Finance Committee on March 16th, 2010

[The Chair, Conservative, James Rajotte]

I call to order the second meeting of this session of the Standing Committee on Finance. The committee is beginning its study, pursuant to Standing Order 108(2), of the retirement income security of Canadians.

We have with us today four organizations and one individual. We have, first of all, the Certified General Accountants Association of Canada; secondly, we have Teamsters Canada; thirdly, we have the Canadian Labour Congress; fourthly, we have the Canadian Institute of Actuaries; and as an individual, we have Monsieur Michel Benoit, legal counsel.

Thank you all for coming to be with us today to discuss this issue.

Colleagues, we have a vote at 5:30, so the meeting will end at 5:15 p.m.

Each organization or individual will have 10 minutes for an opening statement. We'll start with the Certified General Accountants Association of Canada.

[Rock Lefebvre, Vice-President, Research and Standards, Certified General Accountants Association of Canada]

Good afternoon.

Before I get started, I will just make sure that you have received some papers we had deposited, three tables in particular, to be circulated. I will be referring to them.

Thank you.

Good afternoon, and thank you for granting the Certified General Accountants Association of Canada the opportunity to discuss with the committee the current state of defined benefit pension plans in Canada. The Canadian retirement system is an ongoing area of interest of CGA Canada, as is the financial condition and prospect of Canadian households. Today we'd like to underscore with you the magnitude of the pensions challenge by identifying how the deficits of private pension plans have deepened.

Our work on the topic of defined benefit plans was initiated in 2004, revealing that with indexation of accrued benefits, an estimated $160 billion would be required to fully fund deficit pension plans at the end of 2003. Revisiting that number in 2005 for the 2004 year end, we learned that it had increased to an estimated $190 billion. While we're continuing to study 2008 year-end results, preliminary analysis signals a funding shortfall significantly exceeding $300 billion.

Relying on the supporting expertise of Mercer Human Resources Consulting and the information contained in its 2008 pension database, the funding position of Canadian pension plans at December 31, 2008, has been estimated under a “risk-free basis” approach. That risk-free basis, reflected in table 1 before you, removes any discretion in the selection of “going concern” assumptions of each plan, and it removes the influence of the investment policies in the selection of such assumptions.

In short, we wanted to make it simple for our calculations. We pegged the interest rate at 3.5%, based on long-term Government of Canada bond yields, and indexation has been set at 2%, based on blended pre- and post-retirement indicators.

Our analysis is based on approximately 760 plans covering a total of approximately 1.5 million members as of December 2008. In 2004 we studied 784 plans consisting of 1.8 million members. These plans represent approximately one-third of the total defined benefit plan market.

Including those of trusts and insurance companies, there are an estimated 7,000 defined benefit plans and an estimated 8,000 defined contribution plans, having an estimated 4.5 million and 0.8 million members respectively. Defined benefit assets exceed $550 billion, while defined contribution assets represent an estimated $50 billion.

It's apparent that the overall funding position has significantly deteriorated since December 31, 2004, with and without indexation of benefits. That is, the average funding ratio has decreased from 112% to 77% on a “without indexation” basis, and from 71% to 57% assuming indexation is calculated.

And whereas 59% of the plans were found to be in deficit at the end of 2004, that number stood at 92% by the end of 2008. It's not necessarily a surprise, given the performance of the capital markets, but I thought it was nevertheless notable.

The main results that I have just explained are contained in the two tables before you, tables 2 and 3. They compare the 2004 and the 2008 year ends, the first without indexation and the second with indexation.

The global events that eroded pension asset values, interest rates, and investment returns had a devastating effect on Canadian pension plans. In the six months from September 2008 to February 2009, the typical pension plan lost about 20% of its asset value, measured on a “fair market value” basis. According to estimates, 71% of the Canadian defined benefit plans were in a solvency deficit position at the end of 2007. As previously indicated, that escalated to 92% by the end of 2008. We also saw at the end of 2008 that almost 40% of those plans had solvency ratios of less than 70%, and over 70% had solvency ratios of less than 80%.

Going forward, CGA Canada encourages the federal government to effect the previously announced measure of increasing the pension surplus threshold for employer contributions from 10% to 25%.

