Finance Committee on Oct. 21st, 2009

[Peter Carayiannis]

It doesn't necessarily leave a forced conversion. What it leaves is that the tax-free rollover disappears after December 31, 2012. So the unit holders of any trusts that choose to convert after that deadline will suffer capital gains or losses, as the case may be, whereas the trusts that convert prior to that deadline will do it on a tax-free basis.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Your argument is that the date itself came as a bit of a surprise to--

[Peter Carayiannis]

The date was never mentioned at any time. It was never discussed at any consultations. It was never announced at any point. It's our position that the date is likely an arbitrary date and, truthfully, is not necessary in terms of levelling the playing field, as was the government's stated intention.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Given that 2012 is still floating out there, and given that the legislation has died, and given that we're a year past the legislation, do you have a specific proposal as to a date?

[Peter Carayiannis]

We would actually propose that there be no conversion deadline. It's important for the committee to realize that after January 1, 2011, any income trusts that continue to operate in that role will be paying tax at a rate of 35%.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Yes, 35%.

[Peter Carayiannis]

So they will make a decision to convert or not.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it was arbitrary before, it's arbitrary now, and it will be arbitrary later.

[Peter Carayiannis]

We would respectfully request that the deadline be eliminated.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Howard, your presentation basically is—how shall we say?—from the actuarial standpoint, moving percentages up, moving percentages down, playing with this, playing with that, but it doesn't address the core issue with a lot of pension plans, which is that in their portfolios they have a lot of junk and the junk just won't produce sufficient rates of return, no matter how you play with the required surpluses or any of the other things you're suggesting there.

Have you given any thought to whether the actual asset mixes, the quality of the assets, should be changed?

[Robert Howard]

In fact, your proposal on the target solvency margin would have a direct bearing on that question, in that a pension fund that has riskier assets in it would be required to have a larger target solvency margin and therefore would require the employer to be funding a larger buffer into the plan. If the employer wanted to keep the funding costs to a minimum, then the fund would be using--

[John McKay, Liberal, Scarborough—Guildwood, ON]

Isn't it really beyond the capacity of the employer and the pension plan to say that they've got to replace $100 million worth of Nortel, if you will, with something? How do you get there?

[Robert Howard]

The plain fact is that if there are assets in the fund that are worthless, there is nothing in our proposal or in any action that anybody could take that would change that. We would be encouraging wise investing in any case. That's part of the risk that's present, not just in the defined benefit plans but also in the defined contribution plans in which the individual is directly at stake. If you're saving for the long term, you've got to make investments in assets that will last for the long term. Making bets on risky assets is not in the interests of anybody.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Do you know what percentage of the pension plans actually fall into that category? In what percentage is the asset quality of the portfolio beyond redemption?

[Robert Howard]

I'm sorry, but I don't have an answer for you on that one.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Okay. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McKay.

We'll go to Mr. Menzies, please.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

And thank you to our witnesses. I beg your forgiveness if I focus on Mr. Howard. I think that in the last year I've spent more time with actuaries and pensioners than I have with my wife, so I will probably focus my questions on you.

You had some interesting comments, and I appreciate your input throughout the whole process. Your association has been very helpful on this process.

I want to point out one thing. Maybe I didn't hear you correctly, but I thought you said there's been no meeting of finance ministers or pension ministers. There have actually been two. In December in Saskatoon the federal finance minister had commissioned two papers from experts, Claude Lamoureux and Jack Mintz.Those papers were presented because he was concerned about pensions at that time. That paper came out early in the year and was what spawned the cross-country consultation process. It was then followed up with the report on that consultation process, which went back to that same group of finance ministers in May of last year.

There will actually be a summit of finance ministers. Not everybody understands, although I'm sure you do, that in some provinces it's not necessarily the finance minister who is responsible for pensions, but all the minsters responsible for pensions will convene a meeting. There's a summit of those ministers in December. The findings of the research working group will be reported back then. That is just a clarification to make sure everyone understands that.

With regard to the employer-sponsored pension security trust, one of the big arguments or concerns I heard was over who owns any surplus, if you will. Who would own this trust? If it's tax-exempt, I would assume that the sponsor owns it, but there were certainly some arguments among different groups. Can you tell us who owns that and who can utilize it?

[Robert Howard]

The pension security trust would be owned by the employer, or, more properly, the plan sponsor. The regular part of the pension plan, the general ongoing contributions, are in the pension plan. They're for the benefit of the employees and are essentially owned by the employees. Then the pension security trust sits on top of that and provides additional security to the whole plan, but this top part is owned by the employer. If the assets rise in value, then the pension security trust becomes larger than necessary; the employer would then have the option of withdrawing some of that money. It would be a tax deduction as it went in; it would be taxable to the employer as the money came out.

[Ted Menzies, Conservative, Macleod, AB]

I think you're headed in the right direction; I'm just not sure what form it should take. But I take your comment that if we had some system of providing surpluses in the good times, we wouldn't have had the disasters that we saw in some of these cases.

The argument against that concept, prior to this, was that it then becomes a tax haven for profitable companies. How do we prevent that?

[Robert Howard]

We're also suggesting that there be a maximum surplus that could be put in. Once it grows beyond that, then to the extent that it's in the pension security trust the sponsor would be obligated to withdraw the money, and it would be taxable at that point.

[Ted Menzies, Conservative, Macleod, AB]

Would it be on wind-up?

[Robert Howard]

Yes, on wind-up; certainly it would be.

[Ted Menzies, Conservative, Macleod, AB]

It would be the same treatment .

[Robert Howard]

You can't have it wind up at more than its value.