Industry Committee on Nov. 23rd, 2010

[Michel St-Germain, Actuary and Partner, Mercer (Canada) Limited]

Thank you, Ms. Bastien, Mr. Chairman.

As Ms. Bastien said, pension plan sponsors are currently going through tough times.

We estimate that more than 90% of pension plans are in a deficit position and that 30% have a shortfall of more than 20% of their fund. In a number of cases, the shortfall exceeds $1 billion.

In addition, pension plan shortfalls are highly changeable and can easily vary by more than 10% in the course of a year.

If the order of priority of a pension deficit on bankruptcy is changed, the reaction of plan sponsors, our clients, will depend on the action taken by lenders. We will see a reduction in the security of their loans, as some unsecured debts will jump ahead of the others. If the lenders increase the interest rate charged to companies that sponsor defined benefit plans to compensate for their additional risk, they may refuse to lend to those that have large defined benefit plans or may add additional loan covenants restricting all company investor pension assets.

The change in those rules will have unintended consequences. The effect on some sponsors will vary, but in my opinion they would be most significant for those with large DB plans and deficits, for those for whom the bond credit rating is just above the investment grade, and for those who need access to capital to operate. The effects will include increases in borrowing costs and a reduction in their ability to borrow money.

The competitiveness of those companies that sponsor defined benefit plans will also be reduced, as they will face higher borrowing costs to run their businesses compared to those for sponsors with defined contribution plans or with no pension plans at all. Furthermore, their foreign competitors, in particular in the U.S. and the U.K., are not subject to legislation that ranks pension deficits ahead of other creditors. Those foreign competitors will have lower borrowing costs.

Shareholders are already concerned about defined benefit pension risks, and in response many companies have taken measures to reduce such risks by replacing their DB plans in part with defined contribution plans. If the shareholders of those companies see an increase in borrowing costs, with additional strings attached, shareholders will put even more pressure on companies to replace their defined benefit plans with DC plans--defined contribution plans--with a corresponding transfer of investment risk to employees. We expect that the pace at which defined benefit plans are replaced by defined contribution plans, for both new and current employees, will increase significantly. You and I should be concerned about such a transfer of risk to employees.

Those who rely on defined contribution plans and RRSPs suffered significant losses in 2008, whereas the great majority of those participating in defined benefit plans are receiving and will still receive their full benefits, unaffected by the poor stock market returns.

Sponsors in distress situations, including those covered under CCAA, will be particularly affected. Those sponsors may need urgent access to financing to operate, and many of those sponsors operate in traditional sectors with large defined benefit plans. Lenders will not approve a loan to a distressed sponsor if there's a risk that their loan will be diverted to a large pension deficit.

Mr. Chair, the security of defined benefit plans can be improved by encouraging plan sponsors to better fund their plans. This can easily be achieved by allowing plan sponsors to confirm their surplus entitlement if they conservatively fund their pension fund.

Plan sponsors are requesting a--

[The Chair, Conservative, David Sweet]

Mr. St-Germain, I'm sorry, I have to interrupt you. We're over time again. The clock is our enemy often.

Now we'll go on to Madam Sgro for questions, for five minutes.

[Judy Sgro, Liberal, York West, ON]

I'm going to share my time with my colleague Mr. Garneau.

Very quickly, I'm going to speak a bit on behalf of my party. As the critic, I can tell you that we are working to look at strengthening the pension system. How do we get more people into a pension system, preferably a DB pension? How do we strengthen the pension system in this country of ours and encourage companies to participate?

In 26 years, we're going to have another 10.9 million seniors. The impact on the fiscal capacity of our country I think is going to be enormous. So it's imperative that we get some things right. And the issue of pensions--how to protect them, how to encourage them, and how to strengthen them--I think is critical. We're all here because of the issues that have arisen this year, especially with Nortel, and we are all looking for a way to fix this.

I put out a white paper with 28 recommendations. If this bill isn't right, and you're telling me that it will have a huge impact and will destroy the credit market and the rest of it, then if not this, what? What do we do?

[Michel St-Germain]

I'm glad, first of all, that you're concerned about the plight of defined benefit plans. To me, to resolve the Nortel situation and other situations, government should introduce measures to encourage plan sponsors to better fund their pension plans. The Canadian Institute of Actuaries, and many other players, have suggested special funds to achieve this goal. For example, if plan sponsors would fund their pension plans conservatively--no pun intended--they would have some sort of guarantee that if those excess contributions were no longer required, they would have access to them.

