Finance Committee on April 15th, 2010

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

Mr. Farrell, will you accept that if you don't want to have better treatment of pensions in the event of bankruptcy then it's a much stronger case for a pension guaranty of some sort, or else the pensioners are totally out in the lurch?

[John Farrell]

Not necessarily. I'll defer to Mr. Markham, who'll be able to help us with this answer.

[Ian Markham, Canadian Retirement Innovation Leader, Towers Watson, Federally Regulated Employers - Transportation and Communications (FETCO)]

On that score, a problem of these pension benefits guaranty funds is that if you're a planned sponsor and you're running your plan as best you possibly can, and it's reasonably well funded or very well funded, then the risk is that you will end up putting your moneys into this guaranty fund, and thereby protecting other plans that may have been run with more risk in their asset portfolios and so on. As the better-run plans' sponsors, and the ones who are managing their plans more carefully, you potentially end up subsidizing the other ones. That is one of the reasons why it's an extremely unpopular deal for companies that are in voluntary pension arrangements.

You've only presented two choices, between the preferred creditor status and a pension benefits guaranty fund. Where FETCO would come from, and I think where many private sector defined benefit plans would come from, is let's strengthen, through OSFI and through all the provincial regulators, the funding of pension plans so that each organization will be perhaps doing actual evaluations more often, perhaps having a cushion of extra funding, and so on and so on. In other words, strengthen the funding of pension plans and at the same time provide some quid pro quos to making it easier to keep these DB plans going.

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

You've still got to address the issue that bad stuff sometimes happens. You don't really have a solution, neither insurance nor preferred status, for plans that go bankrupt.

[Ian Markham]

FETCO's solution would be not to do either. It would be to strengthen the system of funding--

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

But even if you strengthen the system, it won't be perfect. There will be failures.

[Ian Markham]

It won't be perfect. That is correct.

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

Okay.

Ms. Di Vito, I like a lot of your proposals. All of them cost quite a lot of money. The one that I have a bit of a problem with is the rolling over to the next generation, because the whole principle of RRSPs I thought was that you get the tax benefit when you contribute but you pay it back when you're older. If you allow it to go to the next generation, why not the next one and the next one and the next one? It seems to me that infringes on the basic principle of RRSPs. Even though there may be some benefits, it seems to me it's a slippery slope.

[Tina Di Vito]

Currently, we already allow tax-free rollovers to a surviving spouse upon the decease, whether they have an RRSP or a RRIF. It puts individuals who do not have a surviving spouse or common-law partner at par. This is very common in Canada, where we see the divorce rates rising significantly for the 55 and over. Through death or never marrying at all, chances are quite high you will be single in retirement. You don't have that same opportunity to roll over your RRSP or RRIF assets to another individual.

If we are looking at baby boomers today and if our argument is that they're not saving enough, that they're carrying debt into retirement, there seems to be an incentive if we allow RRSP or RRIF assets to go from mom and dad to a child, as long as they put it into their own RRSP and RRIF. If they decide to spend that money prematurely, then the government would certainly collect their tax revenue. That's the premise of that.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. McCallum.

Monsieur Paillé.

[Daniel Paillé, Bloc, Hochelaga, QC]

If I understood the last remark, the objective is to ensure that people who die were married to younger people, who then marry other younger people after their spouse dies. That's one way to do it.

I noticed that my banking colleague addressed the first remark to his banking colleagues. I'm going to start with a professor, since I was one myself.

Professor Lee, you say you prefer to own a home rather than accumulate an RRSP. I would say that is quite reasonable. I see that my children, people in their thirties, prefer to invest in a home since they will have the enjoyment of it for a long time, while their RRSP, it concerns me. That's essentially me. So it's a problem. Your remarks about pensions in fact related to the later part of a person's life. With all the advertising we've had about "Freedom 55", we were freeing ourselves from something. So we have completely changed the culture in this respect.

When you say we have to achieve equality between the private and public systems, which of the two do you change? Do you bring the public down to the level of the private, or do you raise the private up to the level of the public?

[Prof. Ian Lee]

I'm going to speak against my own interest. I think public sector pensions are too generous. My pension is too generous. I think the private sector, the small-business sector, is being mercilessly exploited, to use the language of social democracy. We need to reduce the pensions in the public sector to even out the differences with the private. The principal method is by increasing minimum mandatory retirement to age 70.

[Daniel Paillé, Bloc, Hochelaga, QC]

I appreciate that you can say that. It's clear that you have permanent employment, if you can say such a thing.

Ms. Di Vito, have you consulted with the government about your RRSP rollover idea? I think being able to roll RRSPs over to our children tax-free is an idea worth considering. What you said about how RRSPs should be taxed like salary for the contributions and probably at a lower rate for capital growth is also interesting. Have you had discussions with the Government of Canada's Department of Finance on that point?

[Tina Di Vito]

Yes, we have had some informal discussions on that.

One of the recommendations we made was to allow RRSPs and RIFFs to roll over to an RDSP, the registered disability savings plan, which I noted earlier has been proposed in this year's federal budget, so we were quite pleased. But this is something that we see as a significant advantage to those Canadians who are so-called “under-saving”. Being able to inherit an RRSP intact, free from taxes, to replenish their underfunded RRSPs would be a significant benefit to Canadians.

