Industry Committee on Nov. 16th, 2010

[The Chair, Conservative, David Sweet]

Thank you, Mr. Rota.

I forestalled mentioning it, but I have a real problem with the analogy of a haircut.

Mr. Wallace, you have five minutes.

[Mike Wallace, Conservative, Burlington, ON]

First of all, thank you to the witnesses for being here.

I only have a minute or two, so I'd like a clarification. I appreciate the mover of the motion indicating that it is not retroactive, as is presently stated, so that those in the room who are thinking this is a panacea for Nortel issues will know it's not the case.

The other part of the bill on which I need some clarification from the witnesses....

Ms. Urquhart, it's nice to see you again. I'm on the finance committee, so I see you a lot.

One of the issues for me is that the bill talks about super status. Others talked, as I think you did in your presentation, about preferred status. There are four levels: there is super, there is secured creditor, preferred, and then the rest of the gang, including corporate bonds and suppliers.

Does your evaluation change at all based on the status that the bill reflects? The bill reflects super status at the present moment.

[Diane Urquhart]

Basically, I've looked at the market as a whole: all of the bank debt, all of the bond debt, the pension deficit, and then the equity in the economy. I think I've sorted out in my mind that for the economy as a whole, as long as the recovery is 40% in the bankruptcy, then the secured creditors and the pension deficit would be covered. As soon as the recovery goes below 40%, if the pension deficit goes ahead of the secured, the secured bank loans start to be impaired.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

[Diane Urquhart]

So I think that gives a perspective.

[Mike Wallace, Conservative, Burlington, ON]

I understand.

Mr. Laver, I appreciate your commenting in your presentation about the stuff that has already happened. As you know, it takes time around here for things to get implemented. They may get passed in Parliament, but by the time they get regulations and are put into the marketplace it does take a while.

What is the recommendation from your organization of how long we should see what the impact is of what has been already moved and put in place in the law before we move any further? And does your organization have any other suggestions you'd like to provide to this committee on what we could also be doing?

[Ross Laver]

The short answer, if there's very little time left, which I guess there is, would be to take a look at what other countries are doing. I think in many areas, Canada represents best practice as far as the protection of pensioners is concerned. There are other models.

There are, unfortunately, no magic wands to be waved to prevent something such as we saw in the markets over the last couple of years. I would say that, in terms of how much time we should wait to see, the issue here really is that if interest rates remain low—at the historically low levels that they are right now—we're going to have an awful lot of problems in this country, and the ones we've seen so far will only be the tip of the iceberg.

There was a report a few days ago about the massive unfunded deficit in public sector defined benefit pension plans, which are in effect more pay as you go. So I think in terms of the defined benefit private sector plans that this bill is intended to address, as I say, the changes that have already been made have significantly improved protection for pensioners. Yes, some of those effects will be felt as the measures are implemented over the next few years. I think if Parliament wants to take a look at what other countries have done in this situation, it might find some useful examples for us to follow.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

Thank you, Mr. Chair.

[The Chair, Conservative, David Sweet]

Thank you very much to the witnesses.

We're going to suspend now for a couple of minutes and have the next wave of witnesses come in.

[The Chair, Conservative, David Sweet]

Ladies and gentlemen, in order to stay on time, we want to get started again.

We're going to start. Rather than introduce the witnesses and take up time, I think you'll see them on your orders.

I'll start with Mr. Hilton, who says he's ready. Mr. Hilton, please confine your remarks to a maximum of five minutes.

[Robert Hilton, President, Canadian Federation of Pensioners]

I'll endeavour to do that.

I'm here today as the former president of the Hamilton Specialty Bar Slater Steel Salaried Pensioners Association to talk about Bill C-501.

I want everybody in this room to be fully aware that nobody from the Slater Steel group is going to get any benefit out of this, because our plan has been wound up. What I would like to point out is that when our plan was wound up, while the pension side of the plan meant I lost 23% of my income, when you add to that the compounding effect that I lost all of the benefits that I was supposed to get for life, the net effect is 35% of my pension.