We also continue to see enhanced protection for plan members that recognizes more fully the character of pension benefits as deferred compensation that requires greater recognition as secured debt of the company and enhanced consideration in the creditor hierarchy. Consistent with earlier submissions to the Department of Finance, we contend that deliberate clarification is required regarding the following: the ownership and distribution of surpluses on plan termination, letters of credit, the time span for the funding of deficits, and the prescribed solvency ratio levels.

Should more radical departures be envisioned, one potential opportunity resides in the alternative of designing a time-weighted methodology that reflects and accounts for the respective contributions and actions of plan sponsors and members. In time, we expect that the establishment of pooled defined contribution arrangements and multi-employer pension plans will gain greater acceptance.

It's worth mentioning also that in stark contrast to sharp increases in funding requirements caused by the recent crisis, the cost of pension plans, reported in most sponsors' financial statements, experienced significant decreases in 2009. This is because most plan sponsors set the discount rates used to calculate the cost of their plans, for financial reporting purposes, by reference to high-quality corporate bond yields. Those bond yields irregularly soared to as high as 8%. Such target yields increased dramatically the results in the last quarter of 2008 and the first quarter of 2009. What that means is that for plan sponsors whose fiscal year fell within that timeframe, the increased rates typically caused the reported pension expense to be much lower the following year. This disparity between lower reported costs on financial statements and greatly increased cash needs in the same year may prove difficult for sponsors to explain to stakeholders.

The crisis has had a significant effect on many pension plan members, some more directly than others. For some members of defined benefit plans, there have been significant and direct effects. At worst, in cases of sponsor insolvency or winding down, and where the plan was also significantly underfunded, the plan members will experience permanent reductions in benefits already accrued. The high-profile nature of some of these cases has highlighted for members that even in defined benefit plans there is no 100% guarantee. Moreover, it underscores that pensioners continue to be dependent on the long-term financial viability of their former employer.

CGA-Canada believes that the crisis can best be soothed by adopting a holistic approach rather than piecemeal measures, unless those ad hoc measures deliberately respond to the desired end state. Many of the issues that impair the optimal funding and condition of defined pension plans have existed, in some instances, for decades. We applaud the current public initiatives to study and reform the rules and expectations surrounding pension plans. We also support fully the implementation of necessary strategic and structural changes that would contribute to a fair, responsible, sustainable, and efficient retirement system that secures the future of all Canadians. These are changes that more copiously recognize that earned pension benefits represent deferred compensation, not a conditional game of chance.

We must also be mindful that the majority of Canadians are not afforded employer-sponsored pension plans and that as much as 35% of the adult Canadian population does not commit to any type of regular savings. Taken in tandem with CGA-Canada findings on escalating household indebtedness and a reduced proclivity to save, we understand full well the apprehension of Canadians in relation to retirement security. And while economic growth may once again be in our grasp, the full benefit for society will only be felt over time as the government again achieves a balanced budget, as real incomes grow, and as the capital markets recover.

In closing, while we appreciate that the opportunity may be ripe to pursue pension reform, we encourage that adequate time be afforded to study and understand this relatively complex matter. We are encouraged here today to observe this committee hosting these consultations. We are likewise encouraged by the growing appetite for coordinated pan-Canadian action that harmonizes the efforts of federal and provincial stakeholders. In so doing, we are more likely to enhance information symmetry and to introduce comprehensive, systematic, and lasting improvements.

Ladies and gentlemen, thank you for your time.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from Teamsters Canada, please.

[Phil Benson, Lobbyist, Teamsters Canada]

Good afternoon. I'm Phil Benson, a lobbyist from Teamsters Canada. I want to thank the committee for inviting us back. It just seems a short time ago that we were talking about pensions. As you are aware, we were also in front of the committee on the other side, in other areas.

First, we view this as part of a process. We're looking forward to Minister Flaherty's study—whether with Minister Flaherty, the department, or this committee—later on pension reform. We're looking forward to participating in it, and we welcome the committee taking its time today to once again review pensions.

Though we're looking at a pension crisis, really it is decades in the making. It is decades of inaction. It's decades of letting the entire problem slip. Federal pensions and the pension regime are just one part of the puzzle.

I want to look first at CPP and OAS.

CPP is well funded now. It's in a special purpose account. I hope it will remain there and not end up as the employment insurance account did in a special purpose account and be plundered. The lessons there were that decades of inaction led to the need to increase premiums, in effect, during the last recovery. With the EI account, the plundering of the account—and I do applaud the government for setting up a separate account, but the $2 billion was not enough to cover a recession that we're in now, and that's going to lead to an EI premium increase during a time of recovery. Again, it was decades of decisions not made or incorrectly made.

