Industry Committee on Nov. 18th, 2010

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

Who appears on their behalf is their decision, and if the local rep wants to appear with the national rep on the 23rd, that would be the appropriate way to do it.

[The Chair, Conservative, David Sweet]

Okay, it sounds as though we have consensus, then. Did you actually want to...?

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Mr. Chair, I agree with Mr. Lake's position that both Mr. Coles and Mr. Gaston Lemieux be together when they testify here on Tuesday, November 23.

[The Chair, Conservative, David Sweet]

It sounds as though we have consensus. Very good.

I'm going to apologize to the witnesses in advance. I'm not going to introduce you. We have the standing orders in front of us, and we've already used up some time, so we'll start from left to right--my left, anyway.

Mr. Casey, would you begin? I think you've all been instructed to please stick to the five minutes so that we can get to questions as well.

[Andrew Casey, Vice-President, Public Affairs and International Trade, Forest Products Association of Canada]

Thank you, Mr. Chairman, and thank you to the committee for this opportunity to appear before you today on this very important matter of Bill C-501.

By way of introduction, the Forest Products Association of Canada is the national voice of Canada's wood, pulp, and paper producers. Our industry represents about 12% of Canada's manufacturing GDP. We directly employ over 230,000 Canadians from coast to coast, and we are the economic lifeblood of well over 200 communities across this country.

As you might imagine, a number of our companies, given the number of employees we have, have significant defined benefit pension plans. For that reason, we're very pleased to have this opportunity to appear.

As members of this committee and of Parliament are well aware, this industry has faced some fairly serious, challenging times over the past couple of years. Indeed, parties on all sides of the House, as well as individual members, have gone to great lengths to try to find ways to support the industry throughout this challenging period. We're now looking at somewhat of an economic recovery. There are some encouraging signs on the horizon, but in our view it's still in a fragile state of play right now.

While we're waiting for the recovery to fully take hold, one of the things the industry is doing is preparing for when markets do return. To that end, a couple of things we are doing that will help us prepare for that return are reinvesting in--retooling--our mills and getting ready for when markets return. A key component of that ability to retool is access to capital.

Capital is the lifeblood of our industry. It is in great shortage. It is a very fickle guest. It will go wherever it feels most comfortable, wherever there is the least amount of risk, and wherever there's the greatest return on that capital.

In our view, Bill C-501, while well intended, risks capital. It risks shutting off capital for our industry at a very delicate time. I would say that this risk probably extends to the economy more broadly, and that is our biggest concern with this bill.

We certainly can understand trying to address possible loopholes in Canada's pension system going forward, particularly as they relate to bankruptcies and insolvencies. There are other jurisdictions around the world where certain measures have been put in place, including backstop mechanisms similar to what we have here for our banking system in the form of CDIC. Maybe that's something this committee should study. Certainly this committee has undertaken studies in the past for which they've brought together all stakeholders and departments; in this case, maybe that would be industry, finance, and HRSDC. They could take a comprehensive look at this issue to come up with solutions to address any inadequacies in the system.

I think we have to look at this from a going-forward perspective. The reality is that as we look forward, one of the best ways to ensure that we keep jobs and ensure the safety of pensions is to have healthy companies. The way to ensure that we have healthy companies is to ensure that we have access to capital in a timely fashion, in a reliable fashion, and in a competitive way. For that reason, we urge the committee to reject Bill C-501 and look for ways to address the pension deficiencies in another fashion.

Thank you very much for the time. I look forward to any questions.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Casey, and thanks for your punctuality.

We'll go to Mr. Harden now, for five minutes.

[Joel Harden, Pension Policy Advisor to the President, Canadian Labour Congress]

Thank you, Mr. Chair.

My name is Joel Harden. I'm the registrar for the Labour College of Canada, and today I'm also a representative of the Canadian Labour Congress.

It's a pleasure to be here. We work for 3.2 million members in the country.

I've had the opportunity to talk to a lot of you individually, and I know that everybody around this table, regardless of your partisan stripe, cares a great deal about pensions and this particular issue we're talking about today, the security of pension benefits in bankruptcy.

