those opposed to the "privatization" of
CPP, however, argue that the average Canadian does not have the knowledge to make prudent
investment decisions. In addition, the CPP would still be needed to fund promises made to
current recipients or those near retirement age; hence, workers would have to pay twice:
once to fund their own private pension and a second time to finance the unfunded
liability.
It is expected that the new CPP Investment Fund would accumulate $135
billion by the year 2007 and more than $560 billion in the year 2020, and would be subject
to the 20% foreign content limit. Such a large fund could affect Canadian stock and bond
markets. Some analysts argue that the federal government should increase that limit in
order to reduce the effect on Canadian financial markets and maximize the rate of return.
The government and its supporters argue that these proposed changes
would rectify the immediate cash-flow problem facing the CPP and that, by acting quickly
and decisively to implement the changes, the government would avoid large future premium
increases. (It should be remembered that without any reform premiums would likely have to
grow to over 14% by the year 2030, according to the Chief Actuary.)
While Bill C-2 would appear to resolve the immediate cash-flow problem
and would move the system further away from strict pay-as-you-go financing, it leaves
unresolved the ultimate solvency problem of the CPP. According to the Chief Actuary, in
1995 the unfunded liability of the CPP was $556 billion, an amount that is growing by
about $50 billion per year. Bill C-2 would cause the CPP fund to grow by an additional $10
billion per year on average over the next ten years. The unfunded liability would still
grow significantly, and could reach $1,000 billion by the year 2007.
APPENDIX
COMPARISON OF EXISTING CANADA PENSION PLAN AND
PROPOSED CHANGES TO THE PLAN
|
CURRENT
PROVISIONS |
PROPOSED AMENDMENTS |
Age of retirement (early) |
Starting at age 60 |
No change |
Age of retirement (normal) |
Age 65 |
No change |
Age of retirement (late) |
Up to age 70 |
No change |
Contribution Rates |
Rising to 10.1 per cent by
2016 Projected to increase to 14.2 per cent in 2030 |
Rising to
9.9 per cent by 2003, then held steady Will not rise above 9.9 per cent |
Year's Basic Exemption
(YBE) |
Currently $3,500 indexed to
wages |
Frozen at
$3,500 |
Year's Maximum Pensionable
Earnings (YMPE) |
Indexed to wages |
No change |
Investment Policy |
Invested in non-negotiable
provincial bonds |
New funds
invested in a diversified portfolio of securities |
Provincial Borrowing |
Provinces borrow at federal
rates |
Limited
provincial borrowings at their own market rates |
Retirement Pensions and
Earnings-Related Portion of Disability/Survivor Benefits |
Based on average of last 3
years' YMPE |
Based on
average of last 5 years' YMPE |
Eligibility for Disability
Benefits |
Must work and contribute in 2
of last 3, or 5 of last 10 years |
Must work
and contribute in 4 of last 6 years |
Retirement Pensions for
Disability Beneficiaries |
Based on YMPE when recipient
turns 65, then indexed to prices |
Based on
YMPE at time of disablement, then indexed to prices |
Combined
Survivor/Disability Benefits |
Ceiling equal to maximum
retirement pension plus larger of two flat-rate components |
Ceiling is
one maximum disability pension; limits on flat rates |
Combined
Survivor/Retirement Benefits |
Ceiling equal to maximum
retirement pension |
No change to
ceiling; limited adding up of benefits |
All Benefits (except the
Death Benefit) |
Fully indexed |
No change |
Death Benefit |
Equal to 6-months' retirement
benefits up to $3,580; maximum grows with wages |
Equal to
6-months' retirement benefits up to $2,500; and maximum frozen |
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