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1985 Report of the Auditor General of Canada

The Federal Role in the Canadian Retirement Income System

4.1 Canada's retirement income system has three main components. They are government-sponsored public pension programs which provide a basic protection for all Canadians, employer-sponsored plans, and individual plans and other forms of savings. Jurisdiction over pensions is shared by the federal and provincial governments.

4.2 The federal government plays an important role in all aspects of the retirement income system in Canada. It provides a basic retirement income to older Canadians through Old Age Security benefits, as well as tax assistance (such as Registered Retirement Savings Plan deductions) to help Canadians save for their retirement. It also administers the Canada Pension Plan (CPP). Through the Pension Benefits Standards Act and the Income Tax Act, it has an important role in the regulation of employer-sponsored pension plans.

4.3 The federal government also administers and provides funds for pension programs for other specific groups of individuals. These include veterans' pensions and pensions for federal employees, judges and MPs. Directly and indirectly, it also provides funds for Crown corporation pension plans.

4.4 Total direct expenditures by the federal government for public and employee pension programs were about $17 billion in 1984-85 or 17 per cent of budgetary expenditures. (This excludes CPP benefit payments of $4 billion which were funded by employer/employee contributions). There is no precise information on tax expenditures relating to retirement income, but, based on published government statistics, they are estimated to be in the $5 billion to $10 billion range annually.

Audit Scope

4.5 This audit focused on the public pension programs administered by the federal government - the Old Age Security program and the Canada Pension Plan. Today, most elderly Canadians are dependent on these pensions as their major source of income. Exhibit 4.1 shows retirement income of the elderly in 1983 by source.

(Exhibit not available)

4.6 Our overall objectives were to assess the adequacy and accuracy of financial and other information provided to Parliament on public pension programs, and to evaluate the adequacy of systems and procedures in place for managing these programs.

4.7 Our audit was carried out in the Department of National Health and Welfare, which has primary responsibility for administering these programs, and in the Departments of National Revenue, Supply and Services, Finance, and Insurance, the Canada Employment and Immigration Commission, and the Treasury Board. All have a role to play in public pension management.

Overview of Programs Audited

4.8 Old Age Security. This program is the cornerstone of the Canadian retirement income system. It has three basic components:

    - Basic Pension (OAS) - payable to all individuals once they reach age 65, provided they meet residency requirements;
    - Guaranteed Income Supplement (GIS) - additional income assistance to OAS pensioners who have limited income; and
    - Spouse's Allowance (SPA) - income assistance to OAS pensioners' spouses who are between ages 60 and 64 and who have limited combined income.
4.9 During 1984-85, of the 2.5 million Canadians who received the basic OAS pension benefits, 1.3 million also received GIS benefits. An additional 94,000 Canadians received SPA benefits.

4.10 The Old Age Security program is financed from general revenues. In 1984-85, OAS, GIS and SPA benefit payments totalled $11.4 billion or 11 per cent of the government's total budgetary expenditures for the year.

4.11 Canada Pension Plan. CPP is a compulsory, contributory, earnings-related pension plan providing retirement, disability, and survivor's benefits. Except for those individuals employed in the Province of Quebec, which has a separate but similar plan, CPP covers all employees and self-employed persons who contribute and have contributed to the Plan, and their dependents. Benefits are based on the period of contributions and the individual's earnings during that period.

4.12 The CPP is still a maturing plan. Many of the present beneficiaries retired during the phase-in period (1967-1976) and receive only a partial benefit payment. Currently, the average CPP retirement benefit paid is approximately 50 per cent of the maximum amount payable.

4.13 The Plan is financed by contributions from employers, employees and self-employed individuals, and interest earned on investments. Currently, approximately 9 million people contribute to the Plan and about 1.7 million receive benefits. Contributions for 1984-85 were $3.9 billion and benefit payments were $4.2 billion. Interest totalled $2.9 billion.

4.14 CPP is operated on a partially-funded basis. In the early years, because of phasing in the program and the high ratio of contributors to pensioners, the excess of contributions over benefit payments resulted in a build-up of funds. As provided in legislation, these funds ($27.6 billion as of 31 March 1985) are made available for investment in securities of the provinces and the federal government, on the basis of the contributor's place of employment.

4.15 The Plan is now at a cross-over stage. In 1984 benefits and expenses exceeded contributions and, in 1994, the balance of funds on hand will begin to decrease when benefit payments and expenses will exceed contributions and interest. Currently, the federal and provincial governments are actively considering various financing alternatives which include, among others, increasing future contribution rates to meet benefit payments, as well as delaying contribution increases by drawing down the balance of funds, as required, to meet benefit payments and expenses.

4.16 Exhibit 4.2 shows an overview of the history of the development of these programs.

(Exhibit not available)

Environment

4.17 The pension system in Canada operates in a complex environment. Some of the major factors that influence pension policy and the management of public pension programs by the federal government are discussed here.

(Photos not available)

4.18 Changing demographic base. In Canada, the ratio of people 65 and over to those under 65 is currently 1 in 10. This is expected to double to 1 in 5 in less than 50 years. This trend will continue unless there are substantial changes in immigration and/or birth patterns. The first of the baby-boom generation will reach age 65 early in the next century. Exhibit 4.3 illustrates that the number of recipients of program benefits is projected to increase significantly in proportion to the size of the workforce that will be supporting the costs of these benefits.

(Exhibit not available)

4.19 Concept of universality. Both past and present governments support the concept of maintaining universal social programs. In its Child and Elderly Benefits Consultation Paper, published in January 1985, the government stated that "the concept of universality is a keystone of our social safety net. Its integrity must not and will not be called into question".

4.20 Program objectives. The federal government's objective in providing these programs is to maintain and improve the income security of the people of Canada. CPP benefits are targeted to 25 per cent of the Average Industrial Wage. However, the Old Age Security program (OAS, GIS, SPA) is not linked to any specific target or income level. This, together with the fact that there is no single definition of a reasonable level of income for the elderly, adds to the complexity of both policy making and program management.

4.21 Federal/provincial roles. The Constitution Act, 1867, gives the provinces jurisdiction over public pension matters. Amendments to the Act, required before the Old Age Security and Canada Pension Plan programs could be established, allowed the federal government to provide old age pensions, provided that federal laws did not affect provincial laws in the same area. Although the federal government has the power to amend benefits under the Old Age Security program, no changes in the level of benefits or contribution rates of CPP may be made without the approval of a majority of the provinces. In addition, by law, provinces have the right to opt out of CPP at any time and establish their own comparable plan. Thus, provinces play a significant role in policy setting; federal-provincial committees of ministers and deputy ministers meet on a regular basis for this purpose.

Accountability for Public Pension Management

4.22 The Old Age Security and Canada Pension Plan programs are large and complex to administer. They involve extensive policy negotiations and consultations within the federal government and with the provinces and numerous special interest groups. They also involve running one of the largest and most important service operations in the federal government, maintaining an enormous computerized record-keeping system, and ensuring that over four million cheques are delivered on time every month to over three million individuals.

4.23 Through Acts of Parliament, the Minister of National Health and Welfare has the sole responsibility for the administration of the Old Age Security Act and has responsibility for administering all parts of the Canada Pension Plan, except for the part dealing with collecting CPP contributions and determining coverage, which has been assigned to the Minister of National Revenue. In addition, the Department of Finance plays an important role in policy negotiations and discussions on financing with provinces and special interest groups. The Department of Supply and Services provides the majority of EDP support services for the programs. In addition, two other departments play important roles in the administration of CPP: the Department of Insurance provides actuarial services, and the Canada Employment and Immigration Commission administers the Social Insurance Number system.

4.24 The CPP regulations specifically provide that the Director General, Programs Operations, Income Security Programs Branch (ISPB) in the Department of National Health and Welfare, is responsible for maintaining liaison with all departments involved in the operation of CPP and with the Province of Quebec in respect of the Quebec Pension Plan "with a view to promoting and maintaining efficient administration of the Act".

4.25 Exhibit 4.4 lists the departments and agencies that have significant responsibility for public pension management.

(Exhibit not available)

Management Accountability Within the Department of National Health and Welfare

4.26 Within the Department of National Health and Welfare, we found that the accountability relationships for administering the programs are well defined and understood. The nature and complexity of the programs require a considerable amount of senior management time to be devoted to policy matters. Moreover, because of the public visibility of the programs and the large number of people affected by them, management is faced with the difficult trade-off between providing a consistently high level of service to the population and administering the programs as efficiently as possible.

4.27 Within the past three years, however, the Department has taken a number of steps to improve program administration. These include: introducing improved planning and evaluation systems; establishing a long-term initiative to redesign and upgrade existing record-keeping and payments systems; and creating the position of Comptroller, CPP, to improve financial management of that program.

