Finance Committee on April 15th, 2010

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you, Mr. Chair.

Thank you very much, everybody, for being here.

This is a question for Mr. Farrell, but Ms. Puffer and Mr. Markham, feel free to answer.

In any request for credit, any enterprise is going to have all of their costs and their profit outlook looked at. We were talking about changing the priority for pension plan pensioners in the case of a bankruptcy. When I hear that this is a problem, because it will increase the cost of credit, would that not also be true for government regulations that would require certain activities to protect the environment? Would that not also be true for additional costs a company would have to incur to address workplace safety? Would that not also be true for anything else you could think of that a corporation or enterprise would be required to do for the benefit of consumer safety or for the benefit of its employees?

In the larger context, obtaining credit depends on a company's profitability, or its forecasted profitability, or the out-there costs, ultimately. Can you comment on that? Why would this be any different from changing the priority in this instance? Why would that be any different from any other costs that might be imposed on a corporate entity or business enterprise?

[Marlene Puffer]

The important distinction is that the other ideas you suggested are more about ongoing cashflow obligations. That is obviously one of the considerations if I'm going to lend a company money. Are they going to be able to repay their debt on an ongoing basis? I evaluate the probability of bankruptcy and financial distress for the company.

Both things matter, but when you start to think about changing the priority in the event of financial distress, the analysis is a conditional thing. It's conditional on the company becoming insolvent.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Would that not almost make it less likely? For example, in the event of insolvency--CCAA or bankruptcy--you had a cost of x attributed to the change in priority, but you had operating costs, assuming an ongoing operation, that had the same cost of x. Because the one is conditional, arguably, that would almost be even less of a detriment in terms of obtaining credit.

[Marlene Puffer]

You have to evaluate the trade-off. That's exactly what the credit analysis consists of. It evaluates that trade-off. So the answer is that you can't determine it in general. It's an answer that would depend on the circumstances of the company and on the amounts you're talking about.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Right, but it is true that anybody who is considering giving credit to a business enterprise would consider this, perhaps, an added cost, even though conditional, just like any of those other issues I mentioned.

[Marlene Puffer]

Absolutely. Yes.

[Martha Hall Findlay, Liberal, Willowdale, ON]

What we've seen in a number of cases, especially in areas like environmental regulation or workplace safety or consumer product safety, or even in cases of less immediately tangible things, such as a better employee environment, is that organizations have voluntarily gone that path in order to appear to be, or be, better corporate citizens or enterprises. They hope to get more market because of that or more and better employees applying to their organizations. Why would this be any different from that?

[Marlene Puffer]

I think what you are seeing in the world of corporate pension investment management is exactly that kind of behaviour. What we're seeing is a trend towards liability-driven investing. That is, companies voluntarily take on strategies that strengthen the financial soundness of their pension plans.

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Martha Hall Findlay, Liberal, Willowdale, ON]

I'm not talking about the financial soundness. I mean enterprises taking on changes that would actually make them better corporate citizens. I guess I'm arguing that changing the priority to avoid a situation we've now seen at Nortel, particularly in the case of long-term disability, would be right up there with having a better environmental record, for example.

I want it out there that increased difficulty in accessing credit is not anything different from any other cost that might be imposed on a corporate enterprise.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Mr. Markham, be very brief, please.

[Ian Markham]

I think where the difference lies is that for the companies that have the big DB plans, the size of the liabilities and assets in those pension plans and of the deficits—especially what we've been experiencing—can completely swamp the whole company. The costs of environmental and other issues are probably somewhat smaller for most organizations than the impact of financing that deficit is for the big, well-known companies that have been around for decades and decades. The pension costs or liabilities of quite a number of organizations are certainly bigger than half the assets of the company, but for many of them they're actually bigger than the company itself. For those organizations trying to raise cash, let me just give you an example—

[The Chair, Conservative, James Rajotte]

Be brief, Mr. Markham.