Now, my pension was better than average within the company.

I'm also the president of the Canadian Federation of Pensioners, and as president of CFP I'm here on behalf of the 15 pension associations, with memberships exceeding 150,000.

We as a group certainly hope that all members of Parliament in attendance today are here with a truly open mind, even though my own MP has issued an e-mail that indicates that's not truly the case for everybody.

There are some people in this country who think that pensioners on private pensions are fat cats, or, because some are or were members of unions, they don't deserve any consideration. Neither comment is either correct or fair.

I'm going to provide you some simple statistics from the Bell pensioner association. They total some 32,000 members in their defined benefit plan. Their pensioners' average age is 68. Their average annual pension is the grand sum of $22,000. For the survivors, their average age is 74 years of age. Their average pension is less than $15,000.

So let's put a little bit of an equation there: take $15,000 and 10% is $1,500; 20% is $3,000; and 30% is $4,500. Now, for most of the people in this room, if your income dropped by $4,500, you would complain bitterly. But for those pensioners, if it dropped $4,500, they're in a disastrous set of circumstances.

And I might point out that the Bell pension plan is more generous than most.

I would also point out that our pension plans are nothing but deferred wages. And I can state that at one point in time, when the marketplace went south for steel, the company did not give out salary increases. They said to the employees, “We can't give out salary increases this year, but we're going to modify your pension plan and improve it a little bit.” That meant that they were giving a little bit, but they were delaying how they were having to pay it out.

Now, if you're protecting current employees at a certain level for that last little bit of their payments, their salaries, why should we be treated any differently? To do so is unfair. On that basis alone, we should in all fairness be granted “preferred” creditor status—and I read the word “preferred” as opposed to “secured” or “super-priority” for a very good reason. We certainly feel we should be ahead of the bond holders and the junk bond lenders or any unsecured creditors.

The other thing I'd like to point out is, as a member of a DB plan, there was a limitation that was placed on the amounts that we could contribute to registered plans, such as RRSPs. That limitation reduced the amount that we could have done compared to other people. Hence, if we're forced to take a reduced pension, then we're being victimized twice over: once on the pension itself and secondly due to the RRSP limitations.

I don't have to talk about what Diane Urquhart has said because she's been here today; you've heard it. Mr. Manley and his fellow CEO associates take exception to a lot of what has been said and they certainly would like to not change the plans. In fact, my MP has stated it could be as high as a 35% cost. Yet you heard this morning what Diane said. Interestingly enough, they haven't provided the studies that would say it would be much higher. Diane Urquhart has been very open about where her studies were done and how.

Preferred status is the norm in many countries. Yes, it's not the status in all countries, but in many of the countries where it is not the status there are other mechanisms put in place to take care of failed pension plans.

[The Chair, Conservative, David Sweet]

Mr. Hilton, I'll have to cut you off there. We have a very tight timeframe of only one hour here and all these witnesses to hear. You will be able to try to make the rest of your remarks during questions.

[Robert Hilton]

Okay.

[The Chair, Conservative, David Sweet]

Mr. Rutherford, for five minutes, please.

[Brian Rutherford, President, GENMO Salaried Pension Organization]

Thank you.

Thanks, Bob. And I thank the committee for seeing us.

I'm going to take a different twist at this. My name's Brian Rutherford. I'm the president of GENMO, which is an organization of salaried General Motors retirees. We formed and incorporated in 2009, when General Motors was in deep distress.

I will talk about the rights of deferred payment first.

Most business transactions have terms of payment, such as net immediate, net 25, net 30. Most of those terms of payment are deferred. The company I worked for had payment terms of second month, second day—there's a new one for you—that stretched the suppliers' payments to 45 days. As for the Companies’ Creditors Arrangement Act, or CCAA, these deferred payments only to suppliers are recognized. Suppliers are unsecured creditors. After their obligations owing to the secured creditors are satisfied, the unsecured creditors have the opportunity to receive payments for goods or services that they provided to the insolvent company prior to and during bankruptcy protection.

