Industry Committee on Nov. 16th, 2010

[The Chair, Conservative, David Sweet]

Ladies and gentlemen, welcome to meeting 44 of the Standing Committee on Industry, Science and Technology.

We have quite a number of witnesses here today. They're listed on your orders. I know that some are stuck downstairs and they'll be making their way up. That means we have Mr. Rafferty and two witnesses here and of course plenty of members. We'll get started so we can try to stay on time.

Because of the nature of our meetings--they're so full with witnesses and we have so few--Mr. Rafferty, normally we'd have the mover of the bill give an opening statement and then respond to questions directly, but we're going to include you in the broader witness quorum so that we can move along.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Chair, I'm quite happy not to answer any questions and just to give a brief statement, to allow more time for witnesses, because we do have a pretty packed schedule.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Rafferty. If you could keep your opening remarks to five minutes—

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Yes.

[The Chair, Conservative, David Sweet]

—as will the rest of the witnesses, then you and the other witnesses will be subject to questions.

Please go right ahead, Mr. Rafferty.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Thank you very much, Chair.

As parliamentarians we're charged with a high duty; that is, above all else, to look out for the public interest. To do this we must weigh the benefits of implementing certain public policies against the costs of inaction. It's a heavy responsibility, but I'm sure we can agree that when confronted by a social injustice we are necessarily compelled to act to remedy it.

What we have witnessed in recent years, during the economic downturn, is the emergence of a massive social injustice that went largely unimagined for a long time, largely because the conditions never existed. With the economic downturn we saw employers like Nortel, Air Canada, General Motors, and AbitibiBowater fail and the value of certain assets and investments sink on a scale not imagined in recent times. It was a perfect storm for workers. Employers failed, jobs were lost, and pension funds became insolvent. Lives were decimated, and I have no doubt that some lives were lost during this crisis.

As parliamentarians we must bear the collective responsibility of having allowed these conditions to exist in the first place. But we bear an even greater responsibility today, and that is to ensure that such an injustice can never occur again.

Bill C-501 will do what, surprisingly, has not been done before. It would in most cases secure the pensions of all Canadians whose employers have fallen on hard times, have undertaken restructuring, have entered bankruptcy protection, or have collapsed entirely and had their assets liquidated. If passed, Bill C-501 will mean that every working Canadian can take comfort in knowing that their pension, their retirement, is as secure as possible.

We'll hear in these proceedings from those who will outline the dire need to implement these reforms. We'll hear from those who oppose such reforms. And we'll hear from others who are no doubt conflicted or have alternate prescriptions. In the end, I urge all members to remember that we alone have the ability and bear the responsibility to act in the interests of the people who have elected us to this place to govern on their behalf.

I believe it's time for Bill C-501 to become law. I believe the testimony of the witnesses will bear this out.

I ask all members of this committee who have thus far worked so cooperatively with me on this bill to continue to do so and to exercise our unique powers to ensure that such an injustice is never faced by a hard-working Canadian again.

Thank you, Mr. Chair.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Rafferty.

Now we'll move on to Mr. Laver.

I know you're setting up your communications. I need you to stay within the five-minute limit, please.

[Ross Laver, Vice-President, Policy and Communications, Canadian Council of Chief Executives]

Mr. Chair, honourable members, thank you for the opportunity to appear this morning.

I'd like to begin by acknowledging the efforts of John Rafferty and other parliamentarians on behalf of private sector workers who are covered by defined benefit pension plans.

The issue of pension benefit security is both serious and complex. Particularly in the wake of the global financial crisis, it has received a great deal of attention in Canada and throughout the industrialized world.

As you know, Parliament has already taken a number of important steps this year to strengthen protection for pension plan members. In the past, for example, a federally regulated company that terminated its DB plan would have been free to walk away from any deficit. As a result of legislation passed this year, such a plan will now have a claim on the assets of the corporation similar to that of any other unsecured creditor, the same level of protection offered to members of provincially regulated plans. Moreover, if the company is behind in its contributions or has failed to remit employee contributions, those amounts will be treated as super-priority claims. Both of these changes are fully consistent with OECD recommendations on pension benefit security.