Old age security, something that we all hope to get one day, really depends upon the economy and the ability to pay. It's quite easy in difficult times for governments to perhaps increase clawbacks or to vary or change it.

In short, our private pensions may in fact be one of the most important and critical means for Canadians to retire. In the past four or five years, there have been two series of changes to the system for dealing with pensions and funding. There's a good thing about that--mostly, importantly, that governments, both this and previous, didn't give the companies everything they wanted. The other good thing is that they also listened to labour. They listened to the Teamsters and they accepted some of our recommendations in that action.

Companies basically want to delay funding. They want to use the dollars to build their businesses. I've seen that in the documents they presented to you. Also, the last time we spoke, one of the company representatives made that statement.

The negative about those changes is that it didn't go far enough to address the problem. Yes, it has made some significant changes. Canadian Pacific Railway, one of the employers that a lot of Teamsters are very proud to work for, did kick in $500 million, but their fund is still in a deficit. It was a start, part of a process, not a complete endgame.

Pensions, as the first point, to reiterate what the CGA said, are forgone wages. They're deferred compensation. They're not a gift. They're not a benefit. Let's not be paternalistic; if you're not paying the pension, you're going to have to pay more wages.

In the multi-employer plan world that a lot of our members live in, it's not much of an issue because the wages go into a separate fund. The employer can't get its hands on it. It's generally jointly managed between a union and an employer. There are no contribution holidays. The moneys are generally invested very conservatively, as is a requirement under union leadership.

That brings us to the second point. Investments should be more insurance-like, more invested in bonds and less in stocks, especially as we see the demographics—and what a surprise, dealing with this for 25 years—the aging baby boomers. We cannot have baby boomers in retirement in 10, 15, or 20 years at the beck and call of the market, of a financial crisis, of a war, or of anything else. If that happens, the mistakes we make today will hamstring future governments, just like the mistake to not properly fund the Canada Pension Plan hamstrung the previous Liberal government, and, as we would say, the misuse of the employment insurance account has hamstrung this government. Most people will not be here, but if we are retired, we will pay the price for those mistakes. I urge you not to repeat them.

The third basic point we have is that because these are deferred contributions, workers, pensioners, and their pension funds must be a priority under the BIA. They must be protected. Simply put, people should know when they retire that they're going to get x amount of dollars and that it is going to be there.

If not, let us go forward 10 to 15 years. Let's hypothesize. Most of the baby boomers are retired and we have an economic crisis. Future members of Parliament around this table--hopefully I'll be retired by then and hopefully we get it right--will be sitting here dealing with a simple problem. How much more can we pay out in GIS in a crisis? Do we have to claw back old age security? Can we meet the Canada Pension Plan?

Changing this isn't for today. It's for 10, 15, or 20 years into the future. For the workers we represent at Flextronics and Nortel, they're paying the price today. You've heard about Nortel being at 70¢ on the dollar. Flextronics is at 25¢ or 30¢ on the dollar. I'm sure other unions can come forward with the same story.

We cannot have that happen in 15 to 20 years. That's why we're looking forward to this process. We're looking forward to the review by Minister Flaherty and the government. We have to get it right, because we can't hamstring future politicians. We can't hamstring their options.

With that burden, there are going to be a lot of options. Hopefully, one of them isn't reducing people's incomes in retirement. We have a crisis that has been 10 or 15 years in the making. Let's take our time. Let's resolve it. Let's get the answer right. If we do not, we will all pay a price in the future.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Benson.

We'll now go to Mr. Georgetti of the Canadian Labour Congress.

[Ken Georgetti, President, Canadian Labour Congress]

Thank you very much. I have with me Dr. Joel Harden, our expert on this issue.

We were of the view that this hearing was about federally regulated pension plans, but I sure appreciate the comments I've heard so far.

I want to talk first of all about federally regulated plans. The pension plans of a few large employers, federally regulated, account for most pension plan coverage in Canada, and the solvency funding for these employers is well above the average. It's greater than 85%, so in the overall scheme of things, they're doing not badly relative to most. The presentation from the actuaries was completely consistent with our concerns as well.

