Finance Committee on Oct. 17th, 2022

[Julie Dzerowicz, Liberal, Davenport, ON]

To what extent would providing greater protections to unfunded pension liabilities in insolvency proceedings improve the recovery of amounts owed to members of underfunded pension plans? Despite the changes you have put into your private member's bill, if we pass it, is there still a chance for them to lose a portion of their pension in spite of the proposed changes?

[Marilyn Gladu, Conservative, Sarnia—Lambton, ON]

We're getting the report on whether or not the pension fund is solvent, and those things can go up and down, especially depending on what they're invested in. Let's say they report it, and they've used the mechanism to transfer money in and fix the pension fund, but then one of their investments goes a bit south at the time of the bankruptcy. There is a potential that that could have an impact, but it would not be anywhere near the magnitude of the 50¢ on the dollar or 40¢ on the dollar impacts that we have seen in the past.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Ms. Gladu.

Mr. Chair, I could go on forever, if you like.

[The Chair, Liberal, Peter Fonseca]

Oh, you're right on. You have three seconds, so you're right on time, MP Dzerowicz. You have a good internal clock.

Thank you very much, MP Gladu, for answering all those questions and for your private member's bill, Bill C-228. Thank you for your testimony.

We are going to suspend at this time as we bring in our second panel.

We just want to thank MP Gladu for all of her hard work.

Thank you.

[The Chair, Liberal, Peter Fonseca]

I call this meeting back to order.

For our second hour, from the Department of Finance, we have Kathleen Wrye, director of pensions policy, financial sector policy branch. Also, we have Mr. Neil Mackinnon, senior adviser, financial sector policy branch. From the Department of Industry, we have Mark Schaan, senior assistant deputy minister, strategy and innovation policy sector; and Paul Morrison, manager of the corporate, insolvency and competition directorate.

It will be five minutes from Finance and five minutes from Industry. We'll have Finance first, and then Industry after.

Please go ahead.

[Kathleen Wrye, Director, Pensions Policy, Financial Sector Policy Branch, Department of Finance]

Thank you very much, Mr. Chair.

I think my colleague Mark Schaan is going to start us off.

[The Chair, Liberal, Peter Fonseca]

Thank you.

[Mark Schaan, Senior Assistant Deputy Minister, Strategy and Innovation Policy Sector, Department of Industry]

Thank you, Mr. Chair, for the opportunity to speak to this committee about Bill C‑228.

I will confine my remarks only to the insolvency law aspects of the bill. My colleagues from Finance Canada we speak to the provisions of the bill affecting federal pension legislation.

Let me start by describing what the bill would do.

Canada's insolvency laws provide two sets of options to financially distressed companies—liquidation, or bankruptcy; and restructuring. The superpriority in Bill C‑228 would affect both options. Liquidation occurs when the company can no longer continue as a going concern. It must be wound up and its assets sold to pay the company's creditors. In bankruptcy, pension claims would change from unsecured status to superpriority status, meaning that they would be paid ahead of most other creditors.

The second impact of the bill would be on restructurings. Our insolvency laws are designed to encourage companies that are financially distressed but fundamentally viable to try to avoid liquidation through court-supervised restructuring plans with creditors. Bill C‑228 would change the current balance by requiring that a restructuring plan provide for payment in full of unfunded pension liabilities to receive court approval.

This quick presentation completed, I should note a few general contextual elements for the committee. Given our years of practice in analyzing and working with the domestic and international insolvency and bankruptcy systems, it is worth stating at the outset that the Canadian Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act are carefully considered and calibrated regimes. Our fundamental aim in the system is to avoid liquidations and allow restructurings where possible, to ensure an orderly and fair system that prevents gaming or a race to the courthouse, and to incentivize behaviours that maximize the value of the corporation and its returns for all workers and creditors.

Large corporations, such as those most likely to have defined benefit pension plans or to avail themselves of the Companies' Creditors Arrangement Act, are complicated entities with a number of competing interests. Shifts in one aspect of the regime will have implications and considerations for other aspects.