On top of those reforms, plan sponsors are now also required to file actuarial updates every year rather than every three years. This is intended to reduce the size of future pension deficits by requiring that companies act sooner to make supplementary payments. Also this year, the federal government moved to restrict the ability of employers to suspend contributions when pension plans are in surplus, and to revise the previous tax rule that actually forced companies to halt contributions when the plan was more than 110% funded. Taken together, these changes represent a substantial and important overhaul of the rules surrounding defined benefit plans for employees of federally regulated companies.

Most provincial governments have implemented or are in the process of implementing similar reforms. So let's be clear. The pension system as it now stands is very different from the one that existed prior to the economic downturn.

The issue now with Bill C-501 is whether to go dramatically further by enacting changes that have not been tested in any other advanced industrialized country with a pension system similar to Canada's. Let me expand on that. The proponents of this bill have said repeatedly that most other developed countries already provide the kind of protection offered by Bill C-501. The truth is that most of the countries they cite have pension systems that are in no way comparable to Canada's because they rely predominantly on defined contribution or state-sponsored plans, as opposed to the private sector plans that would be affected by Bill C-501. On the other hand, Germany, Ireland, the Netherlands, Portugal, the U.K., and the U.S. do have pension systems similar to Canada's, yet in not one of these countries are pension deficits given priority over all other creditors in the event of bankruptcy.

Bill C-501, in other words, is an experiment. Before you decide to embark on that experiment, the members of the CCCE would urge you to consider the risks.

The most obvious risk is the impact that this bill will have on the cost and availability of credit. I suspect you're going to hear a lot about this during these hearings. The bill's supporters are going to tell you that the impact would be negligible, that you can go ahead and experiment with the pension system because the financial consequences would be minimal. That's not what the OECD says, however. In a 2007 study of pension protection, the OECD called the idea of giving priority rights to pension creditors controversial--their word. The OECD report said, and I quote, that “assigning ‘super priority’ rights ahead of even secured creditors would likely have a major impact on capital costs, particularly given increasingly market based pension accounting and funding standards”.

Recently a number of independent studies in Canada have reached the same conclusion. I'll leave it to other witnesses to discuss the specifics, but they demonstrate convincingly that the cost to bond holders and companies would be in the billions. What's more, the impact of Bill C-501 would be greatest for precisely those companies that are most in need of credit to stay in business. Lenders would either refuse to provide more credit, or would demand punitive rates.

The bottom line is simple. If passed, this bill will almost certainly force into receivership and into liquidation companies that would otherwise have had a chance to survive. Far from helping workers, it would destroy jobs and hurt Canadian families.

In closing, let me again congratulate members of Parliament for the important steps you have already taken to strengthen Canada's system of private sector defined benefit plans. Bill C-501, however, is clearly a step in the wrong direction.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Laver.

Now on to Madam Urquhart for five minutes, please.

[Diane Urquhart, Independent Financial Analyst, As an Individual]

I'm going to speak technically this morning on the impact of Bill C-501 on the cost of credit.

My conclusion is that the cost-of-credit impact is small on investment-grade owners and corporations with defined benefit pension plans. By comparison, the impact is small relative to the high damages and costs to retirees and severed workers of maintaining the status quo.

With respect to the junk bonds, there is a higher impact, but these are speculative securities that investors recognize when they invest in them.

First of all, the impact of Bill C-501, based on my research, is that the overall bond market exposed to defined benefit pension plans will have an increase in the cost of credit of 20 basis points. This is consistent and in the middle of the range of the 12 to 29 basis points determined by Phillips, Hager & North, owned by the Royal Bank. In addition, my estimate of 20 basis points is consistent with the 25 basis points that has been the outcome of the research of Towers Watson. I believe both of those organizations will be before you.

This level of 20 to 25 basis points impact on the investment-grade markets is consistent with all of the international research that I have reviewed. The basis of my analysis is that the increase of 20 basis points is a calculable matter, as we have also seen with the other financial organizations, since the credit market is the present value of the impact of cash flows. What Bill C-501 does is to reduce the recovery rates for those corporations that do enter default; as a consequence, the risk premium needs to go up in order to compensate for the reduction in recovery rates. If we were not to take legislative change because there was a negative impact, then no legislative change would be undertaken.