We're saying that the federal government did announce some positive measures recently to improve pensions in the federal sector, including a requirement for employers to fully fund pension liabilities when plans are wound up and for immediate vesting rights for workers upon joining a workplace pension plan. We continue, however, by saying that fixing federal sector pensions isn't enough. We say that Canadians are looking to Ottawa as well for more details on this pension consultation announced in the budget of 2010, and we'd like to know when and where these hearings are happening. We know there are hearings starting, I think, in April on financial literacy, and I'll talk about those in a moment.

In Budget 2010 there was also an announcement about promised bankruptcy law changes. What is the scope of these changes, and is the government prepared to consult on these changes before it puts them in place?

We'd also like to know your thoughts on pension reform heading into the finance ministers' meeting in late 2010. Minister Flaherty did announce consultations, as Mr. Benson said, but to date we've heard nothing in terms of when, where, and how. We are having our own pension consultations, and let me tell you that we can't find rooms big enough. They fill up awfully fast with people who have concerns about their security.

After saying all that, despite the short notice that you gave us for these hearings, I want to talk about a couple of things. I certainly agree with the actuaries when they talk about enhanced protection of employees' rights to a pension that they've invested in. We have a plan in place, and you can see it in our brochure. For a very small amount of money--in fact, for $2.50 per person per year--we could provide pension insurance, for a benefit of $2,500 per month for life. That's pretty cheap insurance when you think about all the insurance aspects of life. We have to insure our cars, our boats, our trailers, our houses. Even our savings accounts are somewhat insured, yet there's no form of insurance, except for Ontario, for pension plans to ensure that people get the benefits they're entitled to. We'd like to see some action on that.

I want to tell this committee as well that despite some of the hyperbole you heard out there, today 1.6 million Canadians are living on less than $15,000 a year. These are people who worked all their lives to try to get by and are living on less than $15,000 a year. I dare say that's not very much money if you're living in any Canadian city today, but that's what happens.

As well, there are significant shortfalls in our pension system right now. There's no doubt about that. I don't have the exact numbers; my friend with the actuaries does, but let me point out something about all those registered DB plans that he talked about. Did you know that 40% of those DB plans belong to less than one percent of the population, and that 47% of those plans are registered to groups of 10 or fewer people? I don't have to tell you who most of those people are, but most of them work on Bay Street or on other streets like that around Canada.

I'll mention Don Stewart, the CEO of Sun Life, who is heading up your financial literacy task force across this country. His company just closed its DB plan last year to new employees. They only get DC plans. However, Mr. Stewart is entitled to a DC plan of $1.4 million a year indexed for his life, and he's telling employees who are starting to work for him that they're not entitled to the same kind of plan that he gets. You get a DC plan, and if the market is up when you retire, you're okay; if the market is down when you retire, as it was in 2008, well, that's your tough luck as well.

Is that financial literacy? Is that what we're going out to teach Canadians about? I think it's coming to the point that there are two systems: there's one for the haves and another one for the have-nots.

I must say that the members I represent are lucky enough that we have, as Phil said, deferred some of our wages into pension plans that will, we hope, deliver a benefit that we want. But the vast majority of Canadians don't.

I challenge you as members of the committee and also as MPs to listen to some of your constituents' stories about how much dignity they lose when they find themselves not only without a job but without a pension and without a way to earn income. We hear them every day when we go on our hearings, from people who have to decide whether or not they're going to feed the cat and dog, or feed themselves.

I think this issue is not about numbers. This issue of pension security is about people. I encourage the committee to talk to real Canadians about the struggles they are seeing. Talk to some of those Nortel workers who thought they had something, which disappeared because the guarantee they thought they had wasn't there.

We could give you all sorts of information, but the best approach, which I want to leave you with, is to increase the best pension plan that exists in Canada today, and that's the Canada Pension Plan. It has the lowest administrative cost, it's portable, it's indexed, and it's guaranteed, for all intents and purposes. For an increase of 40 basis points—that's four-tenths of 1%—per year for seven years of increased premiums, people starting on that plan today would retire with a double CPP benefit of $1,635 a month, which would put them at about $22,000 a year in today's dollars.

For people who have pension plans that are integrated, it would actually save employers and governments, over a course of a person's lifetime, 5% of the cost of delivering a pension plan. It would give every employer in Canada who wants a defined contribution plan exactly what they want. All they have to do is make a contribution every month, and every employee in Canada would get a defined benefit plan.

