Industry Committee on Nov. 23rd, 2010

[The Chair, Conservative, David Sweet]

Good morning, ladies and gentlemen. Welcome to the 46th meeting of the Standing Committee on Industry, Science, and Technology.

We have a large number of guests, so I hope you'll accept my apologies that I'm going to do away with the formalities in introducing the guests.

Also, I'd like to mention that many of the members who are not here are tied up in the House, from all parties. That's why I'm proceeding. We don't need a quorum to take evidence, so the members who aren't here can obviously go back and look at the blues for the evidence that's given prior to their arriving.

Without any further ado, I'm going to go to our video conference first.

Mr. Davis, we'll let you go ahead with your opening remarks, please. I'll have to stay pretty disciplined at five minutes or under.

[Ronald Davis, Associate Professor of Law, University of British Columbia; Insolvency Institute of Canada]

Thank you, Mr. Chairman.

Actually it's Craig Hill from the IIC who's going to be making the opening statement for both of us.

[The Chair, Conservative, David Sweet]

Thank you very much.

Please go ahead.

I should say, for the record, so it's on the written record, that Mr. Hill is actually here in the room.

[Craig Hill, Co-Chair, Task Force on Pension Reform, Insolvency Institute of Canada]

I wish to thank the chairman and the members of the committee for the invitation to speak to these important hearings on Bill C-501.

It is clear that Bill C-501 creates a priority charge on all of a debtor's property for unpaid termination and severance pay and the full amount of any pension deficiency. The charge in Bill C-501 includes, and I quote, “any amount considered to meet the standards for solvency determined in accordance with section 9 of those regulations”--that is, the pension benefit standards--“that were required to be paid by the employer to the fund”.

The charge is not limited to special payments that are past due on the day of the insolvency proceeding. The honourable member for Thunder Bay--Rainy River said upon the introduction of the bill that if passed, Bill C-501 will mean that every working Canadian can take comfort in knowing that their pension, their retirement, is secure in its entirety.

The impact of Bill C-501 is not limited to an increased cost of borrowing in the bond markets. Smaller and mid-size companies borrow funds from banks for their operating lines to pay their daily expenses. Access to lines of credit is based on their available collateral. Most operating lines of credit are on a demand basis or have strict review provisions that will be triggered by the imposition of the priority charges created by Bill C-501. If Bill C-501 is passed, lenders will change the margin requirements and impose additional discretionary reserves on the borrowing base. This will remove from the calculation of available collateral dollar-for-dollar amounts of any priority charges.

This is precisely what occurred when the priority charges were granted for unpaid wages. However, in the case of termination pay, severance pay, and pension deficiency amounts, the carve-outs will be substantially higher. The impact will be to severely limit access to credit for all employers, particularly pension plan sponsors. Bill C-501 will materially affect solvent companies. It will be the death knell for many struggling or financially troubled companies.

The cornerstone of Canadian insolvency laws is the flexibility provided to financially troubled companies to attempt to restructure, and continuing is a going concern. That is the best way to attempt to protect employer-related obligations. Priority charges and mandatory criteria for restructuring add roadblocks to those objectives. They cause financial difficulty for employers who are already struggling and significant impediments to their ability to restructure. The result will be an increase in the number of insolvencies that have no alternative but to head straight to liquidation.

Substantial reforms are required in Canada's pension law to address the weaknesses that the economic events of the last decade have revealed. However, taking that agenda to insolvency legislation by expanding priority charges and setting bottom-line conditions for restructuring are commercially imprudent, ineffective, and inappropriate. The additional financial burdens created by Bill C-501 will worsen the situation for the vast majority of solvent companies, while providing only limited impact for employees of the minuscule percentage of companies that become insolvent. Bill C-501 will cause more insolvencies by generating the conditions for a tighter credit market and reducing the number of businesses that will be able to successfully restructure if they become insolvent. As importantly, the financial burdens placed on Canadian employers will impede their ability to compete in a global marketplace, all of which will occur in a sensitive stage of economic recovery for Canadian companies.