4.28 These are important steps but, in our opinion, the Department can take further steps to enhance the administration of public pensions. These steps, as discussed in the following sections of the chapter, include improving the quality and type of financial and performance information provided to management and to parliamentarians, implementing productivity improvements, and strengthening financial controls over benefit payments. We recognize that the Branch's long-term initiative to improve its delivery systems is addressing many of these issues. However, given that many of these observations have been raised in previous audit reports, we are concerned about the length of time taken to implement improvements.

Liaison Among Departments Sharing Management Responsibility

4.29 Accountability for the administration of CPP presents a particular dilemma. On the one hand, by legislation, the Plan is a separate entity that requires a separate accounting for its revenues and expenditures. Costs of administering the Plan by the federal government must, by legislation, be charged to the Plan's accounts. On the other hand, for operational purposes, CPP shares common management, common facilities, and common systems and services with the other programs (Family Allowances and Old Age Security) administered by ISPB. This, together with the numerous departments involved in CPP's administration and shared federal-provincial responsibilities for the Plan, adds to the complexity of the accountability relationships.

4.30 There is significant room for improvement in the accountability for CPP administration.

4.31 The authority delegated to the Department of National Health and Welfare under the CPP regulations for liaising and co-ordinating activities with other federal departments and the provinces has not been fully exercised. ISPB has not always taken an active role in carrying out its responsibilities. In fact, it defines its role as being responsible for administering only specified parts of the Canada Pension Plan.

4.32 In some instances, there has been no regular, formal communication and co-ordination between the Department of National Health and Welfare and the other departments involved in the administration of the Plan. In addition, written agreements for the provision of administrative services do not exist for all departments, and where they do, they do not contain guidelines on the quality and level of service provided to the Plan. The absence of formal and continuous communication and co-operation among the entities involved has had a detrimental effect on the efficient administration of the Plan (See Example 1).


Example 1

Canada Pension Plan - Continuing Problems in the Record of Earnings
4.33 The Income Security Programs Branch administers a computerized record of earnings system which is a permanent record of all contributions made by each contributor to the Canada Pension Plan together with earnings information related to that contributor. The information is provided by National Revenue-Taxation, which collects the CPP contributions through the tax system. Determination of the CPP benefit is based on information contained in the record of earnings.

4.34 As of 31 March 1985, the system contained 16 million accounts and, during 1984-85, over 26 million individual entries were recorded in these accounts. The sheer volume of the transactions, together with the intricacies of the CPP legislation, makes it a huge and complex system to administer.

4.35 The integrity of the record of earnings has been a concern to ISPB management and to us for some time. Managers are aware of the fact that the system is outdated, overpatched and saturated, that communication among major players is weak and the system is prone to error.

4.36 While the errors are numerous, they have not to date resulted in significant errors in benefit determination for CPP contributors.

4.37 In 1978, we recommended that a study be made to review ways of improving controls over the system with a view to identifying and correcting any errors on file. In 1983 and 1984, a project to examine and redefine the record of earnings was carried out by ISPB. Some 100 areas for improvement were identified. Examples are:

    - The record of earnings contains more than 3 million suspense items, mainly due to incomplete or invalid information submitted by contributors and employers.
    - Some accounts have had double postings of contributions and related earnings for one or more years since 1967.
    - Refunds of contributions made by Quebec to individuals residing in Quebec who have contributed to CPP have not been recorded in the record of earnings since the inception of CPP (see photo).
    - Contributions from self-employed individuals written off by the Department of National Revenue-Taxation as uncollectable have not been recorded because of insufficient information provided to ISPB.
(Photo not available)

4.38 One of the major reasons for many of these problems is that there has been no regular formal communication between ISPB and the Department of National Revenue-Taxation in recent years to resolve the problems in the record of earnings. An interdepartmental committee, formed at the inception of the Plan in 1965, to meet every three months, has not met on a regular basis since 1976.

4.39 We estimate that approximately 25,000 accounts in pay have errors in benefit determination as result of these problems. They are mainly overpayments and, with some exceptions, these individual errors are not significant. However, as the number of accounts in pay and the level of benefits increase, and without correcting identified problems (some of which recur each year), these errors could continue and could increase in number.

4.40 The systems redesign is now part of the long-term initiative referred to in paragraph 4.149 and additional resources have been devoted in the short-term to address some of the problem areas. Recently, a new contributor information program was implemented that will allow CPP contributors to review the accuracy of the earnings information.

4.41 However, in our opinion, a number of other steps, in addition to those under way, could be taken to reduce significantly the number of existing errors. These include re-establishing formal communication channels among all parties, exchanging more complete contributor information among these parties, ranking risk areas and improving use of existing system design features to prevent errors.


4.42 Recently, there has been more active liaison and communication among departments in connection with the long-term project to upgrade benefit delivery systems. This should be extended to all aspects of the Plan's operations.

4.43 The Department of National Health and Welfare should play a greater leadership role in the administration of the Canada Pension Plan by fully exercising the liaison and co-ordinating roles delegated to it by legislation. Specifically, it should:

    - help other involved departments establish and implement guidelines for measuring and reporting performance, and should regularly review and monitor this information; and
    - include in the annual report of CPP a detailed accounting of the administration of the Plan to permit an independent and public scrutiny of its operations.
Department's response: The need for enhancing and formalizing Health and Welfare Canada's leadership role for the administration of the Canada Pension Plan has been recognized. Some initiatives have already been taken in this regard and plans are being developed to strengthen the liaison, co-ordinating, reporting and management responsibilities vis-a-vis Health and Welfare Canada and other departments associated with the Canada Pension Plan.

4.44 Within the Department of National Revenue - Taxation (NR - T), which is responsible for collecting, assessing and reporting CPP contributions through the taxation system, responsibility is fragmented. This is partly due to the fact that CPP collection processes are an integrated part of the NR - T revenue collection process and are not treated as a separate operation. There is no one individual within the Department with responsibility for liaising and co-ordinating with the Department of National Health and Welfare to ensure that information on amounts collected is accurate and complete. This fragmentation of responsibility has contributed to communication and co-ordination difficulties, which in turn have delayed correction of long-identified problems.

4.45 The Department of National Health and Welfare, together with the Department of National Revenue - Taxation, should ensure that proper procedures are in place for the collection, recording and transfer of accurate and complete Canada Pension Plan contributor information.

Department's response: A joint National Health and Welfare/Revenue Canada - Taxation Committee has been established to identify and resolve issues of mutual concern. Problems related to the procedures for the collection, recording and transfer of Canada Pension Plan financial information will be referred to that Committee by National Health and Welfare for appropriate action.

Role of Treasury Board

4.46 The concept of separate accountability for the administration of CPP funds, while still maintaining integrated management processes, creates potential conflict-of-interest situations. We are not advocating that this should be otherwise, but we believe that there should be a greater awareness that these situations do exist and of the potential problems they can create. At present, Treasury Board plays a limited role in reviewing CPP operations. The Secretariat informed us that its reasons are twofold - first, the Plan is not subject to annual appropriation and, second, its operations do not affect the Consolidated Revenue Fund. Nonetheless, we believe there should be a greater scrutiny by Treasury Board of the administration of CPP, particularly in those areas where potential conflict-of-interest situations exist. An example of such a situation occurs in ISPB where 30 per cent of its operating budget - or $35 million - is recovered from CPP. As described in paragraph 4.163, Treasury Board has little involvement in the review of these budget estimates and the actual cost recoveries from CPP.

4.47 The role of Treasury Board in the administration of the Canada Pension Plan should be strengthened to ensure that there is an independent scrutiny of the Plan's operations, including the administrative costs charged to it. This role should be at least equal to the Treasury Board's role in monitoring other departmental programs.

Treasury Board's response: A comprehensive review of the policies and procedures currently in effect regarding recoveries from the Canada Pension Plan is under way. The report from that study is expected to result in a submission in the next fiscal year to the Treasury Board concerning the costs charged to the Canada Pension Plan. At that time and with the benefit of the results of the comprehensive review, the Treasury Board would be in a position to assess the appropriate degree of involvement which it should have in the administration of the Canada Pension Plan.

Pension Costs and Commitments

4.48 The costs of supporting public pension programs are enormous and will continue to increase as the number of Canadians age 65 and over continues to rise and legislative changes increase level of benefits. In addition, long-term costs are affected by inflation, employment levels, interest rates, the role of employer-sponsored plans and private savings, and changes in social policy. As an example, the last two amendments to the Old Age Security program in June 1984 and June 1985 will result in additional annual benefit payments of over $800 million, an increase of 7 per cent in total benefits paid. Increases in level of certain retirement benefits for the past 10 years, exclusive of indexation adjustments, are shown in Exhibit 4.5.