Employee pensions are a deferred payment. Employees have contracts with their employers. It is a legal understanding that as an active employee, you will receive an agreed-upon compensation at a set frequency. You're also earning a deferred compensation that you will receive at a future date. This deferred compensation is normally in the form of a registered pension plan. As for federal and provincial pension laws, the employer as the plan sponsor is legally obligated to ensure that the pension plan is adequately funded. A healthy pension plan fund should be in excess of 85% funding on a solvency basis.

The suppliers and their deferred entitlements are recognized in CCAA as unsecured creditors. Pensioners, at the very least, should be no different. This is just.

Current bankruptcy legislation does not reflect the unique circumstances faced by pensioners. In bankruptcy proceedings the pension plan solvency deficiency--that is, a shortfall of assets on the fund as compared to the liabilities of the fund--is treated as an unsecured claim. This claim is addressed after all super-priority claims, secured claims, and preferred claims have been met. After these claims, if there are assets remaining, pensioners must share the assets with the rest of the unsecured creditors.

Pensioners are unlike most other creditors. Other creditors can amend their business plans to help make up for the loss of compensation they had been expecting from bankrupt companies. Current employees have the potential for securing employment elsewhere, albeit with some challenges. Most pensioners have no opportunities. Pensioners have already lived their lives of employment, a life where deferred compensation was promised.

While the provisions of Bill C-501 would not guarantee the pension promised, they would be an improvement over the situation that pensioners face under the current legislation. It is more than likely that a pension plan is in distress in CCAA. Current legislation would provide no aid for the plan. Preferred status, if as amended in Bill C-501, could provide aid for the plan and vulnerable pensioners. Pensioners' rights should be no less than the rights of other creditors.

My own experience with GENMO: The General Motors of Canada salaried pension plan, as of the report of the actuarial valuation as of September 1, 2009, has 12,445 members, of whom 7,361 are retirees and beneficiaries. The average yearly pension is $22,007, which is fixed. The wind-up ratio of the plan was 5.99 at this point. A large portion of this deficiency was due to the Ontario government's 'too big to fail' legislation, which allowed the sponsor to underfund the pension on a solvency basis. Had General Motors of Canada followed its parent into bankruptcy, the value of the average yearly pension would now be $13,182. The current wind-up ratio is approximately 0.8. At this rate, the average yearly pension will be $17,606.

To make matters worse, there is an insufficient capacity in the Canadian insurance market to support the immediate purchase of annuities for all the plan beneficiaries who would want to retain the right to a monthly pension in the event of a plan wind-up. In bankruptcy, pensioners would lose all of their benefits, and that would be an additional financial burden. Most benefits are required, more so for the aged versus the young actives. For the current bankruptcy legislation, everything is stacked up against the vulnerable pensioner. There would be less income to support higher costs due to loss of benefit support and inflation. Independent and secured pensioners could now become a social and economic burden to society.

In conclusion, it is time for Canadian pensioners to enjoy similar protections for their pensions in bankruptcy as are enjoyed by pensioners in most developed countries in the world. Preferred status protection is the norm, not the exception. It is time that the Government of Canada passes legislation to protect pensions in bankruptcy. It is time for economic and social justice for Canadian pensioners.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Rutherford.

Mr. Cole, for five minutes, please.

[Jim Cole, Vice-President, Fixed Income, Phillips, Hager & North]

Thank you, Mr. Chair and members of Parliament. I do thank you for inviting me to meet with you today.

I'm a fixed-income portfolio manger with Phillips, Hager and North Investment Management. PH and N has been investing in corporate bonds for over 25 years and currently invests approximately $18 billion in corporate bonds, many of which are held by defined benefit plans and other retirement vehicles.

We requested to meet with the committee today to express our views on the potential impact of Bill C-501 on credit markets, and we hope these comments will be helpful to the committee and all members of Parliament in considering Bill C-501 as a way to enhance the security of defined benefit pensions for Canada's workers and retirees.