Mr. Davis and I will be pleased to answer any questions the members of the committee may have.

Those are my comments.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Hill.

We'll now go on to Mr. Farrell and Mr. Boychuk.

Will you be splitting your time?

[John Farrell, Executive Director, Federally Regulated Employers - Transportation and Communications (FETCO)]

Yes.

Thank you very much.

My name is John Farrell, and I am the executive director of Federally Regulated Employers--Transportation and Communications. I'm accompanied today by Mr. Michael Boychuk, president of BIMCOR, which is Bell Canada's pension investment manager. He is also the former treasurer of Bell Canada and BCE. He is well positioned to talk about these matters.

Federally Regulated Employers--Transportation and Communications consists of approximately 600,000 workers employed in the federal jurisdiction. The pension plans managed by these companies are worth approximately $75 billion.

In the last few days, in preparation for these discussions, I've had very interesting conversations with two recognized experts in the area of insolvency and restructuring. They are Mr. Bruce Robertson, who is the chief restructuring officer of AbitibiBowater; and former Judge James Farley, who is the pre-eminent insolvency and restructuring judge in Canada, responsible for the restructuring at General Motors and Air Canada most recently.

If time permits I will describe to the committee my conversations with both of these gentlemen, but at this point, because of time restrictions, I will turn the seat over to Mr. Boychuk.

[Michael Boychuk, President, BIMCOR Inc., Federally Regulated Employers - Transportation and Communications (FETCO)]

Thank you, Mr. Farrell.

Thanks the committee for this opportunity to address you today.

Simply put, elevating the creditor status of unfunded pension plan liabilities above unsecured creditors--which include most corporate bonds in Canada--would place an additional onerous burden on the financial capacity of defined benefit plan employers. In fact, Bill C-501 would hinder rather than protect the security of benefits for defined plan members.

The most immediate impact of elevated creditor status for unfunded pension liabilities would be felt by the holders of some $200 billion plus worth of bonds issued by these defined benefit plan employers. A significant percentage of these bonds are held by both Canadian pension plans and individual Canadians in their RRSPs, through either direct holdings or mutual fund investments. Canadians could not protect themselves from such losses, other than by selling these bonds before Bill C-501 becomes law. The result is that this bill would negatively impact millions of Canadians who rely on these securities to provide their retirement incomes.

Philips, Hager & North, one of Canada's pre-eminent fixed-income investors, has estimated that the average increase in borrowing costs across all investment-grade bond issuers could be as high as $17.5 billion. Higher borrowing costs for Canadian companies means less capital investment by these companies and fewer jobs for Canadians.

No other country with significant private sector defined benefit pension assets grants preferred creditor status to unfunded deficits in their defined benefit plans. Canada would set a dangerous precedent if it were to do so. Additionally, it would result in a cost-of-capital disadvantage for companies that sponsor such DB plans and those that do not, while at the same time cause huge inequities between members of DB plans and members of other types of retirement plans.

It is important to note that pension plans have not yet fully recovered from the recent equity market collapse of 2008, the worst collapse since the Great Depression. Second, long Canada bond yields--the very rates that underpin solvency actuarial evaluations--are mired at low levels not seen in over half a century. With very few exceptions, employers have been funding their pension plans and are making significant contributions to get their plans' funded status back to 100%. They are contributing in accordance with some of the most stringent funding rules in the world. Privately sponsored defined benefit plans in Canada must fund their deficits over a finite five-year period.

In reacting to the current underfunded status of the pension plans, it is important that this committee recognize the measures the federal government has recently implemented to protect members of federally regulated defined benefit plans, including the requirement for annual actuarial valuations, restrictions on employer contribution holidays, and a prohibition on benefit improvements for plans that are less than 85% funded. Most provincial governments are either considering or implementing similar measures to enhance members' benefit security. As a result of these measures, pension plan members are better protected today than they were two or three years ago.

In conclusion, the adverse implications of granting elevated creditor status to unfunded pension liabilities would be broad and significant, with vast unintended consequences impacting not only the employers that sponsor these plans, but also the millions of Canadians whose retirement savings have exposure to such bonds.

