Industry Committee on Nov. 18th, 2010

[Serge Cardin, Bloc, Sherbrooke, QC]

Good morning, gentlemen.

We know that situations like this are relatively difficult for retirees. The example of the Nortel workers who came to testify this week is very enlightening and we have many questions as a result.

A defined benefit pension plan is something negotiated between the company and the employees. It is a contract between the two. It's a contract that sets out that the employer must put all contributions in this pension fund. If an unfunded actuarial liability arises, the agreement is that the employer will inject funds into it. So there is a contract, and the company assumes the risk. Someone—I think it was Mr. Harden—just asked who would take on the risk. For the agreement between the employers and employees, it is a matter of assuming a risk.

More difficult situations can arise, such as bankruptcy or potential bankruptcy. The bill requires that special amounts covering the unfunded actuarial liability be prioritized. At that time, the financiers, who do business with large companies, knew that there was a significant risk. In the event of bankruptcy, the financiers assume their risk as well. So I do not currently see a major problem in assuming the risk right up to the end.

A company like Nortel should have paid. It had the means to pay that amount, which I realize would not have been anywhere else. But in this case, perhaps everyone was expecting to lose, at least the retirees. They had a contract with their employer and they are going to really be taken to the cleaners. The employees honoured this agreement over the years.

In my opinion, the bill still brings an important dimension of justice and fairness. Everyone has to take on their own risk. I personally don't see a major problem with financing. The financiers assumed the risk right up to the bankruptcy as well.

In the case of Nortel, who would lose if Bill C-501 was in force? Who would be from the Nortel list and who would have paid the most?

Have you reviewed this case, have you gone back to the drawing board with it?

[The Chair, Conservative, David Sweet]

Who is your question for, Mr. Cardin?

[Serge Cardin, Bloc, Sherbrooke, QC]

For all the witnesses, in reverse alphabetical order.

[The Chair, Conservative, David Sweet]

Mr. Harden, go ahead.

[Joel Harden]

I'll have the first kick at the can and in the interest of honesty say something that I think is true for all parties at this table.

What we're dealing with often in a situation like Nortel's is a company that has taken advantage of weak funding rules, in contrast to a lot of its fellow companies, which actually do fund pensions properly. When Nortel became a company that was worth pennies a share and not $126 a share, it encountered risks, but it utilized the flexibility of pension rules to which it was privy to allow for that.

What this committee is contemplating is supporting the back end of protecting people's pensions in bankruptcy, but the front end--the funding rules making sure that there are regulatory cops on the beat at OSFI who pay a little more attention to how pensions are funded under the federal jurisdiction, which you're responsible for--is crucial.

There are forestry companies that have lived through the last two or three years, such as Domtar, that have properly funded their pensions. Then there are companies like AbitibiBowater, often in the same community and producing the same product, that have taken advantage of the flexibility of funding rules and have then imposed upon their retirees and their workers to bear that risk, which I think is absolutely unconscionable.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Harden.

If somebody else wants to respond as well, we have about 30 seconds left.

[Warren Everson]

Thank you. I have just one very quick statement.

The bill asks you to pick a particular party and assign them the most importance in a bankruptcy situation. We understand the reasons for that, but you don't know the other parties in the bankruptcy situation and you don't know whom you're jumping ahead of in the queue. I would say that in most cases in Canada, you're jumping ahead of ordinary Canadian investors. Their money may be in mutual funds and various other devices, but it's the ordinary retail investor whose money is involved, and you're jumping ahead of them.

You don't know the consequence of this bill. If you pass it, you don't know what it will do, but I'm an investor; I know very well what the risks are. I calculate them carefully. When you change the risk profile, I'm going to change my behaviour. It would be reckless for this committee to pass the bill unless you did a very thorough examination of what impact it will have on capital markets.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Everson.

Now we'll go to Mr. Van Kesteren for five minutes.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair, and thank you, panel, for appearing before us.

We were talking about something to do with bonds, and I want to get back to that. We had quite a discussion last time. I really think we may not have a true description of bonds. My understanding of bonds is that they are the blue-chip investments that people make when they want something that's really secure.

Mr. Allen, you were talking about how companies will raise capital to make those large investments that need to be made. If a company like Bell, for instance, didn't lay down its lines, we wouldn't have the telecommunications industry that we have, so it's a very important part of the market.

