Finance Committee on May 7th, 2009

[The Chair, Conservative, James Rajotte]

I call the 26th meeting of the Standing Committee on Finance to order.

Pursuant to Standing Order 108(2), we're continuing our study on measures to enhance credit availability and the stability of the Canadian financial system. Within that study, this is our fourth meeting on the specific issue of pensions.

We have with us today four organizations and one individual: the Canadian Labour Congress; the Common Front for Retirement Security; Mr. Erik Andersen; the Confédération des syndicats nationaux; and the Air Canada component of the Canadian Union of Public Employees.

We'll start with Mr. Georgetti, and we'll work our way down through the list. If we could have a five-minute opening statement, then we'll go to questions from the members of the committee.

Mr. Georgetti, you have your five-minute opening statement.

[Ken Georgetti, President, Canadian Labour Congress]

Thank you very much, Mr. Chair.

On behalf of the 3.2 million members of the Canadian Labour Congress, I thank you for the opportunity to present our views on pension issues. However, I should point out that we actually had to barge our way into this meeting, as someone forgot to invite the representative of 3.2 million workers. In fact, 83% of all registered private sector pension plans come under our affiliates.

Let's begin by reflecting on why pensions are an important issue today. The reason, quite clearly, is the current economic crisis. The crisis has exposed the weakness of our pension system, but it's also seen employers claim that pension rules are onerous and challenging to the operations of their businesses.

Honourable members of this committee, these employers' claims must be taken with a large grain of salt. Even today, in the midst of serious economic challenges, most Canadian employers—and I'll say it again—don't have a wealth problem. What we have is a wealth distribution problem and a pension fairness problem.

We have a pension system that rewards executives and shortchanges workers' pensions, and that system must be changed. We have a country where the top 100 employers dole out an average pension to their managers of $930,000 a year. Meanwhile, workers are told to take less or even to fend for themselves.

We have a federal economic action plan that values tiny personal tax cuts and huge corporate tax cuts over protecting good jobs and creating pension security for workers.

We have bankruptcy laws that allow rich creditors to pillage workers' hard-earned pensions. Last week this committee heard from forestry workers in Quebec that workers at AbitibiBowater in Grand Falls learned that 2,500 creditors ranked ahead of them in bankruptcy court. These creditors, largely banks and hedge funds, have filed 60,000 pages of documents to recover their losses. Meanwhile, workers at AbitibiBowater are owed between $30,000 and $100,000 each in severance pay. There are 87-year-old widows who won't see a dime of their former husbands' pensions.

We have a federal pension system that allowed Canada Post to take a contribution holiday ten months into this current economic crisis. The same system gave solvency funding relief to Air Canada in 2004, only to see the company reward executives, sell off all their assets, pay out huge dividends to shareholders, and underfund workers' pensions, and now once again is sitting there crying poverty.

We have management fees for defined contribution plans and RRSPs that gouge 30% to 40% from a worker's expected pension. We're talking about billions of dollars being diverted into the deep pockets of Bay Street.

We have studies that show most Canadian employers can pay for today's pension deficiencies. This is true for many large federal sector employers, who are in a good position relative to others.

Still, today we hear calls for weaker pension funding rules at the worst possible time.

As I said before and will say again, a decent pension for all is not impossible. Even in today's economy, it's not impossible. It can happen if we embrace the right pension values and if the policy ideas that we use fit those values. Our recent brief to the finance committee on pensions shows how it can happen.

I'll just end with a summary of our demands.

We say no to unnecessary pension bailouts. Of course we should assist employers with genuine problems and use the government's existing extraordinary financing framework of some $200 billion, as announced in the federal budget, to do that.

We should set a policy goal to double CPP and QPP pension benefits, and allow them to gradually replace the under-performing RRSP industry—which, I might add, uses up $19 billion a year in tax credits, or about half of what we spend on OAS, if you can believe it. And we should increase OAS benefits so that no senior lives in poverty ever again in this country.

We need to create a federal system of pension insurance that mirrors the system for bank deposits and credit union deposits. This fund should be financed through levies from pension plan sponsors themselves. And we should create a reserve fund for this insurance system through a small financial transfer tax on Canadian stock market trades.

Critically, for the sake of genuine fairness, we need to ensure that the full value of workers' pensions is protected in bankruptcy proceedings. If Canadians shouldn't be in the front of the line when it comes to protecting them, who should be?

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Georgetti.

We'll now go to the Common Front for Retirement Security.

[Dan Braniff, Founder and Spokesperson, Canadian Branch, Common Front for Retirement Security]

Good morning, all.

Thank you, Mr. Chairman, for including us in this hearing this morning.