I will seek to highlight some of these areas of consideration for the committee, given the shifts that this bill would introduce.

It is also worth noting that this is an area to which we have dedicated considerable time and effort. In particular, I would note for the committee the important work proposed and implemented in the retirement security project, which saw changes to insolvency, corporate governance and federal pension laws with an eye towards the protection of pensioners and workers.

With that, I would begin by bringing some potential drafting issues to the committee's attention.

First, the committee should be aware that the bill uses terminology from federal pension law that may or may not be relevant to the various provincial pensions laws. The bill also does not distinguish between different types of pension plans with different employer funding obligations. My Finance colleagues would be happy to answer questions on these issues.

Second, I wanted to note that the five-year transition period, as drafted, is tied to a calendar date, to five years after coming into force. Insolvency law transition clauses are typically drafted to only affect proceedings that start after they come into force, to ensure that the rules do not change in the middle of an ongoing insolvency proceeding. Under Bill C‑228, a restructuring proceeding could start four years after coming into force, but the new superpriority could come into force a year later, changing the rules midstream and potentially reducing the chances of a successful restructuring.

I will now turn to a number of more substantive considerations the committee may want to investigate during its study of Bill C‑228.

First, the committee may want to look at the differential impact the bill could have on pensioners under different scenarios.

When the bankrupt assets are sufficient to cover unfunded pension liabilities, for instance, the bill may increase the amount that pensions could receive in a liquidation because they would be placed ahead of other creditors. When the bankrupt employer's assets are insufficient to cover the liability, which can be very large, it may be that losses could be locked in for pensioners without any prospect for further recovery given the impacts that the bill may have on restructurings or other possible futures of the plan.

Second, the committee may want to look into how the bill would change restructuring dynamics when a defined benefit pension plan is involved. We are all familiar with examples of insolvencies that resulted in pensioners not receiving their full benefits. On the other hand, there are also many examples of restructurings under current law where the pension plan was successfully preserved, along with the employer and ongoing jobs, such as Air Canada, Stelco and AbitibiBowater.

New superpriorities could, for example, shift the behaviour of players in the insolvency systems. With a new possibility that a secured creditor may be at risk of not receiving full payment given a pension deficit, that creditor may have a strong incentive to choose to race to the bank to call their loan, or similarly take steps to maximize their return in advance of an insolvency. It is possible that a change in the incentives in restructuring could trigger more insolvencies and even minimize the outcomes for pensioners when insolvency is triggered. The committee may want to speak to the creditor community to assess their views about the impact of this bill.

Similarly, the committee may want to consider the impact the bill could have on the availability of interim financing—that is, the special insolvency loans that insolvent companies must acquire to cover the restructuring costs.

[The Chair, Liberal, Peter Fonseca]

Thank you. We've gone well over our time.

We are going to hear from Finance now for up to five minutes, please.

[Kathleen Wrye]

Thank you, Mr. Chair.

Good evening. My name is Kathleen Wrye. I'm the director of the pensions policy team at Finance Canada. I'm here today to answer your questions about this private member's bill, Bill C‑228. I would also like to take this opportunity to provide a bit of context on the funding requirements in federal pension legislation, which is the Pension Benefits Standards Act, or PBSA for short, and how the legislation works to protect the pension benefits of defined benefit plan members and retirees.

I will also provide a few of the key comments we have on the proposed amendments to the PBSA in Bill C‑228 and how they interact with existing provisions in the act.

Under the PBSA, the federal government regulates the pension plans of Crown corporations and private sector plans covering areas of employment under federal jurisdiction, such as telecommunications, banking and interprovincial transportation, as well as private pension plans in the three territories.

The Office of the Superintendent of Financial Institutions is responsible for supervising federally regulated plans with the mandate to protect the rights and interests of plan beneficiaries. At this time, there are over 1,200 federally regulated pension plans. Over 400 of those plans are defined benefit or a combination of defined benefit and defined contribution. Approximately 7% of pension plans are federally regulated, with the remainder being regulated by the provinces.