When we look at baby boomers, this is the group on whom, across the country, there will be the biggest impact. They will be entering retirement over the next five to ten years en masse, and we think they are under-prepared for retirement.

Looking at current seniors, their lifestyle is very different. Boomers today will not retire to that same lifestyle. You said you are your children's RRSP. The fact remains that there is a sandwich generation. Baby boomers today are caring for their children, for themselves, and for their aging parents. One of the things we've seen first-hand is how caring for parents and their long-term care needs later on in life is now falling to the children because their parents have not adequately planned for that.

[Daniel Paillé, Bloc, Hochelaga, QC]

Thank you.

I would like to ask the Canadian Federation of Independent Business representative a question because she has done an excellent survey. To all intents and purposes, there are two kinds of businesses: those with 0 to 49 employees, where a very large majority have no pension plan, and those with between 50 and 500 employees, where 56% of them have employer and employee plans. The reason you cite is that it's too expensive.

Have you observed differences between the provinces? Quebec is the SME champion in Canada. Have you seen differences between Quebec, where there are the most SMEs, and elsewhere in Canada?

[Doug Bruce, Director, Research, Canadian Federation of Independent Business]

That survey data is for Ontario only. As Catherine Swift mentioned, we will be surveying our members across the country, but my guess in looking at some of these survey questions and results in the past is that it probably wouldn't vary significantly by province. The key aspect here is the size of business. A lot of them can be in a seasonal sector. The employees, for example, don't have these plans, because there's less demand among their staff to have a retirement savings plan in the workplace as well. But in terms of provincial breakouts, we will be able to have that data available for the consultations by the end of the day.

[Daniel Paillé, Bloc, Hochelaga, QC]

Thank you.

I'd like to ask one last question about FETCO. With all due respect, I would say that, in my opinion, you are propagating the urban myth that the financial markets would be a nightmare if pension plans were given creditor status or employees were preferred creditors.

For quite a long time, throughout my career, I was a company CEO, and I know that granting or applying for credit is a function of risk analysis. In my opinion, that would be part of the risks and the analyses. I agree that there would have to be a buffer period, to use that term, but I don't think we can say it would be a nightmare and we absolutely can't make employees preferred creditors when they retire because it would scare people.

[John Farrell]

I'll defer to Dr. Puffer to answer your question.

[Marlene Puffer, Managing Director, Twist Financial, Federally Regulated Employers - Transportation and Communications (FETCO)]

The big question about the impact on the capital markets is to get away from thinking about it as the impact on average and the impact under normal circumstances. It's very difficult to assess what the impact would be immediately if this were to be done. If any study purports to be able to provide data to that effect, it's just not feasible to actually estimate it. You can't run that social experiment.

What we do know is that credit-rating agencies take into account in their evaluation of the credit-worthiness of companies the status of the pension plans, and we do know that they account for the deficit position of a pension fund as additional effective debt held by the company. So for those companies that have a substantial defined benefit pension fund, and at the times when they are either in a deficit position or there's a high risk of a deficit position because of their investment strategies, those companies in particular would absolutely be impacted, and potentially quite significantly, potentially through a decrease in their credit rating and therefore an increase in their financing costs.

[The Chair, Conservative, James Rajotte]

Thank you.

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

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair, and thank you to all our witnesses for appearing here today.

I'm glad we have OSFI here with us, and that's where I'm going to direct my questions to start with.

We haven't had the regulator here to explain some of the jurisdictional issues that we all face. I'm privileged to have met with almost all of you before in this process, so I've heard some of the challenges, and we're hearing more as the witnesses continue to come to our committee. I'm glad that the rest of are able to hear these challenges.

We know the complexities of this situation. Ms. Cameron, we realize the importance of making sure that any new policy direction we take is in cooperation with the provinces and we're seeing more and more provinces step up to that, rather than working at cross-purposes. Can you provide us with a quick analysis of the jurisdictional issues that pension regulation policies present to you and to the provinces?

[Judy Cameron]

Do you mean the differences in the regulations, the rules?

[Ted Menzies, Conservative, Macleod, AB]

Yes.

[Judy Cameron]

One of the jurisdictional issues is simply that under the Constitution, pensions are regulated according to where the area of employment is regulated. In some businesses employees fall under federal regulation; those businesses include banking, telecommunications, interprovincial transportation, etc. Then there are areas of employment that fall under provincial regulation, and a company can have employees who fall into both categories. They can have some employees who are regulated at the federal level and some who are regulated at the provincial level. Those are called multijurisdictional pension plans; they're subject to many kinds of rules, and I think that makes the administration of the plan much more complicated.

Ideally you would have some form of harmonization of rules. That would require a lot of coordination between provincial and federal governments, and that's really beyond the scope of the regulators. To deal with this challenge, regulators have been working on a reciprocal agreement that allows the regulator with the plurality of members to regulate on behalf of the smaller jurisdictions in the context of a particular plan. That approach minimizes the burden, but it doesn't eliminate it.

Was that the area you were...?

[Ted Menzies, Conservative, Macleod, AB]

Thank you. I appreciate that.

To continue, we've had some very devastating stories provided to us from the Nortel people, and they were just a sampling of people whose pensions have been threatened. We sympathize with those people, but we need to make sure that we have an understanding of the regulatory role specifically in terms of Nortel pensions.

You are the federal regulator of pensions, and that jurisdiction is outside bankruptcy and CCAA. What role did you have in Nortel, if any?