I want you to tell me, first of all, who normally invests in bonds, and then what happens to bonds when a company enters bankruptcy. What happens at that point? Then maybe you could give us a little information on CDS, because there have been some allegations that the hedge funds that take over these bonds profit from the bankruptcies. Could you shed some light on that?

[Jonathan Allen]

To start, I'll underscore the importance of the bond market and how big it is.

You used the example of Bell Canada. If my memory serves me correctly, they have about $12 billion of unsecured bonds outstanding. These people would rank equally with pensioners. They have zero secured bank lines in place; they have a few hundred million dollars of suppliers outstanding, so it is critical. The bond market is essentially the lifeblood of these companies for funding.

Who owns these things? The corporate bond market in Canada is about $500 billion or so, and it's grown significantly over the last 10 years. The mix of who owns these bonds is a combination of many pension funds, many investment counsellors, mutual funds, and a large segment of retail investors, but in the end I don't think you can necessarily separate these into institutional and retail investors, because at the end of the day, this is our money being managed. For any of you who have a mutual fund, the chances are that the money belongs to you at the end of the day.

Now, the people who own these bonds are not 25-year-old people starting their careers and going out to buy corporate bonds. Corporate bonds, in the bond market in general, are deemed to be safe, very low-risk, low-volatility investments. The people who own these bonds are people who are a few years from retirement or people who are already retired and living on the monthly interest they receive from the bonds. These are the people who invest in this market and are most at risk.

With regard to your second point about what happens when a company goes into bankruptcy, I think on Tuesday a lot of the focus was on junk bond holders who are trying to profit from this situation. Really, the people who lose are not the junk bond holders. As soon as a company goes into bankruptcy, a lot of these institutions and the pension funds out there are not allowed to hold non-investment-grade bonds. They can't hold junk bonds, so they've already lost 50% of their investment. It's already been destroyed as soon as the company goes into bankruptcy.

Now they have to sell it; someone has to step forward and pay for it, and that's generally where the transfer comes in to some of the distressed bond funds or hedge funds that you look at. Those people are taking on a very large risk and looking for very large returns from it, but essentially the damage has really been done to the original investors, those people who owned the bonds in the first place and who have lost half their wealth.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Can they insure these bonds, these junk bonds?

[Jonathan Allen]

They can't do it easily. On Tuesday I think there was a lot of focus on a product called CDS, or credit default swaps. They provide a way for bondholders to insure themselves against loss. The big focus was on Nortel.

The problem is that CDS doesn't exist in Canada. These swaps are very liquid in the U.S. and are frequently used in Europe. Only companies that actually issue a lot of U.S. dollar bonds, such as Nortel, actually have these insurance contracts. Otherwise, in terms of the typical Canadian company, I could count on one hand the number of companies that actually have a CDS product insurance policy available to them, and I'd probably have a couple of fingers left over. It's not a viable solution in the Canadian market.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you.

[The Chair, Conservative, David Sweet]

Go ahead, Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you for coming and for bringing up that point.

I'm going to ask the Canadian Labour Congress a couple of questions.

You talked about much of the industry being insolvent. If it were proven or shown that this bill makes it more difficult for those companies to come out of insolvency and get back into business--because that's basically what we're talking about--would you still have the same position on this bill? Second, has your organization looked at that woman who unfortunately only has $400 left and what the ramifications would have been if this bill had been implemented? Would she have received much more money out of it, or not? Have you actually done that study?

[Joel Harden]

Thanks for the question.

We rely on the research we think is bona fide and peer reviewed. At this committee you're all engaged political folks, so you can distinguish between positioning and bargaining and fact. The fact I've been made familiar with--I and my counterparts at other unions who do labour market research studies in those jurisdictions where pension liabilities are ranked much higher up the food chain--is that it hasn't meant catastrophic consequences for access to capital.

[Mike Wallace, Conservative, Burlington, ON]

So you couldn't tell us what the difference would have been to that woman?

[Joel Harden]

What I can tell you is that in the current marketplace we have, there is one priority for people who are actually producing the wealth in the communities--working hard, getting up in the morning, and doing their job--and then there's another set of priorities for employers, some of whom--the very minority of whom--use bankruptcy legislation to offload pension liabilities. I think that's the issue we should consider.