[Phil Benson]

We couldn't agree more.

There are three points we raise consistently. One is that Bill C-501 is some kind of approach. But that's to close the gate. Before it happens, we have to put in rules and regulations to ensure that money is invested more like an insurance company, with more in bonds and bond equivalents, and second, that they're adequately funded. We should never have a situation where a company can get up and say “Rather than giving the money I should to my pension fund, I need the money to run my company”.

I think if that were in place, this bill would not be onerous, because the marketplace would have taken care of it. We have to get the horses in line, but this is certainly part of our three ideas for fixing it. And I think it's needed. Whether it's this bill, the next bill, or some other time, this will eventually have to become law.

[Ian Markham]

I'll just add to that point. We already have a number of actions taking place across the country. The federal government has already taken action through Bill C-9 and some regulations to enhance the funding of pension plans. We're seeing the same happening in various other jurisdictions. And I think it's inevitable that it will happen right across the country, curtailing the ability to take contribution holidays, curtailing the ability to give benefit increases when there's a poorly funded plan, and making actuarial valuations more frequent. So I'd say that things are already happening that are going to help.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Mr. Caron, when you completed your presentation, it seemed to me that you wanted to say something else. So I'm offering you the opportunity to do so.

[Guy Caron]

Thank you, Mr. Garneau.

We understand that there are concerns among the companies, investors, actuaries and pension plan managers, and a proposal that we submitted last year could address those concerns.

In fact, in the middle of the crisis last year, 70% of our members were working for a company that was under the protection of the Bankruptcy Act or the Companies' Creditors Arrangement Act.

Our proposal provides for the creation of a national investment and pension fund, somewhat similar to what there is in Quebec, and we discovered in the meantime that the two concepts were very similar. The federal government could establish a fund without investing any money. The fund would be administered by the Canada Pension Plan, separate from the plan itself, and we could have a guarantee that the assets of the companies that have put themselves under creditor protection could be invested in it in order to grow. At that point, those funds would no longer be subject to a plan termination and could be managed less conservatively than the funds of insurers. So we're talking about a mix of stocks and bonds that would permit a higher return.

That would subsequently assist the companies because, when restructuring, they would ultimately no longer need to calculate their shortfall on a solvency basis. They could consider the shortfall on an ongoing basis since we would have a guarantee that the plans would not be terminated.

I know it takes quite a long time to explain, but I have inserted the explanation in your documents. This kind of fund would help allay the companies' fears about this and it should be an essential partner for Bill C-501, which is still absolutely essential in protecting workers and retirees.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Caron.

Now it's the Bloc Québécois' turn for five minutes.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Good afternoon, ladies and gentlemen. My first question is for Gaston Carrière.

Mr. Carrière, could you tell us why the pension funds and severance pay should become protected super-priorities in the event of claims or bankruptcy?

[Gaston Carrière]

First of all, because employers have to stop taking advantage of workers and commit to complying with provincial and federal legislation, to paying workers' severance, separation and pension plans. Yes, we want to be secured creditors. Our severance and termination pay must be secured claims. I repeat: what they're doing is abominable.

Since when are workers paid in shares? The multinational is going to pay us our separation and severance in shares, up to 36.5% of what it owes us. Find me a Metro store, an IGA store, a car dealership, a city, that will accept shares as payment? That's how the multinational wants to pay us, 36% and not 100% of the value of our separation and severance pay.

The multinationals aren't penalized by Bill C-501. This one doesn't have enough teeth. It has to be given some. The multinationals come after our materials and don't invest in infrastructure. They transport them to other countries, if not to other continents. Bill C-501 is so weak that three-quarters of Canada's forest mills are under the protection of the Companies' Creditors Arrangement Act. It's not just AbitibiBowater, Fraser or White Birch. There was Smurfit-Stone. Some are lining up to be placed under the act's protection, Domtar, Catalyst Paper, in the west, or Cascades. They're all lining up. The entire sector will be under protection because these companies won't be able to compete with the companies that are restructured under the CCAA, not to mention all the other sectors of the Canadian industry that will want to take advantage of the same opportunity. This is one of the reasons why the bill has to be given some teeth.