We know this: over the last six to eight years, about 450,000 manufacturing and resource sector jobs have been lost in Canada. With those job losses, many people's livelihoods have been placed in a great degree of insecurity. We began today's meeting talking about whether or not to include brother Carrière as part of the CEP delegation. While that might have been a bit frustrating, I encourage you to listen to brother Carrière's story on November 23, because that particular town of Thurso, Quebec, which is not far from here, has seen a 40% haircut in those members' pension benefits.

That town has been very important to Canada's economic security and framework. The products that have come out of that mill have been important, but right now those folks are dealing with a 40% haircut. My friend didn't elaborate on this fact, but I was shocked to learn from some of our negotiators in the Communications, Energy and Paperworkers Union that today over 50% of paperworkers work for insolvent companies in Canada. Canada has been described as the nation of hewers of wood and drawers of water; at this point, half of that equation is placed in extreme uncertainty, and people's pension benefits follow that.

There are other countries, and Diane Urquhart, who I understand is also going to be a witness before this committee, will elaborate on the research--oh, she has already spoken. There are 35 other countries that prioritize people's pension benefits higher in bankruptcy proceedings, so what we're really dealing with here, I think, is a question of what this committee wants to do as this bill that Mr. Rafferty has proposed heads to its third reading.

What I'm impressed with so far is that there has been cross-partisan support to have this bill reach fruition. I don't think that's an accident, because we have been through a major pension debate in this country, and a big part of that debate is how we secure folks' pensions.

I'm not an actuary by training--I'm a political scientist--but one of the reasons I think my president, Ken Georgetti, wanted me to be here was to share with you, in addition to Mr. Carrière's story, what we've been hearing from our members across the country.

Our members, we like to remember, are the fortunate ones when it comes to pension benefits in the public and private sectors. We're the ones with workplace pensions. Six out of 10 workers in this country do not have workplace pensions. I won't throw facts and figures at you. I've done that already. In closing I want to share with you two stories that remind us of our collective sense of urgency on this issue, because we've held town halls and leadership capacity training on pension issues across this country in the last two years, and security benefits have come up.

I want to talk to you first about Loretta Kent. Loretta Kent is a pulp and paper worker from Nackawic, New Brunswick. You may be familiar with the story of this particular mill. Over the course of five years, the pension plan at this company went from 94% funded to 48% funded, and what we know after the fact is that this was a bankruptcy proceeding planned well in advance in accordance with pension benefit laws in New Brunswick, which allow employers not to fund benefits to the tune of 100% a year, but to underfund benefits and still stay within the law, given pension regulations. Compounded over five or six years, what that meant was a dramatic reduction in the funded health of this sister's plan.

In 2004, when the company declared bankruptcy, essentially what workers got paid--their commuted value payout at the end--was abysmal. For Loretta personally, after16 years of service it was $400 in pension benefits--not $400 a year or a month, but $400, period, after 16 years of service.

I want to share with you the story of Gail Clark, whom we've brought to meet with finance minister Dwight Duncan in the Province of Ontario. She's from Windsor and is a union member with the Service Employees International Union. Her long-term care facility in Windsor closed down about four years ago, and when it closed down, the pension benefits were also placed in jeopardy. This is a parapublic sector workplace, I'll remind us, not a private sector forestry workplace. For Gail, what it meant after 16 years of service as well--ironically, similar to Loretta's--was about $170 a month in pension benefits. The previous expectation was $800 or $900 a month.

The question Mr. Rafferty's bill is posing to all of us is this: who should bear the risk when it comes to bankruptcy protection? I understand my friend's concern about access to capital, but in 35 other countries, that has not been the primary concern; the primary concern is to know what financial institutions and which folks who are involved in the bankruptcy process can bear the risk.

I dare say we should have laws that stand up for Loretta and for Gail, and we should follow the lead of other jurisdictions that have done that.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Harden.

Go ahead, Mr. Everson, for five minutes.

[Warren Everson, Senior Vice-President, Policy, Canadian Chamber of Commerce]

Thank you, Mr. Chairman.

My name is Warren Everson. I am from the Chamber of Commerce. With me is Jonathan Allen from RBC Capital Markets.