I am Dan Braniff, unpaid volunteer and the founder and spokesperson for the Common Front for Retirement Security.

Common Front is the largest general advocacy in Canada, representing 20 diverse organizations, consisting of two million members. I think you have my list on file.

I last appeared before your committee in October 2006, appealing for pension splitting, and that followed a three-year advocacy campaign. That was described by my members as the best Hallowe'en trick ever. Pensioners rejoice every year when they fill out their joint election for pension splitting, and that means this reward for you goes on forever.

Pension promises are under unprecedented stress. Capital markets lie unprotected from the pillage of unethical forces. The majority of defined benefit plans suffer solvency deficits. Contribution plans are inefficient, and participants lack expertise and guidance. One-third of Canadians do not have access to occupational plans.

The deficiencies are interrelated and demand a consolidated solution. Retirement security, of course, is dependent on market stability and regulation. Universal and equal access is essential if social turmoil--we call it pension envy--is to be avoided. A lethal combination: plan members watch their pension security evaporate while perpetrators of toxic investments fill their pockets and pension investment managers appear to take excessive gambles to reward themselves while the funds are going down the tube.

Contribution holidays should be postponed until rules are strengthened. The regulator needs more power to scrutinize funding obligations, diminishing solvency trends, and fiduciary assumptions. Next to the banks, pension funds form the most powerful engine in this country, driving the economy. Retirement security motivates savings, and that's what we need in this country.

Pension funds require a contingency reserve, a rainy-day provision for surviving economic emergencies like the current meltdown. The 10% surplus tax threshold should be abolished. Surpluses above the proposed contingency reserve should be amortized similar to the amortization of solvency shortfalls.

Solvency deficits should rank above all creditors in bankruptcy. The Common Front proposes that sponsors pledge fixed assets as security for shortfalls other than a letter of credit. The Common Front supports previous submissions and the one I heard this morning for a universal pension plan. If Canada had a UPP in place, the solvency crisis would not exist. General Motors, Nortel, and Air Canada pensioners would not be facing a pension disaster.

Portability would enable pension plan transfers and a level playing field among competing private industries. Capital markets need a sophisticated national agency with laws and enforcement tools. They need to be staffed by legal and forensic economists equipped with investigative specialists similar to CSIS and the FBI.

Regulation reforms must have national standards for today's mobile worker and pensioner. Periodic schedules of regulatory reviews should be programmed to keep pace with rapidly changing economic times. We're far out of date.

Finally, eliminate the mandatory RRIF minimum withdrawal to enable pensioners the budgetary flexibility to preserve independence.

Thanks for your attention.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Braniff.

We'll now go to Mr. Andersen, please.

[Erik Andersen, Economist, As an Individual]

Good morning, Mr. Chairman and members. Thanks for the opportunity to come here this morning.

I come as a private individual. I took up this issue in 2002, so I come at it from an intellectual and moral perspective.

What I'm trying to focus on is the Canada Pension Plan and the board and its conduct. So I'll read from this text that you all have in front of you but others may not have seen.

The formation of the CPP IB as an independent corporation had to have occurred after representations were made that moneys surplus to the immediate needs of the CPP could be invested in other than government bonds to a significant financial benefit of the plan members.

The CPP legislated mandate is to act in the best interests of CPP contributors and beneficiaries, to maximize investment returns without undue risk of loss, and to take into consideration the CPP’s funding status and ability to meet its obligations. The reference there is from the legislation.

Beginning in 2002 I expressed my concerns to the finance minister, and my worries then and now are the following.

First, the CPP IB might become an investor of last resort for failing companies.

Second, equity investments represent an elevated level of risk incompatible with the mandate, and not understood or accepted by the contributors or the beneficiaries.

Third, private equity investments--more correctly described as speculations--have no place in the CPP fund, as valuations are not determined objectively when either purchased or valued.

Fourth, liquidity of many of the investments at the CPP fund will be compromised and often are unavailable.

Attached under tab 1, which you don't have, are copies of my representations, predominantly to the ministers of finance, beginning with a letter dated January 14, 2005, to the Honourable Ralph Goodale, and finishing with a letter dated February 18, 2009, to the Honourable James M. Flaherty. In each letter the theme is the same, but I have introduced examples of inappropriate investments--speculations, in my judgment--which support my concerns.

Attached under tab 2 are copies of articles and notices of these inappropriate investments. To help with the appreciation of the nature of a financial investment and speculation, I've included a short definition as well.

A speculation is where there is no promise of safety of principal and a financial return on the money, such as an interest payment. Posted on February 28, 2007, was a report titled “CPP Investment Board dips toe into U.S. real estate market”. The $500 million U.S. was characterized by the author of the article as a first major bet.