Elevating defined benefit pension plans' creditor status would impede sponsors' ability to cost-effectively raise capital, thereby adversely affecting their ability to invest in Canada's economy and remain competitive. As a result, it would hinder their ability to grow their businesses and hire more Canadian workers, or in some cases maintain current employment levels. It could also trigger insolvencies that might not otherwise occur. Ironically, this bill would make it more difficult for companies to fund their pension plan deficits. Each of these outcomes would negatively impact members' benefit security.

The basic premise underlying the security of pension plan members' benefits remains a financially strong sponsor.

[The Chair, Conservative, David Sweet]

Thank you very much. I'm sorry that I have to stay brutal on the time.

Mr. Randle and Mr. Kennedy, you have five minutes.

[William Randle, Assistant General Counsel and Foreign Bank Secretary, Canadian Bankers Association]

Thank you, Mr. Sweet.

Good morning. My name is Bill Randle. I am the assistant general counsel at the Canadian Bankers Association. With me today is Bill Kennedy. He's vice-president, special loans, with the National Bank of Canada. We appreciate the opportunity to appear before the committee today to discuss Bill C-501.

We sympathize with Canadians who face a reduction in their current or future pension benefits upon the bankruptcy of their former employer, and we applaud MPs and senators who are championing efforts to find solutions. We believe that every effort should be made to attempt to prevent Canadians from experiencing such hardship, but we are here today to raise our concerns about the particular solution that is proposed in Bill C-501 and about its potential impact on the ability of employers who sponsor defined benefit plans to invest in research, new equipment, and expansion; on the ability of employers to successfully restructure and maintain jobs and operations when they themselves are in difficulty; and on the savings, including the retirement savings, of millions of Canadians who hold corporate bonds through their RRSPs, employer-sponsored pension plans, the Canada Pension Plan, and the Quebec Pension Plan.

There is a delicate balance that has been achieved over the years in the order of priorities in bankruptcy legislation. This balance aims to ensure that the rights of various creditors can be met while also ensuring that companies are able to access reasonably priced credit to fund their operations and make the investments they need in order to grow and be successful in an increasingly international marketplace. Changes to the order or priority in bankruptcy threaten to seriously undermine this delicate balance, with ripple effects across the economy.

Our major concern with this bill is that giving priority to potentially very large pension deficits will decrease the funds available to repay other creditors. As a result, both lenders and investors would experience a significant increase in their risk.

Financial institutions, as you know, manage risk very carefully, and the amount of risk they are allowed to take is closely regulated by the federal government. As the recent financial crisis highlighted, there are very good reasons for paying such close attention to the risk in financial institutions.

One of the main methods financial institutions use to manage risk is to carefully assess the amount that will be available to repay a loan if a company enters bankruptcy proceedings. As a result, if funding deficiencies in a company pension plan are given priority, as proposed in this bill, and therefore the amount a lender can expect to recover is reduced by the amount of the pension plan deficit, there will be a corresponding reduction in the amount a company will be able to borrow. Indeed, prudent lending practices, which require an abundance of caution, will probably result in further pressure on the availability of credit in order to reduce the risk of losses.

Large and well-established companies often turn to the financial markets to borrow funds. For investors who purchase financial instruments such as bonds, a change in the order of priority once again increases the risk that they will recover a smaller proportion of their investment if the company experiences financial difficulties. This increased risk means that investors will be more reluctant to buy a company's bonds, thus depriving it of financing, or would do so only if there was a higher risk premium on the bonds, making financing more expensive. In effect, higher risk means increased financing costs, which in turn will prevent some businesses from effectively financing their operations or expansions. Ultimately this leads to reduced economic growth and job creation.