It's the best-managed plan in Canada, which has delivered the only real security Canadians have today and the guarantee of a cheque when they retire.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Georgetti.

We'll go now to the Canadian Institute of Actuaries, please.

Mr. Charbonneau.

[Serge Charbonneau, Member, Government Liaison Task Force on Pensions, Canadian Institute of Actuaries]

Good afternoon, ladies and gentlemen. My name is Serge Charbonneau, and I am here representing the Canadian Institute of Actuaries. I am a member of the government liaison task force on pensions.

The Canadian Institute of Actuaries is the national organization for the actuarial profession in Canada. It has over 3,900 members. Many of them work in the pension field in Canada, in particular in signing valuations certifying the amount of premiums required to fund pension benefits.

Lately, the pension world has been the focus of attention, and for good reason. Over the past few years there have been a series of governmental reviews of pensions and their regulations; other consultations are just starting.

For many years, the Canadian pension system has had to deal with tough challenges, including low interest rates, increased longevity, legal decisions, volatile market yields, rising pension costs, uncertainty over contribution holidays, and plan surplus ownership, as well as a patchwork of pension laws and regulations across the country.

The global economic crisis and recession has made the situation even bleaker. In 2008, large deficits emerged in most defined benefit pension plans. Even though 2009 market returns were more attractive, they did not help very much. Pensioners and workers from companies facing bankruptcy now run the risk of having their pension benefits reduced drastically.

Individuals have seen the values of their accumulated savings in RRSPs and workplace DC pension plans melt away in 2008, and they did not recover much in 2009. Recent changes in pension accounting standards have created volatility in pension plan sponsors' balance sheets, and an imminent transition to international standards could make things even worse. Employers are very reluctant to introduce new plans. Many have terminated existing plans or closed them to new employees. For plans that remain, employers have tended to minimize their contributions.

We believe the time has come for governments to implement fundamental changes to acts and regulations to strengthen pension plans. We believe a large proportion of Canadians need to save more for retirement and they need wider pension coverage. More than three-quarters of private sector workers have no employer pension plans.

Defined benefit plans need to be saved and even encouraged. They are very effective means of providing retirement income as they insulate members from many of the risks associated with increasing longevity, low interest rates, and market volatility. They provide employers with the tools to attract and retain employees.

Please let me focus on the health of federal pension plans by discussing funding rules under the PBSA, the Pension Benefits Standards Act. In November 2009, the CIA released its pension position entitled, “Retooling Canada's Ailing Pension System Now, For The Future.” Our document had been prepared prior to the federal reforms announced last fall. We are pleased that some of our recommendations were included in those changes, but unfortunately others were omitted that we consider crucial.

Our recommendations are aimed at improving funding rules for DB plans in a manner that could benefit plan members and plan sponsors. The following proposals are designed to work together in a coherent whole.

First, enact legislation allowing employers to set up and fund a new type of vehicle that we call pensions security trusts, also referred to as deemed trusts in some cases. It's a type of side fund, separate from but complementary to the current DB pension fund. We see this as a practical solution to the asymmetry in surplus ownership, and it would create an environment to encourage contributions beyond the minimum amount legally required.

Employers gain because they can contribute more than the minimum cost under the going concern valuation, knowing that if a surplus arises in the future, it can be covered. Pensioners and employees also gain because stronger funding will make their benefits more secure. Contributions into the trust will be tax deductible and withdrawals will be taxable.

For your information, the expert panel that studied pension reform in B.C. and Alberta did recommend such a new vehicle.

Second, in conjunction with that pension security trust, we suggest that new legislation be introduced to require each DB plan to have a target solvency margin related to the risks in the plan's assets and liabilities. The recent announcements last fall did stipulate that contribution holidays would only be permitted if pension plans are more than fully funded at 5% above 100% of liabilities.

It's a good starting point, but we believe there should be flexibility to reflect the risk. The CIA produced a study describing how those calculations could be done. For example, some plans could have a margin of only 2% to 3%, while others could be 8%, 9%, 10%. We think that plans that implement strategies to minimize risk should not be imposed as much of a margin as plans that don't manage risk.