(Exhibit not available)

4.49 We are concerned that parliamentarians do not have adequate information to assess and understand fully both short-and long-term financial implications of public pension programs. Long-term costs are not estimated regularly, except for CPP. Moreover, despite previous recommendations by parliamentary committees, there is no mechanism in place for regular review of long-term financial implications and commitments of these programs.

4.50 Several departments play essential roles in forecasting pension costs. However, the lack of an overall policy regarding the costing of these programs has at times resulted in inconsistent cost forecasts of proposed program changes and delays in providing financial information.

4.51 Finally, the quality of information provided to Parliament through the Estimates and annual reports has deteriorated, with the result that there is, in our opinion, insufficient information for parliamentarians to assess financial performance of the programs.

4.52 To assess the accuracy and adequacy of disclosure of costs and commitments for public pensions, we reviewed the roles and responsibilities of the departments involved in the forecasting and financial reporting process, procedures for forecasting short-term and long-term cost commitments, and procedures for reporting financial performance and results to Parliament.

Long-term Costs and Commitments

4.53 As noted above, the costs of supporting public pension programs are substantial and increasing. Program amendments made today have both short-and long-term financial implications; some amendments will not have a major cost impact for many years.

4.54 Given the magnitude of the costs, an increasing elderly population, and the complexity of other factors affecting these programs, it is reasonable to assume that there should be quantification and a periodic review by the government of long-term financial implications. In addition, it is also reasonable to expect that when reviewing proposed changes to programs, long-term financial implications, as well as short-term costs, should be considered.

4.55 Long-term costs and commitments for public pensions are not estimated regularly, and there are no formal requirements to do so, except for the Canada Pension Plan, which by legislation requires quantification of long-term costs every five years and when proposed amendments are introduced. The most recent report of the Chief Actuary of the Department of Insurance estimates that long-term commitments for CPP, based on benefits to be paid to people alive now, could be as high as $225 billion.

4.56 All Old Age Security benefits are paid under the unlimited statutory appropriations contained in the Act; that is, they do not require annual appropriations. Thus, the program is not subject to annual debate - discussions of this nature occur only when there are program changes or in specific circumstances, such as in the current consultation process. Exhibit 4.6 shows the growth of public pensions in the last five years and the projected costs for the next five years. Under present benefit formulas, as the Old Age Security program is universal and CPP is earnings-related, current expenditures for Old Age Security are much higher than for CPP. Although the gap in level of expenditures is diminishing (see Exhibit 4.6), it is logical to assume Old Age Security long-term commitments would be significantly greater than those for CPP.

(Exhibit not available)

4.57 In 1979, the Royal Commission on Financial Management and Accountability recommended that federal statutory programs be reviewed regularly, stating:

Though changes in the levels of statutory expenditure can be legislated at any time, there is no general requirement for the Government to review the effectiveness and continuing desirability of programs under which these expenditures are made. Changes in public attitudes and expectations, as well as in economic factors, private sector capability, and technology can render programs redundant or obsolete. Furthermore, duplication of legislation and services at federal and provincial levels can more than double the cost of achieving an objective and multiply the cost to the private sector of fulfilling legislative requirements. These observations have led us to the view that a process should be developed to ensure that statutory programs are periodically reviewed in depth by Parliament as a prerequisite for continued funding.
4.58 The Commission went on to recommend specifically that:

with respect to existing statutory programs, legislation be enacted to require the responsible minister to evaluate once in the next ten years and thereafter every five years the current and projected costs and benefits of all these programs, except those relative to interest on the public debt, and that a report thereon be tabled in Parliament and be automatically and permanently referred to the appropriate standing committee for its consideration and recommendations.
4.59 We see no reason why this should not apply to federal public pension programs.

4.60 In 1983, the Parliamentary Task Force on Pension Reform recommended that a review of commitments for all public pensions should be carried out in conjunction with the regular five-year review of CPP. Specifically, it suggested that:

... the Minister of Finance table in the House of Commons every five years ... a comprehensive set of cost projections for the public pension system ... in order to promote public debate about the extent and sustainability of current commitments.
4.61 To date, the government has taken no action to implement these recommendations.

4.62 Regular quantification of long-term obligations for all public pensions and a review of these commitments would identify the long-term costs of existing programs, as well as implications of any changes to the programs, and would indicate the extent to which future government spending will be directed to financing public pensions. As future spending levels depend on a variety of economic and demographic factors, including economic growth, inflation, fertility and mortality, several sets of assumptions should be used in preparing these projections.

4.63 In conclusion, we support the recommendations of the Royal Commission on Financial Management and Accountability and the Parliamentary Task Force on Pension Reform for a regular review of long-term costs and commitments for public pension programs.

Forecasting Process

4.64 There are three departments involved in forecasting public pension costs - National Health and Welfare, Finance and Insurance. In addition, the Office of the Comptroller General has responsibility for the quality of financial reporting practices. National Health and Welfare forecasts both macro and micro effects of changes in pension policy (for example, the number of persons affected by changes; effects on income levels for an average family). The Department is also responsible for quantifying the financial effects of program changes for both Cabinet documents and Budget announcements, as well as estimating annual cash requirements for the programs.

4.65 The Department of Finance reviews all proposed pension program changes from the point of view of overall government policy and affordability. The Department also forecasts the effects of changes to the CPP contribution rate on the economy as a whole, estimates the amount of annual CPP contributions, and forecasts the amount of excess funds available for investment. It is also the lead player on behalf of the federal government in current federal-provincial discussions on the financing of CPP.

4.66 The Chief Actuary of the Department of Insurance, as required by legislation, carries out long-term financial forecasts of CPP every five years and when any amendments with financial implications are proposed for CPP.

4.67 Thus, economists, accountants and actuaries all play vital parts in the process. The forecasting processes in the Departments of National Health and Welfare and Insurance are generally acknowledged by the users of the information to be good. In recent years, the forecasts of National Health and Welfare supporting legislative amendments to the Old Age Security program have proved accurate.

4.68 Some eight departments are involved in the management of public pensions. When programs cross departmental boundaries, it is important that roles and responsibilities be clearly defined. We found that the various professionals (economists, accountants and actuaries) involved in the process do not have a sufficient understanding of one another's role in the forecasting process and that there is room for improved co-ordination and communication among these individuals. In addition, on occasion there has been insufficient consultation by third parties with these individuals. This has resulted, at times, in providing incomplete, inconsistent and late information to both management and parliamentarians and other external users of financial forecasts. Some examples of the reasons for our concerns about the need to clarify roles and responsibilities include:

    - The Parliamentary Task Force on Pension Reform, which reported in December 1983, made a number of important recommendations to reform the public pension system. In estimating the cost of these recommendations, the Committee used its own research staff. The Task Force report contains the caveat that these were "rough estimates". There was very little involvement of government officials in reviewing cost estimates. What review there was occurred just prior to the release of the report. In some cases, the recommendations of the Task Force were not costed. In others, subsequent costing by the Departments of National Health and Welfare and Insurance indicated major differences in costs. Exhibit 4.7 illustrates the significant differences between the Task Force estimates and those of the government. The time constraints under which the Task Force was working were formidable, but nevertheless there is a need for accurate costing of program proposals for such major expenditures. While ultimate responsibility for the costs rests with the Task Force, we believe that there is onus on the government to ensure that committees such as this are made fully aware of the expertise available in the Departments to assist in evaluating financial implications of proposed policy changes.
(Exhibit not available)

    In January 1985, the Fiscal Policy Division of the Department of Finance, which is responsible for forecasting the amount of CPP contributions, advised the Department of National Revenue of a $314 million reduction in the estimated CPP contributions for the 1984 calendar year. National Revenue in turn advised the Department of National Health and Welfare. Health and Welfare then advised the Financial Services Division of the Department of Finance. This Division is responsible for determining and communicating to the provinces the amount of funds available for investment. It took six weeks from the time the reduction in amount was determined (a decrease of seven per cent of total annual contributions) to the time the provinces were advised. As a result, the provinces were advised that, instead of $222 million being available for investment in March 1985 as originally forecast, no funds would be available in that month and the funds available for April 1985 investments would be reduced. (Finance officials informed us that this was the first time there had been a downward revision in CPP forecasts.)
    For macro-economic purposes, the Fiscal Policy Division also estimates CPP payments. These estimates are not compared to the annual benefit payments estimated by the Department of National Health and Welfare.
4.69 Adoption or serious consideration of a change in policy may depend on the cost of the proposal. If decisions are being made without consideration of costs or on the basis of inaccurate costs, policy decisions may be made without due consideration for their affordability.