Beyond the direct impact on the financial markets and the cost to businesses of raising funds, the super-priority contemplated in this bill will have a number of other negative consequences, including the following: first, companies with a defined benefit pension plan would find themselves at a competitive disadvantage either to companies without such a plan or to international competitors in other jurisdictions. This may provide a further incentive to employers to switch to defined contribution plans or to close their defined benefit plans to new entrants, to the detriment of younger Canadians. As well, other unsecured creditors, such as suppliers--many of them small businesses--will have a significantly reduced likelihood of recovering the amounts they are due, which may put pressure on their own finances. Since lenders and investors will be less likely to agree to advance funds to help save a company due to the additional risk, it may be more difficult for companies to restructure and ultimately avoid bankruptcy. Finally, by increasing the risk for many corporate bonds, a super-priority would have a detrimental effect on the investments and retirement savings of millions of Canadians.

As I noted earlier, the challenge for lawmakers and stakeholders is to find the appropriate balance in addressing the problem of unfunded pension liabilities without damaging the ability of companies to raise capital to invest in research and development or expand their operations, which may limit their growth and their potential success. In our view, amendments to bankruptcy and insolvency statutes are not an appropriate solution and will tip this balance in a way that could impair economic growth and ultimately be detrimental to workers when companies find it more difficult to restructure or invest in projects that could lead to job creation and higher wages.

We would be pleased to answer your questions.

[The Chair, Conservative, David Sweet]

Thank you very much to all of the witnesses for your discipline on our time.

Now Mr. Dafoe, for five minutes, please.

[Stephen Dafoe, Director, Corporate Bond Research, Scotia Capital]

Mr. Chair and committee members, I want to thank you for the opportunity to appear.

I'll begin by clearing up some misconceptions that may be left from previous comments.

First, a billion dollars is a lot of money. If you want to make the denominator large enough, say the entire Canadian economy, almost any cost or loss can be made to appear small or manageable. But in the context of the Canadian corporate bond market, which is what I think we should be considering here, a few billion dollars would be very, very damaging. Even a billion dollars would be a very significant loss, and it wouldn't be easily recovered.

Corporate bonds are relatively safe investments, especially in Canada, where the vast majority are of investment grade. Investment-grade bonds have low volatility, which is what makes them safe compared to equities or trust units. If that low volatility means a 1.5% loss, or whatever the loss might be, it would be difficult, if not impossible, to be quickly and easily recovered.

On another matter, regarding credit default swaps, there's very little net CDS protection outstanding on the bonds of Canadian corporations. A characterization that there's more net CDS insurance protection than there are bonds outstanding is not the case generally, and it is certainly not the case for the Canadian corporate bond market.

These bonds aren't held by faceless speculators, or just by wealthy sophisticated individuals; they're mainly held by ordinary Canadians, both workers and retirees, through their savings in mutual funds, life insurance policies, and pension funds. They're managed by professional investment managers. These managers have a fiduciary responsibility to avoid undue risk and to be adequately compensated for the risks they do assume by holding these bonds.

As you know, the credit rating agencies made terrible mistakes with ABCP and other structured securities, and they have seen their reputations suffer for that. But the rating agencies by and large understand and evaluate corporate credit pretty well, so professional investment managers still pay attention to what the rating agencies have to say.

In discussing this bill the image has often been made of a queue, and the question is posed about who is at the head of the queue. This is exactly the way the rating agencies view the bankruptcy scenario. If through this legislation corporate bonds were suddenly placed behind pension liabilities, downgrades could ensue in many cases.

This would be virtually certain to happen, in my experience. I've worked at two rating agencies for twelve years, and I've been critiquing and predicting the actions of the rating agencies for the nearly ten years I've worked at Scotia Capital. If the rating agencies downgrade, and especially if the market agrees with the rating agencies' reasoning, the losses on outstanding bonds would be very significant and very hard, or impossible, to recover.

As well, because such bond market losses would be based on prudent estimates of possible future scenarios by managers seeking to avoid risk, there's no reason to think there's an even offset between the amounts lost because of downgrades and spread widening and the amounts gained by the relative few who stand to benefit from the bill. The losses could easily outweigh the benefits.

I've published research on the bond market effect of Bill C-501, and it's being submitted to the clerk of the committee. While it may seem technical, I respectfully wish that it will be of some use to the committee in understanding how the Canadian bond market could react to the proposed legislation.