The impact of a 20-basis-point increase in the cost of credit for the investment-grade markets is that all of the bonds that have exposure to defined benefit plans will go down only 1.5 percentage points. You'll hear later in this hearing that Phillips, Hager & North have done a roll-up of the top 60 bond issuers and they have determined that most of the bond issuers do have exposure to the defined benefit pension market. However, they too concur with my work that the degree of increase is approximately in the.... They say 12 to 29 basis points, and they consistently also agree that the impact on the bond market is only down 1.5%.

Based on the 20 basis points, the impact on the bond market as a whole is approximately $3 billion, and that's consistent with what the Royal Bank has indicated the bond market impact is as well. There is also an increase in the cost for corporations. I'm saying that that cost is approximately $3 billion, so the total cost of Bill C-501 on the Canadian economy, on a present-value basis, is approximately $7 billion. Seven billion dollars is a nominal amount in relationship to both the bond market values outstanding and the corporate profitability dynamics.

What I'd like to note also is that with respect to pension funds the deficit today, on average, based on the Royal Bank analysis, is 20%. So what we're saying is that the bond market goes down by 1.5%, but for those companies that go bankrupt, the average deficit is 20%. Depending on what the value of the estate recovery is, that will be the degree to which the pension income must be cut in the case of the liquidations, and upon liquidation of corporations pension funds must be wound up.

As a consequence, I weigh the $7 billion to the economy as a whole against the $50 billion of deficits, of which a small proportion will have to be borne, and with fairly significant negative consequences, by the pensioners of companies that are in liquidation.

I'd like to make the point that there is a difference between liquidation and ongoing concern. When you have this small impact on the cost of capital, even in the fallen angels or junk bond part of the market, I'm saying that's 90 basis points. We are not saying that you must pay upfront the deficit in the case of a restructuring as an ongoing concern. That will still continue to be a matter of negotiation and determination with the liability remaining outstanding. The difference is, as in the case of Nortel, where the management decides to conduct a liquidation, there should be no basis where they've already determined to liquidate that the pension deficit isn't taken as a priority over the creditors at that point in time, the consequence of which is that it will have nominal impact on the rest of the bond market and yet will be the right social policy as well as economic policy for the country.

[The Chair, Conservative, David Sweet]

Thank you, Madam Urquhart. I'm sorry that I have to keep you tight to the five minutes because we have another panel coming in at noon.

Mr. Rienzo, for five minutes please.

[Douglas Rienzo, Partner, Pensions and Benefits, Osler, Hoskin & Harcourt LLP]

Thank you.

Good morning. My name is Douglas Rienzo. I'm a partner with the law firm of Osler, Hoskin & Harcourt.

I'd first like to extend to the committee our appreciation for the opportunity to appear before you and to contribute to the work of the committee studying Bill C-501. My colleagues and I at Osler believe we can provide this committee with a unique perspective on the issue of protecting pensions, which is the cornerstone of Bill C-501.

Osler is home to one of the largest groups of full-time pension law practitioners of any Canadian law firm through our teams in Toronto, Montreal, and New York. Our group represents a broad range of clients in the private and public sectors. Our clients sponsor some of the largest defined benefit pension plans in the country, regulated at both the federal and provincial levels.

My colleagues and I collectively have decades of experience in the area of pension law. We have worked with our clients in corporate Canada through years of constant change, from the times of pension surpluses to the present day when many are facing challenging pension funding issues.

Many of you have heard and read about the precarious health of private sector employer-sponsored defined benefit pension plans. The comments and concerns have come from employees, retirees, organized labour, and also from 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 are extremely technical and complex.

One issue on which most commentators would agree, however, is that the health of a private sector defined benefit plan is entirely dependent on the financial ability of the employer to support it. This is particularly true in times of financial crisis, such as the one Canadian employers have been struggling with since 2008.

Although some may think that the financial crisis is now behind us, given the rebound in the stock markets over the last year, long-term interest rates are at a historic low and the impact of these low interest rates on pension plan funding is very significant. In fact, one might say that the current financial crisis facing pension plans results more from low long-term interest rates than it does from employer underfunding. In addition, market volatility has not disappeared and employers’ contribution obligations continue to be onerous.

