Industry Committee on Nov. 16th, 2010

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Okay.

A question for Mr. Laver. Of course the Bankruptcy and Insolvency Act is the responsibility of the industry minister, and John Manley, one of the longest-serving industry ministers in Canadian history, has commented on this. I'll quote from a public letter that he wrote and then have you comment. He says:

...Bill C-501 would weaken the financial viability of companies that sponsor those pensions, as well as the financial well-being of many Canadians who do not have such plans.

Bill C-501 does nothing to help Canadian businesses avoid bankruptcy. Instead, it only increases the possibility that companies with private pensions will fail. Nor does the bill benefit Canadians who do not have access to private pension plans. In fact, it could potentially hurt Canadians who invest in corporate bonds directly or through their retirement savings plans.

Can you expand on these points and maybe address some of the testimony you've heard today in light of those comments?

[Ross Laver]

Thank you for the question.

As I said before, if we are going to find money to make whole people who belong to defined benefit pension plans that were appropriately managed but invested in the markets that have taken a nosedive so there is a large deficit.... We are not talking here about a bill that's designed to simply ensure that companies make their lawful payments. If we're going to find that money it has to come from somewhere. As I think Diane Urquhart acknowledges, it will partly come from the value of outstanding bonds.

Pensioners and any Canadians who have RRSPs invested in balanced mutual funds, bond funds, or what have you, have money invested in the large pension funds, such as the Canada Pension Plan fund, the teachers' pension fund, the OMERS pension fund, and the Caisse de dépôt. They all invest billions of dollars in Canadian bonds.

Ms. Urquhart, if I understood her correctly, said this bill would not be a problem because it would only reduce the value of those bonds by $7 billion. That's taking money out of investments held by other Canadians and using it to compensate the small minority of Canadians who belong to defined benefit pension plans.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Mr. Rienzo, you had another concern to bring up on Mr. Garneau's questioning, or maybe Mr. Bouchard's. Do you want to elaborate on that now?

[Douglas Rienzo]

Sure. Thank you.

The concern is that even if we assume the bill as it may be amended is confined only to payments that are missed, pension plan deficits have to be funded over time. As we all know, restructuring can take a long time, so from the time a company goes under CCAA protection, it could be years before it emerges from that protection. If the court has approved suspension of special payments and those payments are missed, then drip, drip, they will go into this super-priority protection.

You really have a smaller example of the problem if the whole deficit goes into super-priority protection. If there's a $1-billion deficit that's being paid over five years, hundreds of millions of dollars could fall into this super-priority protection as the company is under CCAA protection. It could make it more difficult to emerge from that protection, and may cause the parties to decide they might as well just have a bankruptcy declared on day one, because they don't want to expose themselves to this. Then you can't emerge from protection until those amounts are paid anyway.

You might think of it as going into protection with just the amounts owing today falling into the super-priority protection, but it could actually be a very substantial amount and a big proportion of the deficit if the restructuring takes place over a number of years, as has happened recently in Canada.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Rienzo.

We'll go to Mr. Rafferty for five minutes.

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

Thank you very much, Chair.

I'll continue my questioning along the lines of Mr. Lake's.

I have two questions. One is for Ms. Urquhart and involves credit default swaps as they relate to forced liquidations. That will be my second question. My first question is for Mr. Laver.

Last year in November a COMPAS research poll was undertaken for BDO Dunwoody. It sampled CEOs right across the country, and many of your members, on how best to handle the issues of pension shortfalls, bankruptcy, retirement, and income security in general.

The findings of the study were summarized by the firm as follows:

Among potential new reforms being proposed by some opposition members, panellists are especially supportive of the idea of legal priorizing of pension rights in the event of corporate bankruptcy.

I'd like to ask you a two-part question, Mr. Laver, and feel free to be brief.

Don't you think that Canada's CEOs really do care about the plight of workers and retirees of their companies and want something done?

Aren't you, Mr. Manley, and others really overplaying the level of opposition that exists among members of Canada's chief executive officers?

[Ross Laver]

Let me start on the issue of the poll you mentioned. I can absolutely assure you that none of our members were among the “CEOs" in that poll. That poll is notoriously misrepresented as a CEO poll. It is in fact a voluntary, web-only survey of members of small-town chambers of commerce.

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

So BDO Dunwoody was very careless in....

[Ross Laver]

No, I would say that the news reports of those polls are careless.

In any event, you asked whether CEOs of large companies care about workers. CEOs of large companies are trying to remain in business and are trying to keep their companies operating. When they operate, they continue to employ people.

The issue here is that when a company is in trouble, when it's in distress—and it may be in distress because worldwide demand for newsprint has gone down, as in the case of AbitibiBowater, or it may be in distress because car sales in North America have fallen off a cliff and people aren't buying vehicles and can't get credit to buy vehicles—it needs credit to carry on and to pay its workers. If it cannot get those loans, then it has no choice but to go out of business and put workers out of their livelihoods.

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

So you don't feel that you're overplaying the level of opposition you have to this.

[Ross Laver]

No, I don't feel I'm overplaying it, absolutely not. I quoted from a report by the OECD, an OECD working paper on benefit protection in 2007, which did a roundup of the forms of defined benefit pension protection in many countries and concluded that this was a controversial area. I suspect that's why no other country has gone this route.

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

Thank you, Mr. Laver.

Ms. Urquhart, can you elaborate on your findings? You've done a lot of work on credit default swaps as they relate to forced liquidation.