I can tell the committee that the bond market professionals I've spoken to about my research in the past few weeks all agree that the bill is very concerning. While they understand it's been proposed with the best of intentions, it could have very serious unintended consequences.

Mr. Chair and members, thanks for the chance to appear today, and thank you for your attention. I'd be pleased to answer any questions.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Dafoe.

Now to our last witnesses, Mr. McKenna and Mr. Breton. Please go ahead and share your time as you wish, for five minutes.

[John McKenna, Chair, Corporate Practice Committee, PricewaterhouseCoopers Inc., Canadian Association of Insolvency and Restructuring Professionals]

Good morning, Mr. Chairman and distinguished members of the committee.

My name is John McKenna, and with me today is Jean-Daniel Breton, appearing on behalf of the Canadian Association of Insolvency and Restructuring Professionals, known by the acronym CAIRP in English, or ACPIR in French.

CAIRP is the national not-for-profit organization that represents some 900 insolvency and restructuring professionals in Canada. As licensed trustees in bankruptcies, receivers, monitors, and financial advisors, CAIRP members are, and they have been, involved in every major insolvency and restructuring filing in Canada, both on a corporate and a personal basis.

As such, CAIRP's comments on Bill C-501 come from experienced insolvency professionals who are called upon daily to apply insolvency law.

[Jean-Daniel Breton, Senior Vice-President, Ernst & Young Inc., Canadian Association of Insolvency and Restructuring Professionals]

Given its mission, CAIRP has cooperated closely in the insolvency reform since 1992 and, more particularly, as consultants on preparation of the act adopted in 2007. It was with that in mind that we prepared our brief on the various bills tabled in the House of Commons and Senate which contains our comments on Bill C-501, which is being examined today.

CAIRP acknowledges the importance of providing adequate protection for employees and former employees who constitute groups of vulnerable creditors—

[The Chair, Conservative, David Sweet]

Mr. Breton, I can tell just by the translator's voice that they're having a hard time keeping up with you. Slow down just a bit, please.

[Jean-Daniel Breton]

—who constitute groups of vulnerable creditors who depend on their employers and who do not have independent means to monitor and control their risks of loss. It is important that the statutes as a whole be designed to limit the impact that employers' financial difficulties have on employees.

[John McKenna]

Essentially, Bill C-501 deals with three areas, all related to employee protection. Due to time constraints, we will not deal today with the third area, which relates to a change to the Canada Business Corporations Act to facilitate the processing of claims against directors.

Regarding the first area, the bill proposes that super-priority protection will be extended to any arrears of special payments. To the extent that this is the change that is contemplated, we would support such a change, as we see no substantial public policy reason that would justify a different treatment between the normal cost arrears and special payment arrears, and it could be accommodated with reasonable efficiency in insolvency proceedings.

However, to the extent that the intent is to create protection for the entirety of the pension deficit, CAIRP has identified a number of significant issues that would materially negatively impact companies sponsoring defined benefit pension plans. These issues are set out in detail in CAIRP's paper, but the net effect of these can be summarized as, firstly, to reduce by a potentially significant amount the credit available to all companies that have or are viewed as having defined benefit pension plan deficits. It may also make it impossible for an insolvent company to borrow to finance its operations during a restructuring.

Secondly, it could cause downgrades in the credit rating and/or in increased interest rates for such companies. Thirdly, it could accelerate the probability of insolvencies for such companies due to reduced availability of both secured and unsecured credit. Fourthly, it could make insolvency proceedings lengthier and more costly.

Finally, it could decrease the possibility of achieving a successful restructuring. In our view, this would be counterproductive to the interests of many stakeholders, such as current employees, suppliers, customers, and investors, as experience tells us that restructurings return more value to creditors and preserve jobs.

[Jean-Daniel Breton]

The purpose of the second measure is to extend statutory priority for salary claims to claims for separation pay. Parliament has previously considered protection for salary claims but specifically excluded severance and separation pay under the BIA and preferred to protect severance pay through the WEPP.