In contrast and well before this transaction, the Governor of the Bank of England publicly cautioned the British banks to be prepared for a 40% rollback in real estate values.

Additionally, the CPP IB would have had knowledge of the U.S.-based Case-Shiller housing index. In early 2007 that index was at an all-time high of 210, when the steady state is normally around 100.

Posted in The Globe and Mail on May 5 was a story about the CPP IB speculating on the prospect of building a very controversial power transmission line in Patagonia.

[The Chair, Conservative, James Rajotte]

You have one minute left in your presentation, sir.

[Erik Andersen]

I'll go to conclusions.

The CPP IB engages in speculations that are incompatible with the legislated mandate.

Accountability to the beneficiaries is minimal to non-existent.

The use of non-publicly-listed assets sabotages the confidence in the financial statements of the CPP fund.

Suggestions.... Suspend all new investments and seek liquidity on the existing investments.

In the event that this isn't accepted, do a test: ask the CPP to volunteer projects and test it for liquidity and valuation.

Thank you, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Andersen.

We'll now go to CSN, Madame Carbonneau.

[Claudette Carbonneau, President, Confédération des syndicats nationaux]

Good morning, Mr. Chairman. On behalf of CSN's 300,000 members, I am pleased that this consultation is being held and especially to be able to express our point of view on the future of pension plans.

CSN believes it is absolutely necessary to step back a little and do a complete review of our entire pension system in order to conduct an in-depth examination of the types and models of pension plans and, of course, of the scope and level of protection offered to the Canadian public.

To illustrate my remarks, I'll state at the outset three types of problems that merit more serious examination: first, the regression experienced with defined benefit pension plans; second, the small percentage of the Canadian labour force contributing to a registered pension plan; and, third, the legislative barriers to more sectoral or inter-corporate approaches.

In Canada, as in all the provinces, defined benefit pension plans are in trouble, and businesses are terminating them and transforming them into defined contribution plans. The recent financial crisis will no doubt enhance this trend and, unlike a number of provincial acts, the federal act does not require employers to cover the plan's shortfall on termination. In view of the current economic situation, CSN believes it is imperative that the government amend its act and thus prevent businesses from shirking the obligations they have undertaken toward workers.

In Canada, less than 40% of workers contribute to a registered plan, and that percentage is even lower in the case of private sector workers. If we compare our pension system with those of other OECD countries, we realize that a number of countries have systems that result in higher income replacement levels, and do so for many more of their workers than in the Canadian system.

For example, countries such as the Netherlands, Australia and England have passed legislation that is tougher on employers and compels them to contribute to registered pension plans. CSN believes we must look at the Canadian system as a whole and try to find mechanisms that will ensure adequate coverage for all workers at retirement. To that end, we believe we have to find new types of pension plans that help share the risk between employees and employers, not transfer all risks to workers, as is the case with capital accumulation plans in particular.

In addition, we must not only raise the legislative barriers to inter-corporate plans, but also put in place measures that encourage employers to join forces and offer their workers much better pension plans.

I think the Canadian government must take advantage of this consultation to go further. It must assume leadership of a joint reform with all the provinces to reposition the Canadian pension system and, lastly, to enable workers to achieve decent income levels at retirement.

To that end, CSN believes that the Government of Canada should adopt legislation that recognizes the right of all workers to be covered by a pension plan and that requires all employers to pay a minimum contribution. I remind you that these kinds of initiatives were taken by the Canadian government in the late 1980s, which led to an entire series of amendments in the provinces. I think it is about time to take another in-depth look at this matter and to achieve a much more adequate level of coverage, and I don't think that's unrealistic.

I cited some examples of OECD countries. I'll come back to the Netherlands and the recent legislation in England and Australia.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Finally, we will go to Ms. Thompson, please.

[Katherine Thompson, President, Air Canada Component of the Canadian Union of Public Employees]

Thank you, Mr. Chair.

Hello. My name is Katherine Thompson. I'm the president of the Air Canada Component of CUPE. I'm here with you today representing the 6,800 flight attendants across Canada who are employed by Air Canada, a federally regulated company. Our members participate in a defined benefit pension plan sponsored by Air Canada. It is in regard to this plan that I am speaking to you today.

Historically, when given the opportunity, some employers fail to sustain adequate funding for the pension plans they administer. Accordingly, the government enacted pension legislation in order to protect retirees who may now be unable to re-enter the labour force should their pension plans fail.

Air Canada's pension plans, like many pension plans in Canada, have been adversely affected by our economic downturn. The assets of the plans have lost value, which puts more pressure, but certainly not the only pressure, on Air Canada's finances.