The PBSA sets forth a number of requirements in respect to the funding and administration of plans that are designed to protect and promote pension benefit security for plan members while acknowledging that the financial health of plan sponsors is important for the continued operation of these plans.

Under the PBSA, there is a specific requirement for plan assets to be held separate from those of the employer. This protects plan assets from being seized by creditors in the event of bankruptcy proceedings.

Further, federally regulated defined benefit plans are generally required to be 100% funded on a solvency basis, which means that they must have enough assets to purchase annuities from a life insurance company to provide the promised pensions in the event of an employer insolvency. The employer is required to fund any funding shortfalls within a period of five years. As of December 31, 2021, the average estimated solvency ratio of federally regulated defined benefit plans was at 109%, meaning that the assets of these plans were, on average, 9% higher than their solvency liabilities.

To address solvency deficits and ensure benefit protection, plan sponsors are able to obtain a letter of credit in lieu of making any solvency special payments up to a limit of 15% of the plan solvency liabilities. The letter of credit amounts would be paid into the plan in the event of an employer insolvency, similar to insurance. Plan sponsors are also able to obtain life annuities from regulated life insurance companies either by purchasing them as a planned investment or by having insurance companies make pension payments directly to retirees. Transferring the obligation to make these payments to a life insurance company helps to secure pension benefits for plan members and retirees.

The use of insurance to meet funding requirements as proposed by the amendments in Bill C-228 would not be very different from the existing tools available to plan sponsors under the PBSA. However, I would note that the existing PBSA provisions are accompanied by a number of safeguards to ensure that pension benefits are protected, such as details regarding which institutions can provide letters of credit to plan sponsors. The current bill does not include any such safeguards to ensure that the insurance to be used would be appropriate for protecting retirement benefits.

I would also like to take this opportunity to raise the consideration related to the amendments regarding transparency requirements in the bill. Bill C-228 contains amendments that would require the superintendent to consult with the Office of the Chief Actuary on its annual report prior to its being tabled in Parliament, and to send this report to provincial ministers of finance and provincial security commissions. I would note for the committee's consideration that neither the Office of the Chief Actuary nor provincial ministries of finance or security commissions have any roles or responsibilities with respect to federally regulated private sector pension plans. As such, it is not clear what these amendments are intended to achieve, in particular as this report is already made available on OSFI's website.

To close, I would like to thank the committee for allowing me to provide some additional context and raise these considerations as part of its work to study the bill.

I look forward to answering any questions you may have or discussing other considerations with respect to the amendments to the PBSA proposed in Bill C-228.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Wrye, Mr. Schaan, and all officials.

We are going to move into questions from members in our first round, which will be six minutes for each party.

We have the Conservatives up first. I have MP Chambers for six minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Thank you to our officials for appearing with us here this afternoon. I will ask my questions, but feel free to delegate them as you wish, depending on your area of expertise.

I'm hoping to get a discussion on.... We've heard some questions about unintended consequences and potential liquidity issues or lending issues of those organizations that might be close to insolvency now if these rules were to come into force.

The question is more around a sizing of this problem. I heard some stats. There are about 400 defined benefit pension plans, 7% of which are federally regulated. Are there any studies, any information that can be shared with this committee, that have looked at the number of companies that would be affected by this legislation and/or the number of companies that may, in an unintended way, be negatively impacted by this legislation? For example, they might have a challenge getting credit.

Do we have an idea of the size of the issues that we're dealing with?

[Mark Schaan]

I'm happy to start and then turn to my colleagues from Finance, who will have more precision.

One important thing to note is that while the Pension Benefits Standards Act—as my colleague from Finance noted—applies to federally regulated pensions, the insolvency system applies to all organizations and companies within the country. The number of companies potentially subject to this law would be all of those companies proceeding either through the Bankruptcy and Insolvency Act or through the Companies’ Creditors Arrangement Act.

It is important to note that while we've had some discussions about federally regulated pensions, this would be applicable across the entirety of the insolvency regime.

I'm happy to turn to my Finance colleagues to try to give you a sense of the population of DB pension holders.

[Kathleen Wrye]

Thank you, Mark.