Third, we were pleased that the announcement increased the Income Tax Act's threshold for surplus up to 25%. However, we note that the pension reform proposed did not include a pension security trust. In our opinion, without that security trust, the proposed increase to 25% will accomplish virtually nothing. Few plan sponsors have funded to the 10% limit in the past, and we expect virtually nobody to use the additional 15% in the future. However, if the pension security trust that we propose is implemented, we would expect many sponsors to use that extra room.

We encourage governments to act on that integrated package of initiatives. We think if those proposals had been in place before the recent crisis, the funds would have been in a much healthier situation and relief measures might not have been needed at all. Certainly the risk for members would have been drastically reduced.

With respect to other federal reforms announced last fall, we know that the proposed rules on solvency valuations represent a new approach. They are expected to produce contributions that are higher than the old solvency rule that required amortization of new deficits over five years. Actually, we expect contributions to be between the old five years and the temporary ten years that was introduced recently.

This might be considered a reasonable compromise between employers and unions that have opposite demands. But we reiterate that having the new pension security trusts would greatly encourage some employers to contribute more than those minimum amounts.

We also looked at the new rules allowing letters of credit on a permanent basis, instead of a temporary basis, as in the past. We think those are useful ways of increasing benefit security, and they help employers who are reluctant to build surplus in case of a market turnaround. While we are in favour of a letter of credit approach, we still prefer our proposed pension security trusts.

Another aspect of pension reform related to benefit security is for crown corporations. We know they cannot go bankrupt, and therefore when the rules were changed from five to ten years, they did not need to submit letters of credit as did other employers. In fact, we think the whole solvency approach might not even be relevant for the purpose of protecting the security of plans for members of crown corporations since their employer has no bankruptcy risk. This has already been recognized under several provincial laws that exempt public sector plans from solvency valuations. We suggest the federal government consider the possibility of exempting from solvency valuations certain types of employers who have no bankruptcy risk.

We also would like to highlight the fact that solvency valuations involve certain problems with respect to calculation of liabilities for retirees. Legislation requires actuaries like me to determine the cost of purchasing insured annuities, knowing very well that in many cases it would be impossible to purchase them if a very large plan were to terminate. This type of difficulty also arises in the case of pensions that are indexed to inflation, because there is only a very limited supply of real return bonds. The CIA would be very interested in examining alternative approaches for valuing retiree benefits for solvency or wind-up purposes. For example, this might involve the possibility of creating new schemes through which the funds attributed to retirees could remain invested for a number of years, allowing a gradual transition to the insured annuity market.

We note that other issues of great importance to the pension issue will be addressed in subsequent meetings over the next few weeks. We would point out that the institute has examined the possibility of having new types of pensions that would be facilitated by the state. In fact, we will be releasing a white paper on that topic later this week. We would be delighted to discuss our findings at upcoming meetings of your committee.

Ladies and gentlemen, that completes my presentation. I will be pleased to answer your questions.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation, Mr. Charbonneau.

I will now turn the floor over to Mr. Benoit.

[Michel Benoit, Legal Counsel, Bell Canada, Canada Post, Canadian National Railway Company, Canadian Pacific Railway Limited, MTS Alstream and Nav Canada, As an Individual]

Good afternoon. My name is Michel Benoit. I am with the law firm Osler Hoskin & Harcourt.

I am appearing today before this committee on behalf of six federally regulated companies, namely Bell Canada, Canadian National Railway, Canadian Pacific Railway Limited, Canada Post, Nav Canada, and MTS Allstream. For the purposes of my presentation today, I'll be referring to these companies as the group of six.

First, I would like to extend to the committee the appreciation of the group of six for the opportunity of appearing before and contributing to the work of the committee on an issue that has solicited many comments and concerns, namely the health of employer-sponsored pension plans and, more specifically, those that are regulated by the federal government.

The group of six hopes it can provide this committee with a unique perspective on the issue it is considering today. They have been sponsors of defined benefit plans for decades. Their plans collectively cover over 130,000 employees and provide pensions to over 120,000 retirees and beneficiaries. And their pension funds collectively hold over $50 billion in assets, which represent approximately 50% of the assets of defined benefit plans regulated by the federal government.

Many of you have heard and read about the health of employer-sponsored pension plans. The comments and concerns have come from employees, retirees, organized labour, and employer organizations. Consultants and academics have also expressed their views. The proposals that are put forward by these stakeholders are often conflicting, and the issues, obviously, are extremely technical and complex.