On the credit default swap issue, it bears--

[The Chair, Conservative, David Sweet]

I'm sorry, but I can't allow you to expand. I already gave you some grace in order to be able to finish it, even though you mentioned a haircut, which, if you had read the blues from the last meeting, is a term I disdain.

[Joel Harden]

I'd prefer a chance at a future question to elaborate on that, Mr. Chair.

[The Chair, Conservative, David Sweet]

Mr. Rafferty, go ahead. You have for five minutes.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Thank you very much, Chair.

I have a quick comment to Mr. Everson and the Chamber of Commerce. As a past member of a chamber of commerce, I can tell you that if seniors and retirees don't have enough money, your membership is going to suffer, and so will all those communities and small businesses that count on people having money to get by daily. I can understand why you're here and I understand your concern, so thanks for that.

Mr. Allen, you made some interesting comments about bonds. I'm not sure I agree, but I wonder if Mr. Harden could make a couple of quick comments about Mr. Allen's comments.

[Joel Harden]

The only thing that's very clear is that in terms of the over-the-counter derivatives market and the insurance for those derivative products, nobody can say who holds what, because it's not regulated or listed anywhere. It's impossible to say that there are no Canadian companies that are participating in hedging products on the insurance side of things or in the derivative market.

My anecdotal research, which I know from people at bargaining tables and people who are familiar with the finances of large corporations, indicates that most large institutions in this country have gotten in on the game of the derivatives market. The derivatives market today is $650 trillion, if you can conceptualize that, and the world economy at this moment is $45 trillion.

This is a global paper behemoth that puts the entire world's economy at risk. At the moment, those junk bond holders you were debating in your last session have greater standing than the Lorettas and the Gails of this world. I think that's why this bill that you're working on is incredibly important.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Thank you.

If I can make a further comment, I think the bottom line is that some bonds--many bonds--can be insured, and the fact is that retirement is apparently not insured at all.

One of the things I hope my bill does is provide some measure of insurance for those people who work for 40 years, put their money in faithfully every paycheque, and expect there will be something there at the end.

Mr. Casey, I'm not sure if you realize it, but my involvement with the forest industry is one of the main reasons I decided to put this bill forward, so I'll leave my last question for you.

Employer after employer, mill after mill, has gone under, and not just in my riding and in northwestern Ontario, but right across Canada. There have been 35,000 direct jobs that have been lost in forestry in the last year. There are 1,000 direct and indirect forest jobs a month that continue to be lost in Ontario, and that's just in Ontario. That's why I'm here and that's why I tabled the bill.

Your industry and your companies, quite frankly, have let too many people down. I understand that you're a lobby group and you don't include all the forest companies--in fact, a rather small percentage of forest companies are under your umbrella--but underfunding pension plans and spending the termination and severance pay of workers is something that some in your industry have done on a regular basis. It's unconscionable.

Do forest product members not feel an obligation to live up to the contractual obligations they enter into voluntarily, such as paying people's wages and severance and making sure they contribute the full amount to the pension?

[Andrew Casey]

Thanks for the question.

I think you cited some numbers that are very true. These have been a very tough couple of years for the industry. You're very well aware of your riding, as are a number of other members around this table whose ridings have been directly impacted by what's happened to this industry, and of course our industry is not unique in the general economy more broadly.

I would remind the committee, though, that we continue to employ 230,000 Canadians. This is a viable industry, and we are retooling. We need to invest in our industry to go forward and take advantage of the new markets that are opening up, the new opportunities in the bioeconomy, in biotechnology, in bioenergy. That's going to require money.

Mr. Rafferty, you would know full well from your riding that the equipment in those mills is very expensive. A paper machine costs $1 billion to build. That requires capital. If we're going to be there--and we do want to be there--I think the most important thing is to ensure, in all of these ridings, that we have healthy companies that continue to employ the employees who are there and that we will continue to fund it.

I think your bill does raise some very important questions about the pension system, for sure. I think the reality is that your bill raises those issues, and as Mr. Harden's testimony says, this is a very complex issue. It would involve provincial jurisdictions and pensions, and it also obviously involves the Bankruptcy and Insolvency Act.

I think we need to take a very comprehensive look at this situation to ensure that we know what the consequences of this bill will be.