According to the latest statistics that we have from OSFI on pension coverage in Canada, there are approximately 9,000 defined benefit pension plans. There are around 4.5 million active members as of 2021 in Canada.

The 400 plans that I mentioned were only within the federally regulated space, so they are the 7%. The other 93% of pension plans in Canada are provincially regulated.

[Adam Chambers, Conservative, Simcoe North, ON]

There are 9,000 DB pension plans. At what rate have defined benefit plans been converting to DC plans over the last decade? We've already seen a significant erosion of DB pension plans. That universe has been shrinking at a significant pace over the last 10 years.

Are there any round numbers of how many we expect are rolling off every year?

[Kathleen Wrye]

I'm seeing if I can pull up numbers.

The member is right. There has been a significant decline in defined benefit pensions in Canada as planned sponsors move towards defined contribution. I just need to grab the information.

[Adam Chambers, Conservative, Simcoe North, ON]

Perhaps while you're looking for that, I'll ask a follow-up question.

[Kathleen Wrye]

Thank you.

[Adam Chambers, Conservative, Simcoe North, ON]

This bill, or a version of the bill, was studied by previous Parliaments. I think what I'm hearing in some of the language is a push for additional study.

I suppose the question would be more around.... If we believe there are unintended consequences, have we not already discussed what they are in previous Parliaments? Could we have provided to this committee the previous reports that were done by the government on this issue?

[Mark Schaan]

I obviously can't speak to the specific process that you might want to adopt as a committee, but I would say that the issues related to the structuring context and insolvency law in Canada continue to evolve and have evolved as a function of additional changes that have been made, for instance, by the government. There have been subsequent changes to both the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act, as well as to corporate and pensions law.

It's also worth noting that a key factor that plays into this overall discussion is pension solvency requirements by pension regulators. My colleague from Finance was able to identify the pension solvency regulations at the federal level, but it's worth noting that there are extremely different deviations from that norm in provincial funding requirements. That is a shifting landscape that is an important part of the overall considerations for this bill, noting that, in a number of cases, provinces actually have no requirement for solvency funding of pensions on a windup basis.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Perhaps in my last 30 seconds I'll just make the point that I'm highly sympathetic to those individuals who have some concerns about unintended consequences for people who are maybe pushed into bankruptcy.

The issue, I think, is that the government has had this legislation since June. We've looked at this legislation previously. I have yet to hear or see any amendments brought forward on behalf of the government to improve the bill.

We all recognize and can read the room that the bill has cross-party support, at least on this side of the table. It would be incumbent upon the government to introduce amendments that it feels it could live with in this piece of legislation. It has had a significant amount of time to generate this over the last 10 years as various versions of this bill have been before various Parliaments.

Thank you, Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

Now we'll hear from the Liberals. We have MP Dzerowicz for six minutes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I think Mr. Chambers stole all of my question notes. I think he literally took the direction of every single one of my questions.

I want to start off just by thanking our officials for being here today. Thank you for your extraordinary work. I know this is not an uncomplicated matter, so I really appreciate all of your hard work on this.

As mentioned by my colleague, I think there's a very strong desire to strengthen protections for pensioners. I personally suspect that the reason it's taken this long is that it is actually highly complicated. On the one hand, you want to provide room for companies that are in financial difficulty to restructure and get back on their feet, while at no point in any way threatening 100% of the pensioners' pensions.

I would like to very quickly make sure it's clear on the record. Ms. Gladu had indicated that this bill would only affect federal pensions, but what I heard from Mr. Schaan is that it would actually impact companies right across the country. It would be applicable to all companies across Canada.

Can you please verify that?

[Mark Schaan]

I'm happy to confirm that the nature of insolvency is that it is a federal responsibility. The rules that provide for the orderly insolvency process cover all creditors and debts of companies in the BIA and CCAA process. This would mean that pensions, regardless of their regulator, would be creditors to an insolvency that's presided over by federal legislation, which this bill amends.

[Julie Dzerowicz, Liberal, Davenport, ON]

What role do the provinces play in ensuring the long-term viability of pension funds? How does that play into the private member's bill that's before us?