The first point that we wish to make is that Bill C-501 has the potential to affect most of the significant issuers of investment-grade corporate bonds in Canada. Today 60 entities represent about 90% of the market value of all investment-grade corporate bonds outstanding; 54 of these issuers are corporations, and of those 54, 48 report having defined benefit obligations in their public accounts. The impact from a credit market perspective, therefore, is potentially broad.

Second, we believe the cost to existing bond holders and to the issuers of corporate bonds could be in the billions of dollars if unfunded pension obligations are given super-priority or preferred-creditor status. We estimate that existing bond holders could see the value of their investments decline by as much as $4.5 billion. Corporations will also face higher costs for new debt issues, and we estimate that these costs could be in the range of $7 billion to $17 billion. We do not expect these costs would be shared equally across the market. Corporations with large pension liabilities, particularly those with lower investment-grade credit ratings--triple-B, for example--and the investors in the bonds of these corporations are the ones that stand to be most affected.

Third, we believe there is a potential for perhaps unintended consequences that could result from Bill C-501. For example, some corporations could become at risk of a credit downgrade if unfunded pension obligations are given senior credit ranking in the event of insolvency. Credit downgrades increase the cost of borrowing to varying degrees, but as an example, a 150 to 200 basis point or 1.5% to 2% increase in the cost of debt would not be unreasonable for a triple-B rated company that is downgraded to below investment-grade status.

Corporations may also find that they're not able to raise debt when they most need to. Unsecured bond holders will be less willing to lend given a large senior claim that could rank ahead of them should the corporation default, or alternatively, they may demand a punitive interest rate on any new bond issues. Constrained access to capital markets could force more companies into bankruptcy.

I would like to conclude by saying that we do understand the importance of securing retirement benefits for Canadian workers and retirees and we appreciate the objectives of Bill C-501. We also believe that Bill C-501 will impact credit markets in meaningful and potentially unintended ways and we hope the committee will find our raising these points helpful to its deliberations.

Thank you for your attention, Mr. Chair and members of the committee. I look forward to answering your questions.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Cole.

Will it be Madam Clark-Stewart or Mr. Sproule making the opening remarks?

[Donald Sproule, President, Nortel Retirees and Former Employees Protection Canada]

I'll be speaking.

[The Chair, Conservative, David Sweet]

Mr. Sproule, for five minutes, please.

[Donald Sproule]

Thank you, Mr. Chairman.

Let me begin with where I will end in five minutes. Since the spring of 2009, our Nortel group has been asking for pension deficits to receive preferred priority status, not the super-priority status as currently tabled in Bill C-501. We want pension deficits to be at the front of the line of unsecured creditors.

I'm a Nortel pensioner with 27 years of service. The NRPC, my organization, was formed in January of 2009 to protect the interests of some 20,000 former employees and pensioners who would be affected by this bankruptcy. We now have 8,200 paid members in our group, despite having to find people who were ill and unable to access e-mail. Basically, we've reached out as well as we can to that pensioner class. Within that group, there are some 11,700 pensioners in pay, with an average age of 74 years. I'm one of the younger guys, and that's why I'm here; I have the energy to do it.

The average pension is $17,500. It is not a gold-plated pension by any standard. In addition, our retirees have been receiving health and life insurance benefits from the corporation. For the past 22 months, we've all been receiving 100% of our pensions and benefits.

Here is where I have to stand up and feel like the ghost of Christmas future. I know what's going to happen to the Nortel pensioners. First, at the end of this year our health benefits will be taken away. Second, some time early in 2011, the pensions will be cut back by 36%. There will be hardship for all Nortel pensioners, and poverty for some. A modified Bill C-501 could significantly improve that situation.