[Ian Markham]

Ms. Cameron talked about the funding of federally regulated plans. Those are well-funded plans, actually. The provincial plans are worse funded.

If you go back to March 2009, the typical funded ratio was around 65%, maybe 70%, or even lower than that. Had those organizations at that time tried to raise extra cash in March 2009, it would have proven to be too costly. They couldn't do it because of the massive deficits in their pension plans. In these cases, the legislation that we're talking about may have driven the company under and the plan members may only have received 60% or 70% on the dollar, whereas otherwise, if they had been able to see it through, they might have ended up today at 85%.

[The Chair, Conservative, James Rajotte]

Thank you.

Monsieur Carrier.

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

Thank you, Mr. Chair.

I would like to pursue the subject highlighted by my Liberal colleague. I was a little surprised earlier, Mr. Farrell, in your presentation, when you opposed pension plans being regarded as preferred creditors at the end or in a bankruptcy, particularly since you are not proposing any alternative. It's easy for you to oppose that obligation, that avenue that could be explored. There is a lot of talk about it at present. Not to be socialist, as my colleague said, but we are very concerned about providing a minimum of protection for the public. We are talking about improving protection for the public as a whole, but I think we must at least meet some minimum when people have worked all their lives in a company, when they have sacrificed a portion of their earnings to accumulate a comfortable pension, and then they find themselves with nothing at the end. I think business owners can't say this isn't important because it would cost us too much. I'm wondering whether you at least have an alternative, to protect the public.

In Quebec, legislation was enacted last year. It means that when a company goes bankrupt, the Quebec Pension Plan, the equivalent of the Canada Pension Plan, takes over from the bankrupt company's pension plan. That is an approach that might be suggested. In that case, I put it to you, because you have no alternative for protecting workers who find themselves with nothing. What do you have to say in your defence?

[John Farrell]

Would anybody care to answer that?

[Ian Markham]

If I could just comment on the Quebec solution, if you're an organization and the plan is 85% funded—and perhaps Ms. Cameron can peer-review what I'm saying here—the Caisse de dépôt then takes over the pensions at that 85% level. So people effectively have to accept that at that moment in time, their pensions have dropped in value.

The object is that the Caisse de dépôt would then invest, using certain principles, and hope over time to push that 85% back up towards the 100% mark. In order to do that, they may have to take a little risk, and as I understand it, if the risk goes the wrong way and the plan members are receiving their 85% and the pension fund that the Caisse is holding for that particular group does not have enough money in it, then it's the Quebec taxpayers who have to come in and boost it back up to the 85%. So the risks are actually being borne by Quebec taxpayers. If that's a solution on the table, I suppose it's worthwhile talking about it, as long as it's understood where the backstop is coming from.

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

To your mind, the lives of workers who find themselves with nothing, that isn't a risk that the Canadian public should assume. That is what I conclude from your presentation.

I was also listening to Ms. Cameron earlier. On the question of our concerns about the bankruptcy of Nortel, which the Parliamentary Secretary to the Minister mentioned, and in reply to his question, she said there had been no comments about the Nortel situation because the company was provincially chartered. Is that in fact what you said, Ms. Cameron?

[Judy Cameron]

Yes, that's right.

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

To my knowledge, Nortel has establishments in several provinces of Canada. Does that mean that the company is incorporated in only one province and pension plan protection depends on that province?

[The Chair, Conservative, James Rajotte]

You have about 30 seconds left.

[Judy Cameron]

I'm not an expert on the Nortel situation. If I understand correctly, most of the employees were from Ontario or Quebec. So there were some pension plans that were regulated by Ontario and others in Quebec.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrier.

Just before I go to Ms. Block, I understand we have some very special visitors and observers here in the room with the finance committee. I want to welcome officially on behalf of the committee the high commissioner from Tanzania and the leader of the opposition, who are currently saying hi to Mr. McCallum.

[Some hon. members]

Hear, hear!