I will. Thank you, Mr. Chairman, and thank you very much for inviting us to talk to this committee once again.
I am John Farrell, the executive director of Federally Regulated Employers--Transportation and Communication, otherwise known as FETCO. Here with me as advisers to FETCO are Mr. Ian Markham, Canadian retirement innovation leader for Towers Perrin, and Dr. Marlene Puffer, managing director for Twist Financial. Mr. Markham is a leading actuary in Canada, and Dr. Puffer holds a PhD in finance and applied statistics and is an expert in fixed income and pension investments.
FETCO is an organization consisting of a number of major employers and associations under federal jurisdiction in transportation and communications. A list of our companies appears in appendix A. FETCO members employ approximately 586,000 employees. The majority of FETCO's members provide defined benefit pension plans, and some of the companies also provide defined contribution plans.
Last spring we appeared before this committee to discuss our recommendations for strengthening the pension plan benefits for employees and retirees without unduly constraining the financial flexibility of plan sponsors to maintain appropriate investments in their businesses. Then last October the government announced its intention to make specific changes to the Pension Benefits Standards Act and associated regulations.
The proposed changes are intended to be a balanced package of measures that resulted from extensive consultation with Canadians. The proposed changes provide enhanced protections to pension plan members. These include the following: full funding for any deficit upon plan termination; filing actuarial valuations on an annual basis; restrictions on contribution holidays; a prohibition on plan amendments if a plan is less than 85% funded on a solvency basis; an increase in the current “excess surplus” limit on employer contributions above its current 10% threshold to 25%; and greater pension plan financial disclosure to plan members.
The proposed changes in funding rules, including the ability to utilize letters of credit, will moderate, to some degree, the current volatility of employers’ defined benefit pension contribution requirements. These are much-needed changes that will provide employers with greater predictability in managing their cashflow.
FETCO's members support this balanced package and the changes to the Pension Benefits Standards Act and regulations. We would like to emphasize both the importance of these proposals being implemented and their implementation on a timely basis.
The need for permanent changes in the pension plan funding rules are apparent. Twice in the last four years the government has introduced temporary funding relief to address the onerous and volatile nature of solvency funding requirements. Yields on long-term government bonds, on which solvency liabilities are based, remain at historically low levels. Financial markets remain volatile. Defined benefit plan sponsors continue to be burdened with onerous and volatile solvency funding requirements.
Bill C-9, recently tabled in the House of Commons, contains the proposed changes to the Pension Benefits Standards Act. However, most of the details will be contained in regulations, which have yet to be pre-published. We urge the Parliament of Canada to adopt the proposed changes to the Pension Benefits Standards Act and the government to issue enabling regulations prior to June 30, 2010, the filing deadline for year-end 2009 actuarial valuations.
Now I'd like to address the issue of creditor status in the event of bankruptcy. I know this committee is examining the creditor status of less than fully funded pension plans in the event of a sponsor’s bankruptcy, and we would like to offer FETCO's comments.
We appreciate the policy intent of providing enhanced protection to pension plan beneficiaries in the event of a sponsor’s bankruptcy. The unintended but nevertheless adverse financial ramifications of such enhanced protection could, however, be significant.
Legislation granting preferred creditor status for pension plan deficits would negatively impact existing creditors, including corporate bondholders, as well as plan sponsors that rely on capital markets for financing. It would increase sponsors’ financing costs. It would reduce the value of the sponsors’ existing bonds. It would reduce the availability of credit to plan sponsors. For weaker plan sponsors, it could limit access to credit of any kind, and it could put fragile sponsors over the edge in a bankruptcy situation.
Equally important, granting preferred creditor status to pension plans would cause significant collateral damage to countless Canadians. Reducing the value of the plan sponsors’ bonds would erode the retirement savings for thousands of Canadian seniors for whom corporate bonds are a key component of their portfolios.
As well, most Canadians’ retirement savings, whether held in RRSPs, defined contribution pension plans, or other vehicles, are exposed to corporate bonds. Their retirement savings would also be eroded if defined benefit pension plans were granted preferred creditor status. In addition, it would exacerbate the inequities between Canadians who participate in defined benefit pension plans and those who participate in other types of retirement plans that cannot, by the nature of those plans, benefit from preferred creditor status for any loss in value.
Preferred creditor status for pension plans would place companies that offer defined benefit plans at a competitive disadvantage against companies that do not offer defined benefit plans, as well as companies in jurisdictions that do not provide such preferred creditor status, including the United States, Great Britain, the Netherlands, and Germany. As a result, such legislation would serve to accelerate the private sector’s move away from defined benefit plans.
In considering the security of plan participants’ benefits, it is critical that legislators not lose sight of the fact that the basic premise underlying the security of their benefits remains a financially strong sponsor. Companies must continue to invest in their businesses to remain competitive and increase productivity. Failure to do so will weaken companies and may even put some companies out of business. Continuing to burden companies with incremental costs, including the costs associated with preferred creditor status for pension plan deficits, will accelerate the process.
Now I'm going to return to the retirement income system in Canada.
FETCO supports the broader consultations that are currently taking place in Canada to ensure the ongoing strength of Canada’s retirement income system. At the heart of these consultations is the question of pension coverage for Canadians. Professor Jack Mintz’s December 2009 report stated:
The OECD suggests the Canadian retirement income system performs exceedingly well by international standards, with the three pillars enabling Canadians to provide enough retirement income to sustain an adequate standard of living in retirement.
FETCO believes that the existing mandatory elements of our current retirement savings system are, in total, sufficient as a minimum framework. Further, we believe that the diversity of the various components of the system reduces risk and contributes positively to income security in retirement.
It is generally acknowledged that Canada’s existing social security programs provide sufficient basic retirement benefit for those at lower earnings levels. In the event that governments wish to enhance the current system for middle-income Canadians, we oppose a mandatory expansion of the Canada Pension Plan. Employers need to have a large range of pension design options at their disposal that are suitable for their particular cost and risk tolerances.
Finally, the modernization of pension plan standards to support the viability of defined benefit plans is an important element in supporting retirement income adequacy for many Canadians. This will enable plan sponsors to continue to manage the risks inherent in their defined benefit plans, thereby allowing them to maintain these plans for current and future Canadians.
Mr. Chair, thank you very much for the opportunity to make these comments. I will turn to my advisers if you have some technical issues you want to discuss.