Thank you, Mr. Farrell.
Thanks the committee for this opportunity to address you today.
Simply put, elevating the creditor status of unfunded pension plan liabilities above unsecured creditors--which include most corporate bonds in Canada--would place an additional onerous burden on the financial capacity of defined benefit plan employers. In fact, Bill C-501 would hinder rather than protect the security of benefits for defined plan members.
The most immediate impact of elevated creditor status for unfunded pension liabilities would be felt by the holders of some $200 billion plus worth of bonds issued by these defined benefit plan employers. A significant percentage of these bonds are held by both Canadian pension plans and individual Canadians in their RRSPs, through either direct holdings or mutual fund investments. Canadians could not protect themselves from such losses, other than by selling these bonds before Bill C-501 becomes law. The result is that this bill would negatively impact millions of Canadians who rely on these securities to provide their retirement incomes.
Philips, Hager & North, one of Canada's pre-eminent fixed-income investors, has estimated that the average increase in borrowing costs across all investment-grade bond issuers could be as high as $17.5 billion. Higher borrowing costs for Canadian companies means less capital investment by these companies and fewer jobs for Canadians.
No other country with significant private sector defined benefit pension assets grants preferred creditor status to unfunded deficits in their defined benefit plans. Canada would set a dangerous precedent if it were to do so. Additionally, it would result in a cost-of-capital disadvantage for companies that sponsor such DB plans and those that do not, while at the same time cause huge inequities between members of DB plans and members of other types of retirement plans.
It is important to note that pension plans have not yet fully recovered from the recent equity market collapse of 2008, the worst collapse since the Great Depression. Second, long Canada bond yields--the very rates that underpin solvency actuarial evaluations--are mired at low levels not seen in over half a century. With very few exceptions, employers have been funding their pension plans and are making significant contributions to get their plans' funded status back to 100%. They are contributing in accordance with some of the most stringent funding rules in the world. Privately sponsored defined benefit plans in Canada must fund their deficits over a finite five-year period.
In reacting to the current underfunded status of the pension plans, it is important that this committee recognize the measures the federal government has recently implemented to protect members of federally regulated defined benefit plans, including the requirement for annual actuarial valuations, restrictions on employer contribution holidays, and a prohibition on benefit improvements for plans that are less than 85% funded. Most provincial governments are either considering or implementing similar measures to enhance members' benefit security. As a result of these measures, pension plan members are better protected today than they were two or three years ago.
In conclusion, the adverse implications of granting elevated creditor status to unfunded pension liabilities would be broad and significant, with vast unintended consequences impacting not only the employers that sponsor these plans, but also the millions of Canadians whose retirement savings have exposure to such bonds.
Elevating defined benefit pension plans' creditor status would impede sponsors' ability to cost-effectively raise capital, thereby adversely affecting their ability to invest in Canada's economy and remain competitive. As a result, it would hinder their ability to grow their businesses and hire more Canadian workers, or in some cases maintain current employment levels. It could also trigger insolvencies that might not otherwise occur. Ironically, this bill would make it more difficult for companies to fund their pension plan deficits. Each of these outcomes would negatively impact members' benefit security.
The basic premise underlying the security of pension plan members' benefits remains a financially strong sponsor.