4.70 Because of the significance of public pension costs, the number of departments involved, the current ongoing decisions on pension reform, the role of public pensions in overall government spending, as well as the unique operational aspects of the Canada Pension Plan, there should be a focal point for the overall co-ordination of the forecasting process.

4.71 In our view, the Office of the Comptroller General, because it has overall responsibility for reporting to Parliament (through the Estimates and the Public Accounts of Canada) should be responsible for ensuring that this process is co-ordinated. Better co-ordination of the process would also facilitate carrying out regular reviews of long-term costs and commitments.

4.72 The Office of the Comptroller General, together with the Departments of National Health and Welfare, Finance, and Insurance, should establish a co-ordinated process for forecasting public pension costs and ensure accurate, consistent and timely reporting of financial information. In particular:

    - The important roles of the Departments in the process should be documented in a manner that will ensure the consistent quantification and disclosure of pension costs.
    - Whenever cost forecasts are provided, the assumptions used in the calculations should be clearly stated.
    - Procedures should be established to ensure that parliamentary task forces, federal-provincial committees and other officially established groups considering changes to public pension programs are made aware of the availability of the expertise and the assistance needed to formulate accurate long-and short-term cost proposals.
Office of the Comptroller General's response: The Office of the Comptroller General has, in general, a role in ensuring the quality of financial reporting practices. However, it would not like to prejudge who should be the focal point for ensuring a co-ordinated process for forecasting public pension costs given the roles and responsibilities that the various departments currently have. The Office will examine this issue together with all affected departments.

Reporting to Parliament

4.73 The government accounts to Parliament for the financial performance of the Old Age Security program and the Canada Pension Plan through the Estimates and annual reports.

4.74 We reviewed the accuracy and adequacy of financial information in these documents which are produced by the Department of National Health and Welfare.

4.75 Estimates. In our opinion, the information contained in Part III of the Estimates on public pensions does not fully meet the standards for disclosure developed by the Office of the Comptroller General. These standards require explanation of reasons for any significant changes or trends in the level or structure of program expenditures. While program forecasts and expenditures are adequately costed and disclosed on a macro level, there is insufficient explanation of the financial effect of policy changes to programs, details of program elements, and operational initiatives.

4.76 New initiatives and changes to benefits and eligibility criteria have significant effects on program costs. Parliamentarians should be advised of such changes and should be provided with estimates of their cost. This information is prepared and reported on when legislative changes to programs are introduced. The same level of disclosure should be included in Part III of the Estimates. Without this information, it is virtually impossible fully to understand or assess programs and their costs.

4.77 For instance, in the 1985-86 Estimates:

    - The financial effects of policy changes introduced during 1984-85, which affect both the structure and level of program benefits, were not disclosed separately in forecast 1985-86 costs. They are:
      - Two increases of $25 a month in GIS for single pensioners were introduced in July and in December 1984, at an additional annual cost of $460 million. The increase in program benefits is described as a cost variance and the reason for the increase is not disclosed.
      - Costs under the Old Age Security program of entering into international agreements ($18 million in 1984-85) are not disclosed.
    - Detailed analyses of both trends and changes by program components are not provided. The graphic illustration of trends and analysis of cost changes currently included display benefits in terms of averages only. These averages do little to explain the range of benefits in the program because the benefits can vary significantly. For example, GIS benefits vary by more than $1,000 per year, depending on the individual's marital status. Review by program component is important for assessing whether benefits are being directed at target groups of individuals. Moreover, this information, which is readily available in the Department, is not used by management in reviewing program operations.
4.78 We also believe that there has been some deterioration in the kind of financial information provided since Part III was first introduced in the 1982-83 Estimates.

4.79 There are also two important items that have not been included in the Estimates - information on tax expenditures, and assumptions used in determining forecasts. In view of the magnitude of the costs of public pension programs, however, it would seem essential that this information be disclosed. For example:

    - Two key assumptions used in forecasting public pension costs are inflation rates and program take-up rates. Disclosure of these assumptions, as well as the department responsible for their development (Finance, in the case of inflation) would facilitate evaluation of the programs.
    - Information on tax expenditures (which are substantial) that was disclosed in the Estimates until two years ago, is no longer provided. The federal government's "Child and Elderly Benefits" consultation paper, released in January 1985, estimated the tax expenditure cost of the over-65 age exemption for 1984 at $560 million and the cost of the $1,000 pension income deduction at $105 million.
4.80 In summary, the information contained in the 1985-86 Estimates, in our opinion, does not fully meet the needs of Members of Parliament.

4.81 The Department of National Health and Welfare, together with the Office of the Comptroller General, should review Part III of the Estimates dealing with public pensions with a view to improving the quality and completeness of financial information for Parliament.

Department's response: The Department, in collaboration with the Office of the Comptroller General, will continue its efforts to improve the information contained in Part III of the Estimates.

4.82 Annual reports. The legislation relating to both Old Age Security and Canada Pension Plan requires that the Minister of National Health and Welfare table in Parliament an annual report on the administration of the programs. We consider the CPP report a particularly important accountability document, in view of the requirement for a separate accounting of the Plan and the shared responsibility with the provinces for the program.

4.83 Both annual reports could be significantly improved in terms of content and the way in which information is displayed. Because of the dollar amounts involved in these programs and the range of available benefits, we would expect full information on program operations and individual benefits as well as disclosure of full program costs. More emphasis on the use of graphics and historical summaries of benefits would facilitate understanding of the programs.

4.84 In addition to current financial information, we would expect to see annual reports contain long-term cost projections, references to other currently available statistical information on the programs, disclosure of changes to programs and their costs, a detailed report on operational performance of the programs, major initiatives under way, and a review of trends of average benefits paid out by program components. Little of this information now appears in the Old Age Security annual report and only a limited amount appears in the Canada Pension Plan report.

4.85 Finally, the information would be more useful if the reports were prepared more promptly. As of May 1985, the annual reports for 1983-84 for both programs were not available. There is a need for the Department to explore ways to expedite the production and tabling of the annual reports.

4.86 For the annual reports to Parliament on the administration of the Canada Pension Plan and Old Age Security program, the Department of National Health and Welfare should improve the quality of information in the reports and issue them more promptly.

Department's response: The adequacy of the Canada Pension Plan and Old Age Security annual report will be reviewed in the light of comments made by the Auditor General and the appropriate additions and modifications made thereto.

The process followed in the preparation of the reports will be reviewed with a view to issuing them more promptly. Other departments and others providing input to the Canada Pension Plan annual report will be reminded of the importance of submitting their data on time.

4.87 Role of Senior Financial Officers. Senior financial officers in the Department of National Health and Welfare have little involvement in reviewing benefit payment costs for public pensions. Their involvement is more with the administrative costs for these programs (less than one per cent of pension payments).

4.88 We believe that the role of the senior financial officers in the review of the Estimates as well as in long-term costing of pensions and financial analysis of benefit payments can be further enhanced. Involving these officers in all aspects of the financial administration of the programs would facilitate a better understanding of the financial implications of these programs and enhance the overall financial management of programs currently totalling $16 billion in expenditures.

4.89 Senior financial officers in the Department of National Health and Welfare should be involved in all aspects of the financial management of public pensions. This should include a review and analysis of public pension costs for the current and next five years, financial aspects of Cabinet documents, disclosure of pension costs in public documents, and long-term pension costs and commitments.

Department's response: HWC financial officers will have a greater involvement in the financial management of the statutory benefit payment programs.

Benefit Delivery Systems

4.90 Overview. The Income Security Programs Branch of the Department of National Health and Welfare is responsible for administering the benefit delivery systems for Family Allowances, Canada Pension Plan and Old Age Security programs. These programs are administered by Headquarters in Ottawa and through a network of 4 area offices, 11 regional offices and 305 client service centres. The centres, which are operated on a full-or part-time basis, depending on location, provide general advice and information on programs to the public, receive benefit applications and amendments, and answer queries on specific accounts. The regional offices process benefits and claims and maintain benefit records. Cheque payments are processed by regional Department of Supply and Services offices. Overall management for the systems is provided by the area offices and headquarters.

4.91 With support from the Departments of Supply and Services and National Revenue - Taxation, every year ISPB:

    - processes nearly 100 million benefit payments;
    - conducts one million personal interviews;
    - answers close to 3 million telephone enquiries;
    - processes over 6 million account transactions;
    - puts a million new accounts into pay; and
    - maintains over 20 million individual accounts.
4.92 Approximately 75 per cent of the volume of these activities pertain to the Old Age Security program and Canada Pension Plan, with the remainder being related to the Family Allowance Program.

4.93 To operate these programs, the Branch maintains comprehensive records on cradle-to-grave statistics on almost all Canadians, including date of birth, earnings, employment and pension contribution information, marital status, disability records, and date of death.