We believe strongly that the financial problems facing Air Canada as a business are unique to Air Canada and stem from the financial re-engineering of the company by its hedge fund owners after the company's 2004 insolvency. These problems will have to be addressed now that the consequences of the hedge fund restructuring have come home to roost.

The problems facing the Air Canada pension plans, however, are more common to all pension plans around the world. Those problems are a worldwide crisis in capital markets, in investments that have led to what we believe are temporary reductions in the value of our pension plan assets. Certainly most economic forecasts suggest the worst of these problems will be behind us in 2009, and we will see a slow return to a more normal capital market in 2010.

For these reasons, we recognize and indeed support the need for temporary measures to see Air Canada through this extraordinary period. However, we emphatically reject the argument that the current conditions require far-reaching, permanent change to our pension regulations. As you know, a group of seven federally regulated employers have recently requested very significant reforms to the Pension Benefits Standards Act, reforms that we think are fundamentally flawed. Under the guise of the current financial crisis, this group of corporations is asking to revalue the funding levels of their pension plans. This revaluing we think constitutes the single largest transfer of risk from shareholders to employees and retirees in the history of Canadian pensions.

In response, the Department of Finance released a discussion paper in January 2009 requesting submissions on the Pension Benefits Standards Act. We availed ourselves of this opportunity to provide a comprehensive submission to Diane Lafleur of financial sector policy branch.

I will refer you to our submissions to Madame Lafleur for more specific comments on the group of seven's proposal, as well as our position on the permanent changes to the pension act that they seek.

I would like to use my remaining time with this committee to make three specific suggestions. It is our hope that these suggestions will be of assistance to your committee.

We support extending temporary and balanced funding relief for federally regulated pension plans. We believe that there are clear principles that must be present for relief to be balanced.

Retirees and employees should maintain the right to withhold consent to any concessions that increase risk or simply transfer equity from plan members to other corporate stakeholders.

Any increased risk that may be agreed to should be fully secured through a deemed trust provision.

In conclusion, I'm here to give a voice to the predominantly female and minority-based flight attendants whom I represent, employees who during the course of their careers with Air Canada have not been the recipients of generous salaries or lucrative stock options to aid in their retirement planning. They are now relying on their elected officials to ensure that pension legislation continues to protect the pension plans that they've contributed to in the hopes of being self-sufficient upon retirement.

With these comments, I wish to close and thank the committee for its time and the invitation to address you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Thompson.

Members, we'll start with Mr. McKay, for seven minutes, please.

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

Thank you, Chair.

Thank you, witnesses.

First of all, I'd like to start with the Air Canada representative.

Air Canada was reorganized in 2004. Let me preface my remarks by saying that I do not pretend to have followed all the bouncing balls with respect to Air Canada and its rocketing back and forth between solvency and insolvency and things of that nature. But there was a reorganization in 2004. I assume that the union had some participation in that reorganization. Was the issue of pension plans discussed and anticipated at that point?

[Katherine Thompson]

Absolutely. It was a component of the restructuring we went through at the time. The unions collectively agreed that some arrangement had to be made to preserve the defined benefits program we had.

When we made the agreement to offer this aid to Air Canada, we subjected ourselves to additional risk. We moved from a five-year to a ten-year amortization period for any deficit that was in place. We've now reached the five-year mark of what would have been the full-funding period, and now Air Canada is in a position, again, of coming and asking us, again, for the same extension they received the first time.

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

In 2004, you went from five to ten years. Now we're in 2009, and they want another five to ten years. I understand that in terms of transfer of risk, but where does that leave the plan as far as solvency is concerned?

[Katherine Thompson]

A $3.2-billion deficit was established when the deficit was calculated in January. Now, with the proposed changes to smoothing regulations, it stands at $2.8 billion of deficit.

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

Beware of smoothing, I guess. Is that it?

[Katherine Thompson]

Yes. As one person said to me, it's calling one dollar two dollars.

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

Yes, yes.

One of your proposals is the right of the beneficiaries to withhold consent.

[Katherine Thompson]

Yes.

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

Wind the clock back to 2004. If you had had the right to withhold consent, would the restructuring have unravelled?

[Katherine Thompson]

We had the right to withhold consent at that point, and we're asking to maintain the same right. We assumed the risk at that point. It wasn't foisted upon us.

Again, that was a temporary change to the regulations, specifically for Air Canada to extend it to a ten-year period. And it was temporary. Now they're asking for permanent changes, so for the go-forward, it would constantly be a ten-year amortization period, and the plan members would not have the option.

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

At this point, do you have the right to withhold consent?

[Katherine Thompson]

Yes.