Thank you very much for inviting us to appear.

The Canadian Chamber of Commerce is Canada's most representative business association. Through our network of over 400 local member chambers of commerce, we speak on behalf of 192,000 active companies of all sizes across Canada.

My part in our presentation today will be to outline the policy concerns of our members who offer defined benefit pension plans and whose businesses would be fundamentally affected if pension plan liabilities are accorded the status of secure debts in the event of a bankruptcy.

Then I'm going to ask Mr. Allen to quickly speak to Bill C-501 from the perspective of a debt market expert.

It's clear to everyone in this room that pensions will be the dominant public policy issue in finance over the next few years, and presumably would have been, had we not experienced the meltdown we did in the last couple of years.

I wish we could support a bill that deals with such a significant issue and such an emotional one. However, this particular bill does not attract our support. We're here today because of significant potential for damage that could be done to many of our members and to millions of Canadians who invest in them if this bill moves forward.

I'd like to deal immediately with two misapprehensions regarding Bill C-501.

The first misapprehension is that Bill C-501 would help members of pension plans whose sponsors have already declared bankruptcy. I think members of the committee heard in the last couple of days that this is not the case. This is not a bill that would rescue Nortel pensioners.

The second misapprehension is that companies who sponsor defined pension benefits have been underfunding their plans. That's not the case. The current underfunding of defined benefit plans is a result of a combination of unusually severe financial circumstances, the 2008 collapse in equity markets, and a very significant decline in long bonds to a level not seen in 50 years. I think it's important for the committee to recognize that we're dealing with a once-in-50-years circumstance.

We do think there are several unintended and adverse consequences in granting creditor protection to defined benefit pensions for employers, for plan sponsors, and for millions of Canadians.

I'd like to ask Jonathan to speak to that.

[Jonathan Allen, Director, Global Research, RBC Capital Markets, Canadian Chamber of Commerce]

Thanks very much.

If pension liabilities are moved above other creditors in a company, we believe their rating agencies and investors stand to lose billions of dollars. It would increase the borrowing cost for companies and reduce their access to raising funding for investment. I can't underscore the importance of how important the bond market is to Canadian businesses. When a company wants to go out and build a bridge, build a lumber mill, or improve their broadband networks, they go to the bond market first. This is a critical source of funding in the market, and it is where companies will primarily go.

The consequences of implementing this bill will be overwhelming. We estimate, in a report that we published earlier this week, that we'd be looking at something in the order of $4 billion to $7 billion of destroyed wealth. Keep in mind that not all of these investors, these bondholders, are sophisticated mutual funds and insurance companies. Many of the people who hold these bonds are actually retail investors, other pensioners. These people are perhaps not sophisticated enough to hedge some of these bets. I think we should ignore looking at some of the junk bonds, but look at the people who stand to lose: the people who are initially holding these bonds.

Contrary to what you heard on Tuesday, there's also no easy way for bondholders to insure themselves. I believe we could see a number of unexpected and harmful consequences from this bill, in particular--and ironically--an increase in the bankruptcy risk for many companies, as well as a reduction in their capital investment, which would lead to lower productivity and job growth. Canada would be less attractive for foreign investment.

Ultimately, the low interest rate is really to blame. In a few years, as interest rates rise, I think you'll see many of these solvency deficits turning into large, inefficient surpluses.

I'll turn things back over to Mr. Everson.

[Warren Everson]

I am conscious of my time, so, while we have submitted our brief to the clerk, I'm going to jump through and address in particular two points.

First, you've seen a trend in recent years of sponsors moving away from defined benefit plans. I worked at a company that did that and I was the first employee to be covered in the defined contribution side of the pension. Increasing the risk to sponsors of a defined benefit plan will hasten the movement of sponsors away from that particular approach.

I also want to impress upon the committee, with vehemence, that Parliament has been active in this field. You passed a budget recently, and the budget had many features relating to pensions. I've listed them in my brief, so I'm not going to speak to them now. We believe it would be an error for the committee to lard on top of the actions that Parliament has already taken another very significant and sweeping piece of legislation.

[The Chair, Conservative, David Sweet]

Thank you very much.