Development of Present Operations

4.94 The Income Security Programs Branch was formed in 1975 by amalgamating two previously separate branches, Income Maintenance Branch (responsible for Old Age Security and Family Allowance) and the Canada Pension Plan Administration. At that time, Old Age Security operations, including record maintenance, were carried out in 10 regional offices across Canada, and CPP operations were centralized in the National Capital Region.

4.95 The following chronology gives the events in the development of present operations.


Department of National Health and Welfare

Income Security Programs Branch

Chronology of Events

July 1975
    - Income Security Programs Branch (ISPB) formed by amalgamating two previously separate branches, Income Maintenance Branch (Old Age Security and Family Allowances) and the Canada Pension Plan Administration.
October 1977
    - Government decides as part of its decentralization program that ISPB would:
      - establish an integrated ISPB client service network in all provinces;
      - establish a CPP benefit processing pilot, decentralize it to Fredericton, NB, and integrate with existing regional operations;
      - phase decentralization of CPP operations to all other provinces except Quebec;
      - relocate Nova Scotia regional ISPB operations from Halifax to Sydney;
      - decentralize Ontario regional ISPB operations to include Toronto (existing), Peterborough, Timmins and Chatham; and
      - integrate CPP and Old Age Security/Family Allowance district and regional systems and structures, leading to more efficient operations and combined cheques, where desirable.
November 1977 - June 1979
    - ISPB client service centres fully integrated in all provinces.
    - CPP benefit processing operations decentralized to Fredericton.
July 1979
    - President of Treasury Board announces:
      - cancellation of relocation of ISPB Nova Scotia Regional Office from Halifax to Sydney;
      - cancellation of split of ISPB Ontario Regional Office into four smaller offices; and
      - continuation of decentralizing CPP benefit processing operations, except for the Ontario region (which would remain in Ottawa).
December 1979
    - Treasury Board approves timetables and additional resources for decentralization of CPP benefit processing operations, on the conditions that planning in respect of full systems integration (Old Age Security and CPP) be advanced as much as possible and that savings from increased efficiency of integrated operations would begin to be realized in 1984-85.
November 1981
    - ISPB forms project team to plan for integration and consolidation of Old Age Security and CPP operations. Implementation now planned for 1986-87.
January 1982
    - ISPB decides to re-centralize disability portion of CPP benefit processing activities to serve disabled community better (see Example 4).
June 1982
    - Cabinet reverses 1979 cancellation plans for decentralization and directs that:
      - Nova Scotia Regional Office be relocated from Halifax to Sydney;
      - Ontario Regional Office be relocated to Chatham, Peterborough and Timmins with a component remaining in Toronto; and
      - CPP benefit processing operations be decentralized from the National Capital Region to four new Ontario offices.
September 1982
    - ISPB submits a request to Treasury Board for additional resources to develop an implementation plan for integrating the delivery systems (as had been instructed by the Board in December 1979).
    - ISPB explains to the Board that start-up of this project was delayed to preserve stability in operations during the period when CPP benefit processing was being decentralized.
February 1983
    - Treasury Board approves the September 1982 submission and instructs ISPB to include in the planning project:
      - an assessment of costs and benefits of integrating War Veterans Allowance program; and
      - alternative modes of program delivery, including Direct Funds Transfer.
April 1983
    - Decentralization of CPP benefit processing operations (except for Ontario) completed on time and under budget.
July 1984
    - Treasury Board approves a proposal to develop a plan, to be completed by June 1985, to consolidate, integrate and modernize delivery systems (scheduled for completion by the 1990s).
November 1984
    - The Government cancels planned relocation of Nova Scotia Office from Halifax to Sydney.
January 1985
    - Timmins Regional Office in operation.


4.96 As part of a government-wide decentralization plan in the 1970s, the Branch was instructed by the government to decentralize and amalgamate certain CPP operations (client service and benefit processing activities) with other income security operations, to relocate regional activities in Ontario and Nova Scotia away from provincial capitals, and to begin integrating CPP and Old Age Security benefit records and cheque payment systems, which were separately maintained on incompatible computer systems.

4.97 The government's objectives were to move program administration closer to the people, assist areas of slow economic growth and high unemployment, increase federal government presence in the regions, and reduce the proportion of federal employees in the National Capital Region. It was also expected that the integration of the CPP and Old Age Security systems would achieve substantial efficiencies in operations (approximately $15 to $20 million annually in 1984-85 dollars).

4.98 These objectives have not yet been fully achieved. This is due in part to successive governments cancelling and rescheduling the planned initiatives in 1979, 1982 and 1984 (see photo page). Moreover, the Branch, in ensuring that its primary objective of providing a high level of service to the public is met, has been cautious about undertaking too many operational changes at the same time. In addition, during the initial stages, there were some difficulties in getting the project started, because of an underestimation of the magnitude and complexity of the initiatives.

4.99 To date:

    - Client service centre operations have been fully integrated.
    - CPP benefit processing operations have been decentralized on time and under budget.
    - Of the four planned relocations of the regional offices, one was completed in 1985 (Timmins); two are under way (Chatham and Peterborough); and one has been cancelled (Sydney).
    - Integration of CPP and Old Age Security benefit payment systems, expected to achieve significant savings in operating costs, is still in the initial stages and is now targeted for completion in the mid-1990s, more than 10 years later than originally scheduled.
(Photo not available)

4.100 Total decentralization and relocation costs incurred by the Branch to date are approximately $15 million. The estimated cost to complete these initiatives is at least $30 million.

Systems as They Exist Today

4.101 We examined the systems and processes for providing information, service and advice to the public, determining and paying benefits, maintaining records and dealing with appeals. We also reviewed financial and EDP systems and the role and relationships of all departments involved in the benefit delivery process. We followed up on past audit observations and reviewed management initiatives currently under way. Our work was carried out in the National Capital Region and at various locations in Nova Scotia, New Brunswick, Quebec, Ontario, Manitoba, Alberta and British Columbia.

4.102 Present benefit delivery systems work. Benefit cheques are generally delivered on time, and ISPB places great emphasis on providing a high level of service to the public.

4.103 However, ISPB considers that the operational processes and systems themselves are costly, inefficient, limited, outdated and, in some instances, fragile. EDP systems are old, using the technology of the 1960s, and have been extensively modified, and management is concerned that certain systems may be so overpatched that improvements can only be made through a complete systems redesign. There are numerous inefficient manual processes, including application processing, benefit calculations and record keeping.

4.104 Management's concern about the situation is reflected in the numerous studies and reviews that have been undertaken by ISPB over the past several years. In addition to the long-term initiative which is scheduled for completion in the 1990s, ISPB has a significant number of current operational improvement plans under way. The 1984-85 Branch operating plan contained 30 projects. Six have been completed, seven are behind schedule, 14 are progressing with new milestones in 1985-86, and the remaining three have been deferred and included in the long-term initiative.

4.105 We were informed that cut-backs in funds and insufficient staff resources, as well as changes in priorities, have contributed to the delays in some projects. These delays have resulted in some significant improvements not being made to the benefit delivery processes. Moreover, most of these projects did not contain quantified statements of impact on quality of service or productivity or savings to be realized.

4.106 Service to the public. Great emphasis is placed on providing courteous and co-operative service to program recipients. Managers also place importance on the reliability and consistency of cheque delivery - to the extent that, in past years, they have exhibited considerable caution in implementing any change that might have affected the process.

4.107 Through a national network of 65 full-time and 240 part-time client service centres, ISPB provides general program information on Old Age Security and CPP for the public and specific account information for clients. In addition, clients can complete applications at service centres with the assistance of program counsellors, have their accounts modified or obtain advice on available program options. Over 20 per cent of the Branch's person-years is devoted to these activities.

4.108 Regional, area and headquarters managers also use various means of communicating general program information and upcoming program changes. These include cheque inserts, media advertising, communications with federal and provincial legislators, appearances on radio and television and presentations to groups that have direct contact with senior citizens.

4.109 Until recently, surveys of client satisfaction had not been regularly conducted. During 1984, the Branch conducted four major surveys. Although some limited survey work was carried out by the Department as part of program evaluation reviews, the only previous survey specifically dealing with client satisfaction was conducted in 1977.

4.110 We strongly support the efforts of the Branch to improve its understanding of its clientele and their needs. However, we believe there are opportunities to make better use of the survey results. For example, feedback regarding survey results to regional managers has been slow.

4.111 Management has not yet developed a clear definition of what constitutes service to the public, including establishing standards and guidelines for providing service. In addition, the various regional activities have not been adequately costed and the results of surveys have not all been used to assess the effectiveness of the many approaches to service delivery. The absence of this type of evaluation and cost information has made it difficult for management to determine whether the public is being provided with the services it needs in the most cost-effective way.