That said, the health of the defined benefit plan is entirely dependent on the financial ability of the employer to sponsor and support it. This is particularly true in times of financial crisis, such as the one that employers have been struggling with since 2008. Although some may think the financial crisis is now behind us, given the rebound in the stock markets over the last year, interest rates are still extremely low, and their impact on plan funding is still very significant. Volatility has not disappeared and employers' contributions continue to be onerous.

As many of you know, the group of six has been actively soliciting the federal government to change the existing legislative and regulatory framework governing employer-sponsored defined benefit pension plans, particularly in the area of funding. Permanent changes are required because the 2009 temporary relief measures were not sufficient to address both the volatility and the onerous nature of the contribution obligations.

On October 27, 2009, the Minister of Finance announced a series of proposals designed to significantly change the existing legislative and regulatory framework for federally registered pension plans. These proposals are a balanced set, including several elements to strengthen the security of benefits. The proposals, however, will require amendments to either the Pension Benefits Standards Act of 1985 or the pension benefits standards regulations of 1985, or both. The implementation process for all these proposals will take some time, and although the group of six has noted the government's intention of having the new funding rules in place so that they can be applied to the December 31, 2009, actuarial evaluations, the group is very concerned that the legislative and regulatory approval process required to finalize all of the October 27, 2009, proposals will detract from the urgent need to implement the proposals on solvency funding and the other funding issues. It is therefore critical that the required amendments to the legislation and regulations be released in the very near future.

The group of six has been providing its views on the funding proposals released last October to both the Department of Finance and the Office of the Superintendent of Financial Institutions. Submissions in this regard were made in November and December 2009 and as recently as last week. They addressed issues such as the proposed limits on employer contribution holidays, benefit improvements that would need to be fully funded, the use of an average solvency ratio to determine the minimum solvency requirements, the use of letters of credit to meet solvency obligations, and the all-important—I stress all-important—transitional provisions that will be required for their implementation.

All of these issues are very, very technical and complex, but in our view the required technical rules can, and should be, finalized and released as quickly as possible.

It is currently difficult for many employers to commit to capital expenditures pending the release of draft legislation and regulation, since corporate cashflow allocated to solvency funding payments is not otherwise available for capital expenditures. Many plan sponsors have already established their 2010 budgets and made statements to their boards of directors, investors, or analysts about their cash commitments. Almost five months have elapsed since the proposals were released, so the group urges the government to act now.

Another issue that has on a number of occasions made the headlines is the need expressed by a number of stakeholders to provide greater protection to pensions in the event of the insolvency or bankruptcy of the employer. While I recognize that this issue is not, per se, being considered today by this committee, the group feels it is important to state its position in that regard. The current rules on this issue were debated at length when the government reviewed the insolvency legislation in 2005. The result was increased protection for unremitted employee contributions and employer current service contributions. Extending the protection to solvency deficit payments or providing preferred creditor status to pensions in pay would materially affect existing credit arrangements and significantly undermine the employers’ ability to raise capital at a reasonable cost.

The group of six has always been of the view that the best guarantee that employees and retirees will receive the promised pensions is a financially sound employer. Increasing the cost of borrowed capital by changing the insolvency rules would not be a step in the right direction. It would be quite the contrary, especially in the current financial environment.

Thank you for your attention, and I am prepared to answer your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will have questions from members.

We'll start with Mr. McCallum. You have a seven-minute round, please.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

And thank you to all our witnesses.

I think it was particularly good to start with the CGA and the rather dire, if not crisis, conditions you outlined facing Canadian pensions, which is in contrast to what I would characterize as the government attitude of “don't worry, be happy, everything's just fine”. In particular, I think this never-ending consultation, when proposals for things like a supplementary Canada Pension Plan have been on the table for many, many months, if not years....

Also, I'd like to refer to the Bankruptcy and Insolvency Act. A number of you mentioned that. The government had a proposal to make amendments to it in the throne speech, but nothing was in the budget. It seemed to say we don't want to act in that area. Mr. Menzies will have a chance to correct me if I'm wrong, but certainly there was nothing in the budget.

We, in the Liberal Party, do believe that the BIA, the Bankruptcy and Insolvency Act, should be amended to provide some additional protection in the hierarchy for pensioners. As a number of you said, this is a question of deferred compensation. Three of you have already been on the record as favouring that, and one as opposing.

