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.