Our concern is not over the principle of a priority for severance pay but rather for the uncertainty it generates. The bill would grant priority status for all amounts owed, without monetary limit. However, severance pay may vary greatly depending on circumstances. Amounts owed under labour standards legislation alone may vary from a maximum of six weeks in New Brunswick to 42 weeks in Ontario.

Lenders and creditors consider priority claims in making their credit decisions. The variability in criteria for calculating allowances will likely lead them to take a generous reserve, which will result in a significant contraction in credit for all businesses.

[John McKenna]

To conclude, we feel it is important to ensure that the laws limit the impact on employees and former employees of financial difficulties sustained by their employers. However, in attempting to protect employee and former employees' rights, it is important that we do not compound the problem by affecting the economy in such a way that the resulting effect is an overall loss of employment in Canada, coupled with a loss in productive capacity.

That possibility exists if legislative changes are made that cause a contraction in credit for businesses in general, limit the opportunity for troubled businesses to restructure and emerge as going concerns, force otherwise viable businesses to become insolvent, or incent employers to discriminate against the very employees and former employees the bill is trying to protect.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. McKenna and Mr. Breton.

Now we'll move on to our questions. We'll go with five-minute rounds again, committee, so that we get as much in as possible.

Madam Sgro.

[Judy Sgro, Liberal, York West, ON]

Thank you very much, Mr. Chair.

And thank you very much to all of you this morning. Certainly the intensity of your comments solidifies your concerns about Bill C-501.

From this end of the table, of course, we're very concerned about the implications, but we're very concerned about trying to help people, such as the Nortel employees we have heard about this year, who have lost so much of their pension income. Just how do we go about protecting them?

Bill C-501 is very narrow as far as that special payment category goes. Mr. Rafferty has indicated that he would be moving to the preferred unsecured category rather than to super-priority status. It's only that special payment. We're trying to find some way to help some of the people who are clearly suffering as a result of the bankruptcies. I'm sure that you are all sympathetic. I've heard that in your voices. The question is how we change it. How do we fix it?

Can you suggest any way we can help the Nortels of the world? Will this bill help Nortel?

[Michael Boychuk]

I would respond to that by saying, Ms. Sgro, that the best security that can be offered to pension plan participants is to maintain a healthy, financially sound sponsor or employer. That is the best protection you can offer. Canada offers some of the best protections already with its CCAA insolvency rules, plus what came out from government reform recently, as recently as the beginning of this year. Those are strong protections.

We heard from Mr. Dafoe that whether you change it from super priority to priority or to preferred doesn't matter. For somebody to jump ahead of the institutions that fuel blood into the veins of our corporations, which go on to provide employment and create jobs, I think would be a big mistake.

In my opinion, keep a financial sponsor or a financial employer or an employer financially healthy so that they can continue to pay those defined benefit pensions, which, by the way, very few people are lucky enough to have, when you look at the rest of Canada. What would we do for those that had defined contribution plans or other retirement arrangements? The crash of 2008 basically obliterated their savings by as much as 60%. What are we going to do for those people?

[Judy Sgro, Liberal, York West, ON]

Well, today we're trying to deal with what's happened to the people in this particular past year.

[Michael Boychuk]

And therein lies the inequity of what comes out of Bill C-501.

[John Farrell]

Ms. Sgro, if I could be of some assistance here, obviously these pension matters are very complicated. It's very difficult for the average Canadian, the average person, and the average politician to understand how pension plans work and how capital markets work. A great deal of work has to be done by the members of Parliament to understand the complexity of this issue.

It's unfortunate. I think that Mr. Rafferty has the best of intentions for his constituents, some of whom may be employees of AbitibiBowater, a company that's been in serious difficulty and is beginning to come out of it. But this is a knee-jerk reaction. This is a bill that is going to create far more collateral damage than any net good. So it really is incumbent, I think, on the politicians of this government and the politicians in all of the provinces to join together to effectively review the pension legislation that exists across this country, because it's not, strictly speaking, a federal matter. Find some reasonable approaches, understand the problem, and fix it. But if we engage in a knee-jerk reaction, such as Bill C-501, we'll end up with a situation in which we're worse off in the long run.