[Diane Urquhart]

Yes, I was a financial expert in the asset-backed commercial paper bankruptcy, which was the largest bankruptcy in Canada. It involved $220 billion of credit default swaps.

I have updated my analysis and have determined that there are $4.5 trillion of credit default swaps on the global junk bond market. There are only $2.5 trillion of junk bonds. The conclusion I reached is that credit default swaps are a form of insurance for the bond owners of the world. You can purchase credit default swaps, which have the impact that, should a company enter bankruptcy, you can get a cash settlement for all of the damage on the bond that the bankruptcy creates.

There is a serious problem in the bankruptcy laws of Canada and throughout the world, because there is no requirement to disclose your position in credit default swaps. You may be fully hedged or in fact short and yet drive a bankruptcy process.

The problem is this. In the 1750s you could buy insurance on ships you didn't own. Needless to say, many ships sank in the oceans. The reason for having this insurance is that you could collect on the insurance of the sinking ships and were able to make substantial profit. Exactly the same is happening today in the credit default swap markets affecting junk bonds.

We believe that if there isn't change in bankruptcy law, the credit default swap has the impact of substantially increasing the frequency of bankruptcies. It also has the impact of creating liquidation of companies without any effort to continue as an ongoing concern, which is what we saw in the Nortel case.

If we don't adopt Bill C-501, we have a situation in which more than twice the value of the junk bonds of the world is covered by credit default swaps, the impact of which is that you get to receive a cash settlement, you get to keep the bonds, you get to take the billions of dollars out of the obligations to top up the pension fund, the consequence of which is that you make a higher profit as a result of the bankruptcy and that you prefer a liquidation.

If we do Bill C-501, we believe it will be the stick that ensures you do not want to liquidate, because if you do liquidate you have to owe up all the billions that are owed. You would rather restructure.

So I have the opposite opinion from the council of CEOs.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you, Madam Urquhart.

I'm sorry to cut you off. I gave you a little bit of grace there, but we need to get on.

It's Mr. Rota's turn now, for five minutes.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Maybe I'll have a question for Mr. Laver, who said that Nortel was badly run. Later, Mr. McCracken said that we should move to protect workers from getting a haircut at the neck—pretty graphic.

With these comments, how can you suggest, Mr. Laver, that doing nothing is okay? I would tend to look at this bill and say that it really doesn't do a heck of a lot to solve the problem, but maybe you can explain to me how doing nothing is a solution.

[Ross Laver]

Doing nothing would not be a good move, and that's why I congratulated parliamentarians for all the steps that have already been taken this year: about half a dozen significant reforms that have been passed by Parliament and introduced through regulation. I don't think anybody can accuse the House of Commons or the Government of Canada of doing nothing about this problem. An awful lot has been done.

My point is simply that before we stray into untested territory to do something that no other country with a pension system like Canada's has done, maybe we should allow the effect of these reforms to be felt through the system.

When, as we are doing now, we are moving to a requirement for annual actuarial updates of pension deficits and for accelerating the new payments into the fund to make up any deficit, that's a significant step forward. I think it would be a mistake for anyone to suggest that Canada's done nothing here. Canada has done a lot.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you.

I have a question for Mr. Rienzo, if you don't mind.

In looking at this and based on a lot of the calls I've had on this bill, it seems that former Nortel employees who are watching this bill with the hopes that.... They were almost led to believe that this was going to be the messiah that was going to put their pensions back in place. In reading it, you realize—in my interpretation, and I guess some of the legal interpretation that came forward—that it only affects pensions from restructuring to bankruptcy.

As you mentioned earlier, that could be a very short period, based on the legislation that comes forward. It's an oversight, obviously, of those who put this together.

How would you fix this, or what would you propose to avoid the problem of going from restructuring to bankruptcy in a quick mode? Really, there is a very short series of payments.

You mentioned that the whole amount of the capital would be frozen. But the interpretation I have looked at said it would just be the payments that are made within that period, which still do not constitute a great amount. It doesn't help the Nortel people at all and it doesn't help anyone going into a bankruptcy with a pension.

[Douglas Rienzo]

Thank you for the question.

I won't comment specifically on the Nortel situation.

I'm not sure what you mean by what I would suggest in order to fix the bill. If you're saying that the problem with the bill—

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

How we solve the problem is what I'm looking for.

[Douglas Rienzo]

Do you mean the problem of protecting pensions?

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Exactly.

[Douglas Rienzo]

I agree with Mr. Laver that Parliament has already done a lot, and most provincial jurisdictions are also embarking on very substantial pension reform. In my view, that's the way to go about it, to make sure that the ongoing pension system can address these problems, to make sure that deficits would perhaps not get out of hand.

There are reforms being proposed, for example, in some of the provinces whereby amendments could not be made if those amendments would increase the liabilities while the plan is in a deficit. Before, an employer could amend its pension plan, promise more benefits—perhaps trying to get something out of collective bargaining—even though the plan was already in deficit and this would only increase the deficit.

In my view, the way to go about this is through the steps that are already being taken, not only on the federal level but also at the provincial level, to strengthen the pension system we have.

The concerns we have about this bill are the unintended consequences. I don't think anybody would disagree that the idea of protecting pensions is a noble goal. It's the unintended consequences of this particular bill that cause concern.

[The Chair, Conservative, David Sweet]

You have 30 seconds, so be very brief.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

I'll just pass.