Thank you.
I'm the Canadian retirement innovation leader with Towers Watson, a global consulting firm. My colleague is Karen Figueiredo, who is the Canadian leader of the investment consulting practice. We're both actuaries with pension expertise. Our firm has already provided the committee with our submission, which was entitled "Granting Higher Priority to Defined Benefit Plan Deficits: Solving Problems or Creating Them?"
While we acknowledge that the need for protection for defined benefit or DB pension plan members is so critical in the event of insolvency, we are concerned that granting higher priority to the full DB deficit, whether super-priority or preferred, will have unintended and extremely negative consequences for Canadian employees, for capital markets, and for industry in Canada.
First, it will increase the cost of financing for many corporate employers with DB plans. For those employers who have the cash, this may divert cash into pension plans in order to boost the funded ratio and thereby avoid a downgrade in their bond rating, but this can be at the expense of job-creating capital investment. We expect it would dramatically accelerate the trend away from DB plans to defined contribution pension plans in Canada, thereby transferring risk from the employer to individual plan members and inevitably reducing their ultimate pensions, often dramatically. Out of all of the threats to the continuation of DB plans in Canada, this bill is by far the most dramatic.
Second, based on our recent survey of fixed income experts from 23 major investment firms and several large corporate employers with DB plans, we believe that this legislation will weaken the Canadian capital markets and drive away foreign investment. Increased interest rates on corporate bonds and additional volatility related to DB solvency funding positions will put many Canadian bond issuers at a competitive disadvantage relative to other bond issuers.
Third, it will make it more challenging for companies to restructure at a time when they might need it most. As a result, it could actually accelerate insolvency and place working Canadians who participate in DB plans at greater risk. Increasing interest rates on corporate bonds will also have a negative impact on Canadian investors, including pensioners, defined contribution plan participants, those with RRSPs, and other individual investors who have corporate bonds in their portfolios today that will go down in value.
It's no good expressing the potential impact of this legislation in terms of average costs, as some have done. As in many circumstances, using averages masks the real issues. It's like telling Ottawa residents not to buy a winter coat because the average temperature is 10 degrees during the year. A key lesson that we learned from our survey and related interviews with respondents is that determining the impact of changing bankruptcy priorities is a highly complex issue and is extremely difficult to predict in advance.