4.112 An example is the problem of telephone access to client service centres, particularly around cheque delivery time. It is clear from survey results that clients encounter difficulty in contacting the client service centres by telephone. One of the 1984 surveys indicated that 55 per cent of telephone callers make an average of three or more calls before being answered. The problem was first identified in the 1977 survey and, from current survey results, the problem appears to be getting worse. At cheque delivery times the number of incoming calls is significantly higher. This is a major problem since 75 per cent of all client contacts are by telephone.

(Photos not available)

4.113 In one case, during the last GIS renewal period in early 1985, the client service centre in Montreal lost 22,000 telephone calls in one day. Although the Branch is now directing considerable attention to this problem, it has not yet developed a comprehensive action plan for the short term.

4.114 Performance measurement systems. ISPB's performance measurement systems cover the work of people representing approximately 2,800 person-years. These people are engaged in clerical work, administration, counselling, benefit delivery and other related operations. Many of these operations are repetitive and are amenable to development of measures.

4.115 In operations such as these, performance measurement systems are essential to measuring levels of productivity and quality of service, as well as providing a basis for proper allocation of resources.

4.116 This audit represents our fourth assessment of these systems in the last eight years and the fourth time we have expressed concern about the ability of the systems to measure program performance properly. Our primary concern with the Branch's performance measurement system is that it does not measure labour productivity adequately and thus cannot be used to improve efficiency.

4.117 The existing national system was developed in the early 1970s in response to a Treasury Board initiative to have departments support budget submissions with performance data; it has basically remained unchanged. Because it does not provide operating managers with accurate indications of short-term performance fluctuations and representative work measures, regional operating managers have developed their own systems. However, as pointed out in prior years, these systems are inconsistent among regions, not documented, and have different measurement standards.

4.118 Example 2 illustrates a situation where techniques different from those used in the present national system were used, with dramatically different results, to measure labour productivity in Old Age Security regional processing units.


Example 2

Old Age Security - Labour Productivity Reviews of Regional Processing Units
4.119 The Old Age Security regional processing units carry out activities that are essentially clerical and repetitive in nature. They include opining new accounts, updating or closing existing accounts and keying data into computer terminals.

4.120 During our 1982 comprehensive audit of the Branch, we carried out a test of 1981 labour productivity levels in the Ontario Regional Office's Old Age Security processing units. Our tests, based on engineered time standards, revealed an efficiency level of 71 per cent (we regard performance above 80 per cent as evidence of due regard for efficiency).

4.121 In March 1984, in order to have a basis for determining allocation of workload capacity among the four new regional offices, and because of management concern that some clerical employees were underused, the Ontario Regional Office carried out its own labour productivity tests, based on standards established after carrying out a work simplification study. These tests indicated a potential overstaffing of up to 30 people in these same processing units (which employ 125 persons in total).

4.122 Some savings were realized when the Timmins office came into operation, and it is expected that additional amounts may be realized when the other Ontario regional offices come into operation.

4.123 The Branch's performance measurement system, in both 1981 and 1984, indicated that productivity in this area was considerably higher than the base period against which it was measured.

4.124 Based on these studies and our observations of similar activities in other regional offices, we believe that annual savings of up to $4 million in this area are possible through improved staff use. These estimates are based on our 1982 work, the results of which are considerably more conservative than the results of the 1984 Ontario Regional Office tests.

4.125 It should be emphasized that these amounts are inclusive of, not in addition to, the estimated savings that are to be realized when upgraded systems are introduced in the 1990s. They do illustrate the fact, however, that labour productivity, even within existing systems can be significantly improved.


4.126 In addition, the Branch's performance measurement systems and its quality-of-service indicators do not cover other important aspects of the Branch's work. Existing measures relate primarily to the processing and cheque delivery aspects of service, including turnaround times and error rates. Moreover, the systems provide only limited feedback with respect to telephone access, an important aspect of service, and on the extent and usefulness of the many different approaches taken by the Branch to communicate with clients.

4.127 Using data from the national performance measurement system, we were only able to account for approximately 40 per cent of the staff time used in client service centres in terms of productive activities. We believe this estimate of low staff utilization reflects the fact that not all client service activities are reflected in the measurement system. It also reflects the wide distribution of staff throughout Canada and the significant peaks and valleys of demand for client services (see photo).

4.128 A Branch project to make substantial changes to the performance measurement systems was undertaken in 1982; it is not scheduled for implementation until April 1986. As proposed at present, even after implementation, the systems will not include a sound basis for determining efficient staffing levels. The Branch plans to continue using a base year for comparison purposes. We consider this to be particularly unsuitable in view of the many operational changes that have been introduced and are planned. In addition, at the time of our audit, work measurement techniques were not being used to develop standards, and management indicated it had no intention of using them.

4.129 Given that we first reported on this in 1978, we consider that eight years is an unreasonable length of time to introduce improvements to such a critical component of the Branch's operations.

4.130 Delivery processes. In 1982, we reported that there was no formal process for ensuring that processing improvements in one program or region were implemented nationally. As a result, there were significant inconsistencies in delivery processes, and opportunities to improve productivity were being lost.

4.131 In 1983, Uniformity Committees, composed of regional, area and headquarters personnel, were formed to address variations in processes and operations. Another committee, for OAS, was formed in January 1985. At the time of our audit, few significant improvements had yet resulted, except for issuing and distributing a CPP operating manual.

4.132 The Alpha index (see Example 3) illustrates a process that is inconsistently applied and inefficient.

(Photos not available)


Example 3

Old Age Security - Inconsistent Implementation of Productivity Improvements: The Alpha Index
4.133 There are significant variations in processing methods among regions and among programs within the same region. One example is the application of computer technology to the alpha index. The index, which is an alphabetical list of accounts, serves as the primary control in preventing the processing of duplicate accounts in the Old Age Security program.

4.134 In 9 of the 11 regional offices, this index consists of manual or hardcopy control cards. The use of trays and rotary card (tub) files, as illustrated, results in excessive staff time and space; moreover, access to the cards is poorly controlled. Only now is a computerized index for the Old Age Security program being tested in the Toronto and Timmins Regional Offices.


4.135 Potential for fraudulent and unauthorized benefit payments. This Office and the Internal Audit Directorate of the Department of National Health and Welfare have made numerous observations over the last six years about the potential for fraudulent and unauthorized benefit payments in the Old Age Security and CPP programs. These concerns have arisen because of EDP system weaknesses, numerous manual procedures, lack of adequate procedures for verifying applications and continuing eligibility, and inconsistent application of controls among regions. We have also expressed concern, as has Internal Audit, about the delays in correcting system weaknesses.

4.136 In 1982, ISPB set up an audit committee to ensure that all internal and external audit observations were adequately dealt with. It also expanded the terms of reference of national and regional benefit control units to include analysing the causes of, and developing preventive measures for, benefit overpayments. In 1983, the Branch initiated a major study to determine the nature and extent of erroneous and fraudulent payments made under the income security programs. The study was completed in September 1984. It concluded that the amount of possible erroneous payments during 1983 on a percentage basis was extremely low: 0.09 per cent to 0.22 per cent of total benefit payments. However, the study pointed out that the payment base was so large that the monetary value of these errors was nonetheless considerable: $29.3 million to $76.0 million for the Old Age Security and Canada Pension Plan programs.

4.137 The study went on to say that there was ample justification for strengthening control measures in the areas of error/fraud detection, correction and prevention. The Branch is reviewing the study's observations and recommendations, which closely parallel previous audit findings, and is seeking additional resources for this area.

4.138 Although an organization is now in place, through the Branch audit and uniformity committees to address improvements in benefit controls, we remain concerned about the length of time taken to implement the audit recommendations. The following illustrate our concerns:

    - A routine ISPB check of Old Age Security applications in August 1983 at the Quebec Regional Office (independent of the study referred to above) resulted in an investigation that disclosed frauds involving approximately $250,000, comprising payments to 21 fictitious individuals over a period of five years. As a result of this discovery, the regional benefit control unit intensified its efforts to identify and follow up suspicious overpayments. During the period May to October 1984, the unit followed up on 109 such cases, 50 of which have been classified as potential fraud cases. In three of these cases alone, recovery of overpayments has amounted to $100,000. Management informed us that the benefit control units in the other regional offices have not been as actively involved in detection work, but rather their efforts have been directed to routine processing activities. The Quebec experience, however, leads to a conclusion that there might be potential for significant savings if more active investigation for fraudulent or erroneous payments were carried out in other regions.
    As part of our audit tests, we used specific computer-assisted audit techniques to match certain information between OAS, GIS and CPP files, Social Insurance Numbers master file and CPP files, and between programs and certain regional offices. These tests identified over 8,200 accounts with overpayments and potential overpayments. Of the 8,200 accounts, we tested 280 accounts which revealed 35 accounts in error and which may result in recovery of over $65,000 in overpayments. The balance of the accounts has been turned over to the Branch for further follow-up and investigation.
4.139 The use by ISPB of similar computer audit techniques, which are neither costly nor time-consuming to carry out, and more effective use of the benefit control units would significantly reduce the potential for erroneous and fraudulent payments being undetected.