I'm sorry that time is always our enemy here. Because we have a minimal amount of time, we'll start with five-minute rounds and go as far as we can.

Mr. Garneau, you have five minutes.

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

Mr. Chair, one of our challenges as legislators is to try to sort through what is actually the real picture as opposed to something that is perhaps a little bit misleading.

One thing about Bill C-501 that has been advertised, and advertised falsely, is that it would elevate pensions to super-priority status. That's simply not the case. The reality is that it only deals with special payments that have been paid up to the date of a company's bankruptcy, which is really a much smaller portion. In that sense, it's unfortunate that this bill is misleading a lot of people.

At the same time, perhaps from the other side of the coin, I have difficulty understanding how the situation I've just described with Bill C-501 is going to cause so much turmoil in the credit markets that it's going to shut off all of that capital that has been mentioned.

As you can appreciate, it's difficult for us to get an accurate picture of the truth.

What I would like to ask Mr. Everson first, and then Mr. Casey afterwards, is how you would answer the question for somebody who has contributed for his or her entire career to a pension and is now in a situation in which the company they worked for has gone bankrupt, and they're only going to get a portion of their pension. I'll use the example of Nortel in your case, Mr. Casey, and of AbitibiBowater in your case, Mr. Everson.

How would you explain the situation to them? Do you have an alternative that would perhaps satisfy them?

[Warren Everson]

I understand the emotional difficulty of dealing with people, and the fear and frustration that someone would feel in a situation such as Joel described in the two cases. However, the significant thing for Parliament to consider, we think, is the access to capital and the capital formation that created those jobs in the first place.

Jonathan's an expert, and I'm going to defer the question to him.

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

That's good enough.

Would you comment, Mr. Casey?

[Andrew Casey]

It certainly speaks to the complexity of the issue, for sure. From our standpoint, I would re-emphasize the point that these have been very difficult times for our industry. We need the capital to retool and to reinvest in our mills in order to keep the jobs and the pensions that are there and get them back up onto a level footing.

For us, access to capital is absolutely paramount. If we don't have that access to the capital, it will go elsewhere. Where it will go is to other jurisdictions where they have some sort of mechanism in place to protect pensions.

I would suggest that the committee take a look at other jurisdictions, such as Germany or Ireland, where there are guaranteed funds in place. Maybe that's a way to address this situation.

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

Our Liberal critic, Judy Sgro, is the author of a white paper that looks at pensions from a holistic point of view. It has 28 recommendations. She's also going to be in debate next week on second reading of a private member's bill that deals with what's called a bill of rights for pensioners.

I want to make sureof this: are you aware that Bill C-501 only deals with special payments in the way that I described it in my first question, and that it does not affect all pensions by moving them up to super-priority? Is that something that you clearly understand? This has an effect on how much you see by way of turmoil in the credit markets.

[The Chair, Conservative, David Sweet]

Go ahead, Mr. Allen.

[Jonathan Allen]

My understanding is that under some of the proposals made as part of the budget this year, a company that enters a state of bankruptcy or CCAA would be forced to immediately fund that pension deficit over an accelerated timeline.

If so, that would mean that any remaining deficit payment would not be stretched out over five years but would be immediately payable within the first year. Thus the effect would be that the solvency deficit would essentially be of priority status.

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

Mr. Casey, do you have an interpretation?

[Andrew Casey]

No, I do not have an interpretation one way or the other. My interpretation, though, is from the street: what we are hearing anecdotally, from both our industry and from outside our industry, is that capital markets are nervous. That makes us nervous.

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

Right. I'm not sure that anybody should be taking their interpretation from the street. That's the point I'm trying to make.

[Andrew Casey]

The street I'm referring to is Bay Street, the Royal Bank--those institutions that are our lifeblood.

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

The piece of legislation that was put forward is a piece of legislation that does not accomplish what its authors intended, so it's quite possible that there is a discrepancy between what it intends to do and what it actually will do. I think that's important to recognize in assessing whether it will create a big problem of access to risk capital.

[The Chair, Conservative, David Sweet]

Now we will go on to Mr. Cardin for five minutes.