I've also heard it said many, many times that what happened in the case of the renewal of AbitibiBowater's collective agreement is good. We saved the pension plans. It should not be forgotten that the Quebec Pension Plan overrode its provincial regulations. Instead of repaying the $1.3 billion in balance benefits over five years, it has extended them over 10 years.

There's also the fact that we've always stayed in a benefit plan. We stuck with the traditional system, but they're starting a new plan at AbitibiBowater through the CEP. It's still a benefit plan. Workers and employers will pay more. I'm not a banker, but everyone knows that it takes 15% to administer a plan. They're going to allocate 18% to it and 3% will be held back. The employer will no longer be exempt from paying premiums. It will have to continue paying its fixed share into the plan to rebuild its solvency.

Workers have abandoned the equivalent of 17% of their working conditions when the last collective agreement was renewed in 2010, 10% of payroll and 7% benefits, not to mention what the Government of Quebec did to protect this multinational. Don't come and tell me that, if we put some teeth into Bill C-501, we're going to force the multinationals into bankruptcy. That's false. In the case of AbitibiBowater, what the Quebec Pension Plan and workers did, no banking institution would have been able to do. If the Quebec Pension Plan and workers hadn't done it, that would have been the end of AbitibiBowater.

To thank us, company officials want to award themselves bonuses. Fortunately, the media are reporting this morning that the restructuring of the business has been accepted in the United States. We know why that was being blocked. The Americans didn't want Canadian managers to award themselves bonuses. These companies come and exploit our natural resources in Canada. They have no right—no right—to dump workers. These are Canadian citizens, and they have no right to dump them as they've done. It isn't happening just in Gatineau, but in Dolbeau, Beaupré, the Belgo plant in Shawinigan, in Mackenzie, Grand Falls, Newfoundland, and Thunder Bay as well. It's not true; it isn't clear. They don't have to do that.

For all these reasons, gentlemen, we think Bill C-501 has to be given some teeth, for the workers' sake.

Thank you very much for listening to us.

[The Chair, Conservative, David Sweet]

Merci, Monsieur Carrière.

That's all the time, Monsieur Bouchard.

Now on to Mr. Lake, for five minutes.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

Mr. Markham, it seems as though, in a lot of the testimony we've heard, there's been a concern that we seem focused on the end, in a sense. I guess that's what this bill clearly does. It does seem, though, that by focusing on the end, by changing rules relating to bankruptcy, ironically we might be bringing in significant unintended consequences for companies and workers who are not at the end, who are not in bankruptcy. It seems like a bit of irony there.

Secondly, by focusing on bankruptcy law we may even be inadvertently forcing more companies to have to use bankruptcy law. That's what we've heard in testimony.

Maybe you could comment on what these unintended consequences are; what this bill might do; your thoughts on the impact on companies' ability to hire workers in the first place, to make those investments that are so critical to help them avoid bankruptcy in the long term.

[Ian Markham]

My remarks earlier were predicated on the idea of strengthening the ability of employers to have a balance. Having a balance allows them to put more money into their pension plan over the long term and allows them to keep their companies in business over the long term.

What we are very concerned about as a result of that survey and the subsequent interviews, and listening to various plan sponsors who are very concerned, is that we want to make sure they continue their defined benefit plans, effectively forever. In order to do that, they have to be in existence.

Bill C-501, with its ramifications for effectively putting the whole deficit ahead of other unsecured creditors, means, from what we understand, that the ability for lenders to charge decent interest rates to the employers is very much in jeopardy. It's not just a case of 25 basis points--in other words, 0.25%; there are some where it could be very considerable.

Our worry is that in order to help those who are already in bankruptcy proceedings, or who are about to go into them, it's going to put a number of other organizations--some very large ones, especially ones that are triple-B rated--into a worse position. Some of them may go under, and there are a lot of workers involved.

In order to be able to channel moneys into those businesses, it does unfortunately mean that there may be some individuals who upon bankruptcy in the immediate future will not get their full amount of money. It's a very sad situation.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

So what do we do? As legislators, we're sitting around the committee and we've heard that said time and time again. We've heard other things said as well.