4.140 Conclusion. Our comments and the illustrations we have used are well known by ISPB. The concern and depth of understanding of the problems are clearly supported by the numerous studies and reviews that have been done by the Branch. What concerns us, however, is the length of time taken to address the problems. In some instances, management has taken swift and immediate action to improve program administration, such as in the CPP disability operations (See Example 4). However, in many other areas, action has been very slow.


Example 4

Canada Pension Plan - Inadequate Management of Disability Operations
4.141 This example illustrates both significant problems in managing a major portion of CPP activities and the improvements that resulted in a very short time when senior management took action in January 1985 to correct the situation.

4.142 Under the Canada Pension Plan, pensions are provided to contributors who become disabled before age 65. The pension is equal to approximately 95 per cent of the calculated retirement pension. During 1984-85, the Plan paid almost $600 million in disability benefits to 168,000 individuals. The process for reviewing and approving benefits and hearing appeals is much more complex than the process for CPP and OAS retirement benefits. All applications for benefits (about 50,000 in 1984-85) are reviewed by a staff of 65 in Ottawa, including 30 medical and nursing officers.

4.143 We found that there were virtually no written policies, procedures or directives for reviewing and processing applications, entitlements and appeals, and for establishing boundaries within which medical decisions were made. Very little information about the program was being disseminated to the public, particularly the medical profession. Client service centres, usually the initial contact point for disabled applicants, were having considerable difficulty in informing individuals of the status of their applications. There were no really useful procedures for measuring and reporting productivity and level of service. This, together with the disruption caused by an attempted decentralization of activities and a situation that allowed virtually no delegation of responsibility, had created an extremely unsatisfactory situation. At the time of our audit in December 1984:

(Photo not available)

    - it was taking an average of 90 days to process an initial application;
    - 38 per cent of the rejected initial applications were being appealed, the majority successfully; and
    - it was taking an average of 90 days to up to two years to process appeals.
4.144 In January 1985, senior management began to take major steps to correct many of the deficiencies. Key among these efforts were:

    - putting in place procedures to clear backlogs in processing applications;
    - improving communications with client service centres; and
    - undertaking studies to improve work flow at all levels and to measure performance.
4.145 At the conclusion of our audit, it was too early to assess the full extent of these improvements. But they appear to be substantive.


4.146 We fully recognize the conditions under which the Branch must operate. These include the enormous size of its operations, its decentralized organization and management structure, the elderly population it serves, the variety of departmental players involved and the political and other outside pressures to which it is subjected.

4.147 We also recognize that these operational conditions make it difficult to achieve rapid change. Nonetheless, we feel the length of time taken to address these problems has been unreasonable. We also recognize that the Branch has a long-term project under way to improve its delivery systems, as described below. However, in our opinion, the Branch needs, in addition, to undertake a program to address those areas where immediate productivity improvements can be made, to address those areas where benefit overpayments are occurring, to implement audit recommendations promptly and to develop milestones to ensure these improvements are implemented.

4.148 The Department of National Health and Welfare should make concerted and immediate efforts to implement productivity improvements and to strengthen financial controls in its existing benefit delivery systems.

Department's response: Productivity improvements will only be introduced after appropriate studies have been conducted as to their suitability in the short term and in the longer term in the light of planned major systems and organizational enhancements, their impact on the quality and efficiency of service being delivered to our beneficiary population and the impact on Income Security Programs employees.

The development and implementation of strong financial and internal controls are an integral part of the new systems being planned by Income Security Programs development. The Department has initiated steps to ensure the strengthening of the financial controls in these systems.

Future Plans to Improve Delivery Systems

4.149 In 1984, the Income Security Programs Branch gave increased impetus to updating, integrating, improving and incorporating technological advances in its delivery systems. A general systems design and organization plan were scheduled to be submitted to Treasury Board in June 1985. Total cost for the project, which is scheduled to begin implementation in the 1990s, has been estimated at $70 million. Currently, some 20 people are involved, with an estimated 130 to be added as the project develops. ISPB plans to fund the project through efficiency gains.

4.150 Present plans call for annual monitoring and review by Treasury Board Secretariat of the progress of the project. During its first year, the project has generally been on schedule. An interdepartmental steering committee has been established, and all divisions of the Branch are actively involved in the project. Recently, the level of importance of the project has been further raised by the creation of the position of Executive Director, who will have responsibility for systems development, reporting direct to the Assistant Deputy Minister of the Branch.

4.151 These efforts to upgrade the systems are substantial. However, we feel it is important that there be close and continuous monitoring by the Department and Treasury Board Secretariat to ensure that it is completed on time - especially given past experience in attempting to upgrade and integrate the systems.

4.152 There are two important areas that, in our opinion, need to be addressed further.

4.153 Future client needs. Following submission of the Branch's proposal to Treasury Board in June 1984, the Board requested the Branch to develop a policy on the type and level of service to be provided. This has not yet been completed. We believe it is an essential prerequisite for designing the delivery process for the future.

4.154 Alternative delivery systems. Although recent surveys of client needs indicate an increase in interest, the project group is not actively considering alternative delivery mechanisms, such as electronic funds transfer (EFT). This technology is widely used by private sector and other government organizations for pension payments, as well as in the United States Social Security System. A private sector source cited an average cost per EFT entry of 60 cents compared with a per-cheque cost of $2.50, thus realizing a 76 per cent cost reduction (this excludes initial conversion and start-up costs). The Department of Supply and Services is running pilot studies on the feasibility of introducing what they term Direct Funds Transfer (DFT) technology in other areas of the government. ISPB, in its redevelopment project, has not been actively pursuing either DFT or EFT as an alternative method of benefit delivery. Rather, it is relying on DSS for initiatives in this area.

4.155 The Department of National Health and Welfare, as part of its long- term plan to upgrade and integrate its income security benefit delivery systems should ensure that it:

    - develops a policy on the type and level of service to be offered, based on its understanding of client needs; and
    - actively pursues the use of alternative payment systems such as electronic funds transfer.
Department's response: The need for the development of a formal policy on the type and level of service to be offered by Income Security Programs has been recognized for some time. The foundation for the development of the policy was prepared in mid-1984 when senior branch management met and formalized the "Mission of the Income Security Programs Branch" and the "Set of Values" under which it would carry out this mission. These products were subsequently reviewed with all Income Security Program employees. Further work is under way in a planned and organized way to further define in detail the types, level and standards of service to be provided and the systems and organization through which it will be delivered.

Income Security Programs Branch is actively pursuing alternative payment systems for the delivery of our benefits and services.

Administration Costs

4.156 Total costs of administering the Old Age Security program and the Canada Pension Plan in 1984-85 were about $65 million and $100 million respectively. Exhibit 4.8 shows a breakdown of these costs. ISPB has overall responsibility for reviewing and controlling them.

(Exhibit not available)

4.157 We reviewed the process for determining, budgeting, recording, monitoring and reporting these costs within the Department of National Health and Welfare. With respect to CPP, we also reviewed both how other departments allocated their costs to CPP and the work of internal audit in reviewing the costs.

Financial Reporting Systems

4.158 In our opinion, ISPB does not have the proper mechanisms in place to identify, monitor, control and report costs incurred by it and other departments in running the Old Age Security and CPP programs. The reasons for this are:

    - Existing cost accounting systems in ISPB do not permit a detailed allocation of costs incurred by ISPB between two of the three programs (Old Age Security and Family Allowances) it administers.
    - Memoranda of understanding between ISPB and other departments providing administrative services do not exist for all departments and, in some instances, do not contain guidelines for quality and level of service or make provision for automatic periodic review of the basis of charges.
    - ISPB does not use simple measures such as cost per cheque or cost per account, commonly used by both government and private sector organizations, to monitor costs and operational efficiency of similar activities.
4.159 The Department of National Health and Welfare should ensure that there is an effective process in place to account for, monitor and report administration costs of the Old Age Security and Canada Pension Plan programs. In addition to establishing appropriate financial reporting systems, the Department should ensure that:

    - roles and responsibilities for administrative cost control are clearly established; and
    - written agreements are established with all departments providing administrative services that specify the nature and level of services to be rendered, the basis for costs to be included in the charges for these services and the performance indicators to be used in measuring their quality.
Department's response: The Department accounts for, monitors and reports the administrative costs of the Canada Pension Plan separate from other program costs. The administrative costs of the Old Age Security and Family Allowance programs are not currently identified separately. Consideration will be given to such a separation in the design of the new financial reporting system presently under development. The roles and responsibilities for cost control will be reviewed to ensure that they are appropriate.