The stated purpose of Bill C-501 is “to ensure that unfunded pension plan liabilities are accorded the status of secure debts in the event of bankruptcy proceedings”. That's from the summary.

Certain provisions of the bill appear to be limited to expanding the so-called super-priority status to all amounts that were required to be paid into the pension fund and are in arrears, including solvency deficit amortization payments. However, when the amendments to the Bankruptcy and Insolvency Act and to the Companies’ Creditors Arrangement Act proposed by the bill are read in light of its stated purpose, the wording could result in the extension of super-priority status to the entire solvency deficit itself, and not just those solvency deficit amortization payments that are due but not yet paid.

Extending either super-priority or preferred creditor status to the entire solvency deficit would place significant additional burdens on the financial capacity of defined benefit plan sponsors and impede their ability to cost-effectively raise capital, adversely affect their ability to invest in Canada's economy and remain competitive, and negatively impact their ability to fund their pension obligations.

It is therefore critical that the amendments to the BIA and the CCAA proposed by Bill C-501 not be adopted.

A number of submissions to this committee have been or will be made showing the massive negative impact on credit markets in Canada that would result from granting priority status to solvency deficits. In addition to this impact, the proposed amendments to the BIA and CCAA could have the following results: first, the amendments could elevate billions of dollars of potential pension claims ahead of lenders in the priority ladder; second, the amendments could cause credit markets to re-value assets available for security and deduct higher-priority claims, thus resulting in a significant reduction of available credit; and third, the amendments could result in immediate default situations based on covenants in existing trust indentures restricting the existence of claims that would have priority over the existing lender.

The proposed amendments to the BIA and CCAA would, in certain circumstances, also result in the acceleration of the amortization of DB plans solvency deficits, which in most Canadian jurisdictions can be paid over a period of five years. In fact, it could be said that Bill C-501 is tantamount to mandating the permanent full funding of DB plans in certain circumstances, which is currently not required in Canada.

Let me briefly explain the current funding rules under both federal and provincial pension standards legislation.

While a plan is ongoing, every three years an actuarial evaluation has to be prepared, in some jurisdictions every year. The assets are valued and the liabilities are assumed to be fully settled. If the assets are insufficient, the deficit must be paid by the plan sponsor over a period of five years.

The proposed amendments to the BIA and CCAA would result in the acceleration of the amortization payments in certain circumstances by requiring a full deficit to be funded on a super-priority basis in the case of bankruptcy, or as a condition precedent to the approval of a proposal under the BIA or a plan of arrangement under the CCAA.

[The Chair, Conservative, David Sweet]

Mr. Rienzo, I'm sorry, I have to hold you there. You can try to get the rest of your remarks in on a question.

Mr. McCracken, I'll have to keep you at five minutes.

Also, just before you start, Mr. McCracken, a welcome to the guests who are in the room. We're going to attempt to get some more chairs. There is a limit in this room as far as a fire code, so we're also checking to make sure that everybody is going to be safe as well. We'll bring in some chairs shortly.

Mr. McCracken, for five minutes.

[Mike McCracken, Chairman and Chief Executive Officer, Informetrica Limited]

Thank you.

I'll try to make my remarks cool, not set off any fires.

[The Chair, Conservative, David Sweet]

Thank you. I appreciate that.

[Mike McCracken]

I was asked to comment on this, and I looked at some of the issues and some of the areas. I think the areas I can speak to are what I will call the macro effects, for lack of a better term. Is this going to shake the Canadian economy to its roots and lead to a doubling of the number of bankruptcies in the country or some other difficulty, or is it not?

In looking over the material, I guess the first comment is that as a result of what's already happened there has been an unfairness to pension recipients. The effect of that is going to have substantial macro effects. We haven't even addressed those in this discussion here.

It basically boils down to what a pension is. A pension is a delayed form of compensation negotiated with a group of workers, where they take that money later in lieu of current wages. This is of benefit to the company, which can then say it will pay that out of future earnings. It's a benefit to the employees, who postpone the tax until such time as they retire, with the mistaken belief that their tax rates might be lower than when they earned them.

