Finance Committee on May 7th, 2009

[Erik Andersen]

Thank you for the question.

I'd like to start with a short word. In the investment industry, the cardinal rule that you have to follow is you have to know your client. So by definition, there are 17 million contributors to the CPP you can't know. That means that right from the get-go, you're outside the parameters of what I would call a legal framework. The CPP board I think maybe has a conversation with somebody in the finance division in various provinces. He's the agent on behalf of everyone. Whether or not he's an effective agent, that's another matter; that's for judgment.

Going to your point about incentives, they can be good, but they can also draw you into conflicts of interest and into making mistakes. One current mistake that is one of a number of them--it's in a line of these--is that the CPP board recently, at the end of March, announced that it was going to do a takeover of an Australian company called Macquarie Communications. Macquarie Communications is a P3-modelled kind of company that trades in the open market, and the takeover was to be and is to be at $2.50 Australian. They're seeking 100%. I'd say it's a hostile takeover. That stock traded during the course of this last six months in the vicinity of about 95 cents. The CPP board knows that, but they went ahead at a premium price, which is more than double.

The second thing is they also know that Macquarie Group as the vendor has a tarnished reputation. A group in New York called RiskMetrics Group published about a year ago a scathing assessment of the Macquarie Group model and Macquarie people.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Mr. Andersen, I must interrupt you since we are short of time. You're citing a very interesting example. Do you think the performance bonus policy is what's causing inefficiency in pension plans?

[Erik Andersen]

That's my reason for giving the example. To me it's an example of an aberration that I'm really upset about. They're even going to borrow money to do it, which is even worse. The incentive programs lead them to that point, as far as I'm concerned.

[The Chair, Conservative, James Rajotte]

Thank you.

I'm going to take the final round. I want to follow up with Ms. Thompson on the Air Canada issue.

In your presentation, under “How We Got Here”, you identify both structural and cyclical challenges. You talk about the insolvency in 2004 and the problems of the hedge fund owners, but you also talk about the worldwide crisis in the capital markets.

It is a challenge determining where we should go in terms of structural and cyclical challenges. As a member of Parliament, obviously I fly all the time and I see Air Canada employees all the time. What they say to me is, “I've worked 30 years for the company. I've put my life into this company. I've paid into the pension plan, and I deserve to have a pension.” With the 2004 insolvency, their common complaint--and you've heard it before--is that there was a transfer of assets to ACE as a result of that, and that there were some very large payments to executives or shareholders.

I'm not disputing that, but as a member of the government trying to address it, I can't redo the 2004 agreement or the consequences resulting from it. We have to try to deal with the situation that we have now. That may have been unjust; I'm not going to pass a judgment on whether it was fair or not. But what do you recommend we do as a government to address that person and ensure that he has a pension when he retires in the next five years?

You talked about recognizing the need for extraordinary measures. I think I have a sense of what you would recommend we not do, but what would you recommend we do to address both the cyclical challenges in terms of the markets, and also the structural challenges in terms of the challenges Air Canada is facing?

[Katherine Thompson]

Actually, I referred to this as an extraordinary “period”; I make no acknowledgement that they need extraordinary measures. I think they would like to take the opportunity of today's extraordinary circumstances to, as you say, take extraordinary measures.

We want temporary and balanced measures. We are not at all convinced, especially in our industry, in which there are such peaks and valleys consistently. Air Canada consistently utilizes the law to contribute the absolute minimum to their pension funds at every opportunity. I think that the laws need to be maintained in place, and they need to help Air Canada through this crisis, but I don't believe they should support them in capitalizing on this crisis to the detriment of the workforce.

[The Chair, Conservative, James Rajotte]

I'd like to draw you out more on what we would actually do. Are you saying the company should essentially be forced to put in more to make up for that pension shortfall at this time? Is that your recommendation?

[Katherine Thompson]

When $3.2 billion was established as being the deficit in the pension fund, it was at the absolute worst time in the markets. I think we would support their having some kind of relief in when and how their payment schedule would be established, but to make permanent changes to pension legislation to accommodate this temporary circumstance would be far-reaching.

[The Chair, Conservative, James Rajotte]

What do you mean by payment relief?

[Katherine Thompson]

It's amortization.

[The Chair, Conservative, James Rajotte]

Would you be okay with the ten-year temporary amortization again?

[Katherine Thompson]

With consent, and on a temporary basis, it is absolutely something we would consider, but Air Canada is seeking a permanent ten-year amortization, with no consent on the part of the plan-holders.

[The Chair, Conservative, James Rajotte]

Mr. Georgetti, I only have a minute left, but do you want to comment?

[Ken Georgetti]

I would draw you back and suggest that you take a look at that extraordinary financing framework. It's in your budget. There's $200 billion there. In Air Canada's case, if they have a genuine problem, it would be a simple matter for the government to issue them a letter of credit equivalent to their deficit so that when they go through restructuring they won't have a pension liability. It could be covered by the government. Air Canada will have to pay that back once they come out of insolvency. It would be a simple matter and it would clear the books immediately.

[The Chair, Conservative, James Rajotte]

Under the extraordinary framework, under what measure would you issue the letter of credit?

[Ken Georgetti]

Under the extraordinary financing framework that you announced, you can issue letters of credit for pension.

[The Chair, Conservative, James Rajotte]

Mr. Harden, you have 20 seconds.

[Joel Harden]

Thank you.

The Business Development Bank of Canada has within its budget, as I understand, a $12 billion tranche of that larger framework.

[The Chair, Conservative, James Rajotte]

Is that the secured credit facility?

[Joel Harden]

Yes, that's correct. And the banking institutions don't appear to want to access....

[The Chair, Conservative, James Rajotte]

That's for the auto sector, right?

[Joel Harden]

Terms of reference can be fluid. The banks don't appear to want to access the loan guarantees you've offered them. Employers who create jobs and wealth in the economy want to keep doing that, so it would appear to be a win-win opportunity for you.

[The Chair, Conservative, James Rajotte]

Okay.

Time is up, unfortunately.

I thank you all for your presentations here today and for your responses to our questions.

Colleagues, I thank you for your participation.

The meeting is adjourned.