Mr. Benson said the government is moving in the right direction in certain areas to do with pensions, particularly with some of the changes we made. Mr. Benson, you also said if this isn't the right bill, then what's the right bill to take? Well, I'd change that a bit and ask what is the right action to take.

Mr. St-Germain and Mr. Benson, what are your ideas in terms of strengthening the system?

[Michel St-Germain]

Thanks.

I want to start by saying that no private plan sponsor is forced to have a defined benefit plan. It's something they decide themselves, subject to labour negotiations. It seems to me that you have to encourage private sector sponsors to set up and maintain their defined benefit plans and to fund them properly. Make their lives easier by having more flexible and better regulations. Encourage them to put more money in the pension plan by telling them if they put too much money into the pension plan they will not lose it.

This bill, Bill C-501, makes the lives of plan sponsors more difficult. It doesn't encourage them to maintain pension plans. It encourages them to terminate their pension plans.

[Phil Benson]

The whole issue of defined benefit plans is interesting. For about 40 years of regulation the goal was to encourage defined benefit plans. Quite bluntly, I don't think we'll see another one come into being unless it's through negotiations, collective agreement, or some other thing. It's been an abject failure.

When we're talking about risks and costs, I support the idea of putting funding more securely--more like insurance companies: get out of the marketplace. There are lots of things that can be done in that regard.

There's also another risk, but I didn't talk about risk and cost. I'm at the tail end of the baby boomers. When we all retire, if those pensions that were promised aren't there, we're also going to transfer that risk and cost onto taxpayers. At the end of the day, if some of our members are going to get 26 cents or 36 cents on the dollar, they'll be getting guaranteed income supplements, HST credits, GST credits.

That's another thing for you to think about as the legislators. Bill C-501 is one piece of the pie; it's not the total fix. But I think it's something that will have to be done eventually, if not now.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Benson.

[Phil Benson]

Thank you.

[The Chair, Conservative, David Sweet]

Mr. Rafferty.

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

My thanks to everyone for appearing here.

I have a question for Ms. Figueiredo.

You talked about a lack of models and you talked about risk. But how is it that so many countries in the world—over 30 of them, according to the report that's been tabled—have either preferred or super-priority status for their pension funds, and yet have well-functioning debt markets? Australia might be the closest to us in how they operate. We heard earlier that this is a real concern, and yet these 30 countries seem to be managing just fine.

[Karen Figueiredo]

I have read Ms. Urquhart's report, and it seems extensive and comprehensive. We have a report prepared by the OECD. I think assigning the priority status is something that needs a bit more research. Certainly the OECD report would not suggest the extensiveness that Ms. Urquhart's report implies. I am not an expert on all of these countries and what they provide in the way of protection, whether it's severance, pensions, or wages. I think a little more definition would help to clarify the issue.

On the question of what governments can do, one of the biggest challenges is that the federal government's jurisdiction is fairly limited. That's the challenge that you have here today. I would encourage the government to work closely with the provinces. That has been a challenge for 40 years. You can legislate for federally regulated plans, but—

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

Thank you, Ms. Figueiredo.

Ms. Bastien, you and Mr. St-Germain were talking about encouraging DB plans to terminate. That might be one of the consequences of this bill. In fact, there's been much talk about the demise of DB plans, or changes or alternatives to them.

Let me just throw this out to you as a suggestion. We have a good model in Canada. We have the best pension plan in this country, and that is CPP. It's well funded. It's huge. Even in the last recession, it took a blip, but not the bump that RRSP-holders suffered.

The added bonus with CPP is that it's run by a not-for-profit board. It's a well-run organization. Maybe the best thing is that, unlike EI, the government of the day can't get its hands on it. That's an important point to remember.

What if DB plans wind down or terminate, and part of the negotiating procedure with employees and employers becomes “Let's make our DB plan a CPP plan”? I'm thinking five, ten years down the road.

Your thoughts, please.

[Leigh Ann Bastien]

CPP is an important pillar of our retirement system. Arguably, it could be strengthened somewhat, but it's a one-size-fits-all. It's an excellent plan that will provide a basic benefit to every Canadian who participates. But there's something special about employer defined benefit pension plans, and that is that they can work in a dynamic and positive way as an element of the compensation offered to the workforce.

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

But could you not offer that compensation through CPP, that it's protected and you have to pay into it?