It is in this event where we now have said we were kind of kidding; we're not really going to pay these pensions, or we're going to make it uncertain. It will be a crapshoot every time to see if you get your pension.

What's the reaction to that by people who are around the negotiating table? They're going to say “Okay, we'll take wages now. We'll put less value on the pension promises in the future, and as a result, you should expect wages to go up in the short run.”

Some people I know are concerned about competitiveness. They're worrying about the cost of borrowing, as if that were a major element of competitiveness. The wage bill for most companies, the value added, is 60% or more. If that goes up, then you have pressures of a competitive nature.

Now, do you lose sleep over that? Some do, and some don't. Some would point out that there are other ways to improve competitiveness. Certainly it's a relative concept. From the corporate viewpoint, If a one-cent or two-cent depreciation of the dollar occurs, that should more than put you back on end in terms of competitiveness.

As you go through your deliberations on this, think about how this is going to change the dynamic of the way Canadians negotiate with companies.

It's unfortunate, but I don't think there's any way this move and this piece of legislation is going to restore trust between employees and companies. It is a very small step in that regard. I wish we had a more magic way of doing it. At least it's a step in the right direction, and it may mean that people are still prepared to accept pensions of one form or the other.

The other item I would quickly mention, to stay within my time limit, is that the debate here isn't in some sense about these macro terms; it's a debate among a group of people who are in a room and they're told to line up and we're going to give you a haircut. What's the order of that lineup?

We're saying that people who don't have experience on an ongoing basis in dealing with bankruptcies, as most creditors would, ought to be at the front of the line. Usually a pension is the single biggest financial asset, and now it's a loss for most individuals who are involved in it. There is an issue of what they should do. Where should they be placed in this haircut room?

It is likely--and this is something you probably cannot restore under this particular bill--that people will still have a haircut. Pensioners are still going to lose. The question is are they going to lose lots, or all of it, or less than they might otherwise? That's what this is about. It strikes me that a move in this direction would be a positive step, along with some of the other measures that were taken in recent legislation.

Thank you very much.

[The Chair, Conservative, David Sweet]

Thank you, Mr. McCracken.

Now we're going to go to our questions. We're going to stick with five-minute rounds, and that way we'll get the maximum amount of questioning in.

We'll start with Mr. Garneau, for five minutes.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

I'd like to ask my first question to Mr. Laver. You represent a great many companies in this country. You've talked about the potential impact to credit markets and the cost of borrowing. You've expressed concerns from that point of view. I took it from what you said that basically we should leave things the way they are.

I'd like to ask you a very political question, if I may. What do you say to the Nortel employee who has contributed their entire career to a pension and who, in this particular case—and there will be other examples—risks getting only 70¢ on the dollar as a result of the way things are set up at the moment?

[Ross Laver]

Thank you for the question.

First of all, are we talking about a situation in which the employer did not make the required contributions to the plan, and did not forward the contributions made by the employees? The Nortel case is a tragic one. A lot has been said about it. It was the worst kind of perfect storm, if you will.

But the reason we are talking here about pension deficits and what to do about them is not that contributions are not being made on behalf of employees and employers. It is because the value of the investments in those plans and investments on behalf of employees in everything from bonds to equities and other securities fluctuates. The reality is that in the years we're talking about, every Canadian who invested in the markets, every Canadian who invested through an RRSP or a defined contribution plan took what Mr. McCracken correctly calls a haircut.

In the case of Nortel, unfortunately the music stopped for a variety of reasons, which I won't rehash right now—and we're talking about a company that was clearly badly run—but the music stopped at absolutely the worst point in the economic cycle, the time of a worldwide financial crisis and huge losses in equity markets.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

If I pick up on what you said—that the company was badly managed and did not make the contributions that it should have—

[Ross Laver]

Sorry, I believe they did make contributions.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

That's what I understood you to say.

[Ross Laver]

They did make the contributions, but I'm talking about the accounting scandals at that company.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

So basically you're saying that in the case of a company that may have accounting scandals there's really nothing anybody can do. There's really nothing we as legislators should be looking at to ensure a greater level of protection.

[Ross Laver]

I think you'd probably agree with me that nothing in this bill will do anything for the Nortel pensioners. Those cases have already worked their way through the courts.