A comprehensive review of CPP Administrative costs is under way. When the recommendations emanating from the study have been approved, it is intended to negotiate written memoranda of agreement with the participating departments.

Independent Scrutiny of Canada Pension Plan Administration Costs

4.160 The Canada Pension Plan legislation prescribes the charging of administration costs to the Plan as follows:

There shall be paid out of the Consolidated Revenue Fund and charged to the Canada Pension Plan Account ... the costs of administration of this Act, under the authority of Parliament.
4.161 These costs are estimated annually by participating departments, reviewed by ISPB, and recovered monthly from the Canada Pension Plan. At year end, adjustments are made to reflect actual costs. These costs are reviewed by the Comptroller, CPP, and are subject to audit by the Internal Audit Directorate of the Department of National Health and Welfare.

4.162 When the Plan was established in 1965, the government recognized the need for an independent scrutiny of these costs and for addressing potential conflicts of interest. An interdepartmental committee on CPP administration costs was established, Treasury Board issued guidelines for the recovery of costs by participating departments, and the Department of National Health and Welfare was given the authority "to review and audit all charges by any other department to the Canada Pension Plan Account for administrative services."

4.163 Although these procedures may have been sufficient at that time, the present practices, in our opinion, do not provide for an adequate independent challenge and review of CPP administration costs. The reasons for this are:

    - The interdepartmental committee on CPP administrative costs was disbanded in 1976. Since then, there has been no formal or regular communication among departments on the administration of CPP.
    - Although there have been significant changes in the organization and operation of CPP over the years, methods for cost recovery have not been reviewed and modified, as required by Treasury Board, since 1974. As a result, the policy for determining what costs should be charged to CPP, and on what basis they should be charged, is unclear.
    - Costs are recovered by participating departments from CPP through a process known as vote-netting. The government discontinued this practice for the most part in other programs several years ago because it allowed departments to make expenditures beyond the amount approved by Parliament.
    - Treasury Board has little involvement in reviewing and challenging these cost recoveries as part of its program expenditure analysis. Administration costs to be charged to CPP by participating departments are reviewed by separate groups and different analysts within the Treasury Board Secretariat. No one person looks at the total picture from the CPP point of view. Furthermore, departmental charges over and above the original estimates are not reviewed and approved by the Treasury Board.
    - Although the Internal Audit Directorate of National Health and Welfare has been successful in identifying overpayments and areas for improving financial controls on behalf of CPP, departments have not always implemented its recommendations (See Example 5).
4.164 In 1982, the position of Comptroller, CPP, was created; the principal duties focus on challenging and reviewing administration costs. Since then, the Comptroller has significantly improved controls over administration costs. However, his present reporting relationship to the Director, Financial Administration, ISPB, does not fully provide the arm's-length relationship necessary for an independent and effective control of administration costs incurred by ISPB. These costs represent approximately one-third of total CPP administration costs.

4.165 These concerns, together with our earlier comments concerning inadequate cost accounting systems, have created a situation where the costs of running a multi-billion dollar program are being incurred without adequate review by government or by Parliament.

4.166 The Department of National Health and Welfare, Treasury Board Secretariat and other participating departments have been aware of many of these inadequacies for some time. In September 1984, the Deputy Minister of National Health and Welfare wrote to Treasury Board Secretariat requesting a comprehensive, independent review of current policies and practices regarding recoveries of administrative costs from CPP. He said:

Following the enactment of the Canada Pension Plan (CPP) in 1965 the Treasury Board issued a policy letter specifying certain guidelines for the recovery of the costs incurred by various departments in administering the Plan. These guidelines were not intended to cover all aspects of the CPP Administration and they were expected to be modified over time. Over the years, piecemeal changes have been made to the original practices on a department to department basis. However, while each of these changes may have made sense at the time, the result is that there are now significant differences in the cost recovery methods and underlying principles used by the various departments. There is, in my opinion, a strong possibility that the CPP is presently being overcharged, thereby subsidizing federal government operations.
4.167 Treasury Board Secretariat approved the request in October 1984, and a task force to examine cost policies began work in April 1985. It expects to report its findings in early 1986. However, even though this study is now under way, Example 5 illustrates the problems in achieving more equitable cost allocation on a short-term basis.


Example 5

Canada Pension Plan- Administration Costs: Inappropriate Cost-sharing Formula
4.168 The following illustrates some of the disparities associated with one of the CPP cost-sharing formulas and the delays involved in resolving the problem.

4.169 The Department of National Revenue-Taxation collects CPP contributions from employers and employees. In 1984-85, it recovered from CPP $45 million for this service, close to one-half the total CPP administration costs. The amount of recovery is based on a formula approved by the Treasury Board in 1974.

4.170 The Internal Audit Directorate of National Health and Welfare began raising concerns about the adequacy of the formula in 1978. Since then, the Departments of National Health and Welfare and National Revenue have been examining the current formula and considering more appropriate alternatives.

4.171 A comparison was made which showed that in 1982-83 the cost recovered by NR-T from CPP to collect each $100 was $1.27, almost three times the amount charged by NR-T to the Canada Employment and Immigration Commission (CEIC) for collecting unemployment insurance premiums ($0.44 per $100). The difference is caused in part by the methods used by NR-T in calculating cost recoveries: CEIC is charged based on cost per account and CPP is charged on the proportion of CPP revenues to total NR-T revenues.

4.172 In September 1984, at the same time that a proposal for a comprehensive review of the administrative costing policies and practices for CPP was submitted, NH&W proposed to Treasury Board an interim formula that stood to reduce the charge to CPP by NR-T by about $30 million over the next three years. The Department felt that the situation required immediate attention.

4.173 In October 1984, Treasury Board Secretariat refused to recommend the proposal to the Board on the grounds that the planned comprehensive review should be completed first.

4.174 In November 1984, National Health and Welfare reiterated its concerns for immediate action in view of the fact that implementation of any changes from the review could take as long as three years.

4.175 In April 1985, Treasury Board Secretariat again turned down the request, stating:

... it is uncertain whether an arbitrarily chosen level of recoveries from the Canada Pension Plan is any more desirable than that based upon the formula which is currently under review. You may be assured that the Treasury Board Secretariat shares the concerns which are evident in your letters about the possibility of greater recoveries from the Canada Pension Plan than may be warranted. We would, however, find it difficult to recommend your submission to Treasury Board Ministers at this time because the submission in effect proposes a change to the basis of recoveries from the CPP at the very time that a comprehensive review of those recoveries is under way.
4.176 As of May 1985, no further developments had occurred.


Public Awareness

4.177 As stated earlier, public pensions, on average, represent almost 50 per cent of the income of the elderly. Given this and the fact that not all programs are targeted against specific levels of income, individuals who are expected to provide adequately for their retirement must know the extent to which public pensions will supplement income from private savings and employer sponsored plans.

4.178 In addition, given our earlier comments concerning the need to clearly define the type and level of service provided to clients now and in the future, we feel that the Department of National Health and Welfare should give consideration to a public education program which explains what each type of pension is currently designed to accomplish and not to accomplish, and how public and private pensions fit together.

4.179 This could cover programs and levels of benefits available, eligibility requirements, advice on tax and retirement income planning, and available services such as direct deposit and tax deducted at source. An example of this kind of information program is the semi-annual bulletin entitled "Pension News" published by the Quebec Pension Plan and inserted in daily newspapers.

4.180 We see this as an extension of the type of information which should be in Part III of the Estimates for Parliament. That is, it serves accountability of the programs in its broadest sense, through disclosure of what it is intended to accomplish.

4.181 In April 1985, the Department began a four year program of mailing out 13 million statements telling individuals about the status of their Canada Pension Plan program and informing them of potential benefits to which they are entitled. We consider this to be an excellent start in informing the public and believe that the Department should expand its efforts to other programs.

4.182 The Department of National Health and Welfare should introduce better public disclosure and education programs on all federal public pensions and their role in the retirement income system.

Department's response: The Department supports the Auditor General's recommendation that Health and Welfare Canada should introduce better public disclosure and education programs on the federal public pension programs which it administers and their role in the overall retirement income system. This need was recognized some time ago and steps are being taken to address it. The Canada Pension Plan Contributor Information Program introduced in the spring of 1985 is a part of the process and this fall other initiatives will be tested.