The assets of Nortel are being sold off. What we will get from them will be determined by how the global lockboxes into which all of the assets are going will be unlocked. The judges within the U.K., Canada, and the U.S. have to decide how to unlock them. We're going to get some money out of them, but we don't know how much or when. The problem, we think, is that the amount may be ten cents on the dollar—twenty cents on the dollar could be optimistic for us. But we're also appalled by the fact that the U.S. estate is probably going to get more than the Canadian estate. There's not much here to console Canadian Nortel pensioners who work in the service of a global Canadian company.

Again, we are looking at Bill C-501 as a mechanism to improve our lot within the Canadian estate.

To give you some idea of the magnitude of what's happening to the Nortel pensioners, approximately $1.5 billion in assets will be taken away from us, with $1.1 billion coming from the pension plan and another $250 million in lost health insurance. When you take into account the combined loss of pension plan and health benefits, we calculate that some people, especially those outside of Ontario who don't have the pension benefit guarantee fund, will suffer a loss of 45% of their income.

How did the pensioners get into this sorry state? Nortel faltered during the economic crisis and meltdown, and the pension plan was collateral damage. From 2006 to 2010, the wind-up rate of the pension plan went from 86% down to 64%. While it's harder to prove, we also believe that the bankruptcy was strategic and probably driven by the junk bond holders, who had no interest in the company actually resurrecting and restructuring itself. The gain of the junk bond holders would come on the backs of the pensioners. None of us pensioners—none of us, I repeat—ever figured out that we'd be in this situation. None of us ever thought that our registered pension plan was at risk. I had long discussions with our lawyer, saying no, this cannot be true, and he kept coming back and saying yes, it's true.

Let's compare the two competing classes of unsecured creditors, the bond holders and pensioners. Bond holders never want for sophisticated money managers. They negotiated bonds with a sophisticated corporation. The pensioners were not sophisticated, let me tell you. The bond holders can distribute their risk across many corporations, whereas the Nortel pensioners have all of their assets tied up in one single entity. Bond holders calculated the probability of Nortel going bankrupt—that's what it's all about—and they have many different instruments to manage their risk. The bond holders have cross-licensed their bonds between Canada and the United States, so if the United States estate paid out better, they'd do well, as they can double-dip in both estates. We in Canada are only dependent on what actually ends up in the Canadian estate—and it's a cash-poor Canadian estate, because we had the global headquarters and the global R and D, but none of the money.

The bond holders could actually buy credit default swaps and buy a form of insurance against a corporation going bankrupt.

Again, I have a list of many things the bond holders could do, but the pensioners were totally unprotected. So we never contemplated that we were going to go into default. In fact, our taking a pension was a form of risk mitigation: Would I live too long and not have enough money to carry into my retirement, or would I die too soon and my spouse not be looked after?

So our conclusion is that it is unfair and it's an uneven playing field when you pit pensioners against bond holders initially, and now against junk bond holders. That's why we're asking for Bill C-501 to provide preferred or higher priority to pensioners.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Sproule.

Now we'll move on to the Liberal Party.

Yes, Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Just as a clarification for our friends, Mr. Hilton lives in my riding. I am the MP he's talking about. He got the e-mail from me. I did not support this coming to committee, and my e-mail reflects that.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Wallace.

Mr. McTeague, I understand you're going to share your five minutes with Madam Sgro.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I will, Chair.

I'll just assure Mr. Wallace I wasn't going to ask that question, but I'm glad he's clarified it for the committee.

Mr. Sproule, my party has made a number of recommendations, and my colleague Judy Sgro, who is our pension critic, has made 20 recommendations. I acknowledge what has happened to you and Nortel pensioners as something that has certainly seized Parliament and has created a lot of attention for us here, and we do want to try to find a way out of this. We know that the Supreme Court of Canada several times has said that retroactive changes to pensions are not possible. Each and every time a request has come, they have struck it down.

If you're looking for a modification, how would you go about it? We need the silver bullet here. We need your help. How are you going to be able to do this? You've suggested that the approach of Bill C-501 misses the mark. It goes for a super-process. You're looking for just the preferred status. Mr. Sproule, how do we do it?