To Mr. Charbonneau, with respect to the act, do you have a view as to whether, and if so how, the BIA might be amended to provide some additional security for pensioners?

[Serge Charbonneau]

I didn't touch that subject today because we understood it's going to be a subject for another committee meeting. However, it was part of our retooling document that was published last November, and we talked about it back in 2007.

We're suggesting that some things should be done to look into it, but we recognize that changing the creditor status for unfunded plans would greatly disturb financing of employers. We recognize the two points of view and we think some things should be done to figure out the best way to put that into place.

[John McCallum, Liberal, Markham—Unionville, ON]

Could it, for example, be done in some way prospectively for the future?

[Serge Charbonneau]

That would be one way of reducing the impact, but it would still have a huge impact down the road when it's all in place. When employers need some financing and they tell the bankers, “We have a big deficit. This year it's $2 billion and maybe next year it's going to be $4 billion. This is going to be paid before we pay back our loans”--I can understand that this would disrupt the financing of the corporations. But on the other hand, actuaries are very sympathetic to the plight of pensioners we see today--Nortel, etc.

It's a difficult question. Actuaries don't have the solution, but we say let's look into it and look very carefully as to what the impact would be.

[John McCallum, Liberal, Markham—Unionville, ON]

Mr. Benoit, I noticed you opposed the idea. Is this opposition unconditional, or do you think there are certain ways in which it could be done that would not be so damaging?

[Michel Benoit]

It's very difficult to answer that question in a simple way. I'll explain myself.

Changing the insolvency rules will definitely impact the credit arrangements existing today if these changes are made applicable immediately upon their adoption. So if we're talking about implementing changes prospectively, that raises a number of questions as to how much of an impact these changes will have. In other words, will they be applied to current deficits or only future deficits? Will they be applied to current pensions and pay or only future pensions and pay? And so on.

I grant you that doing it prospectively has the appearance of making things simpler, but I am of the same view as Mr. Charbonneau. It is something that will require a lot of study. Get the views of experts in the field who contributed to this exercise when the government looked at these changes five years ago.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you very much.

I have one other question for Mr. Charbonneau, because he touched on something that we in the Liberal Party had also proposed.

In the case of so-called “stranded assets”, rather than having to liquidate them at whatever rate of annuity you can get today, there should be a mechanism for ongoing investment. I think that would improve the likely pension value for the members. I think you just said that yourself. I'm asking for confirmation. Do you think this would have a fairly significant impact on what pensioners would ultimately receive?

[Serge Charbonneau]

I believe there is some benefit in looking at that type of new mechanism. It doesn't exist today. There is something similar to that in Quebec. A new law was passed in 2009, but it only applies to bankrupt employers. It allows the retirees of those bankrupt employers to transfer their assets to the Régie des rentes. They would invest assets for up to five years and gradually purchase annuities into the market.

We know there have also been exchanges by certain unions in specific situations across the country to change rules to accommodate this type of arrangement for certain employers, but nothing specific has been put into place as far as I know.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

My last question is to Mr. Georgetti.

You're proposing a doubling of the CPP. We're proposing a voluntary Canada Pension Plan that could be implemented in a number of ways, depending on the default position, and so on.

I'd like to clarify one point with you. If you're not going to have intergenerational subsidies, I believe it will take approximately 40 years for the doubling to be fully implemented. But on your page 12 it seems that the doubling occurs in seven years, so what's the true situation?

[Ken Georgetti]

The seven years would be the phase-in of the contributions, not the benefit. The benefit would be accrued, as any benefit of Canada Pension, on the amount of contributions you make for the amount of time you make them only.

[John McCallum, Liberal, Markham—Unionville, ON]

So it would be something like 40 years.

[Ken Georgetti]

Yes.

[The Chair, Conservative, James Rajotte]

Be very brief, Mr. Harden.

[Joel Harden, National Representative, Social Economic Policy, Canadian Labour Congress]

The only thing to add is that the multiplier effect, even for a small amount of contributions at the higher rate, is significant. Seven years of contributions can get a lifetime net amount of pension of almost $29,000 at our rate because of how competitive the Canada Pension Plan is versus the mutual fund industry or other retirement savings vehicles. Even a small amount of time within that 40-year span is very significant--far more than small business or Canadians can get anywhere else.