Industry Committee on Nov. 23rd, 2010

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I guess we have some others who wish to speak. Just be very quick, because I have another question.

[Michael Boychuk]

I just want to add to Mr. Farrell's comments that, while you cannot be specific as to who these companies are for which you've requested the impacts, suffice it to say that once you fall out of the investment grade category, your access to liquidity becomes much more difficult, particularly in the Canadian marketplace, where there is not a very large what we call “high yield” market.

The important point here is that unfunded deficits today are not the result of employers not wanting to put money into their plans. I can assure you, my employer has put a ton of money into the plan since 2008, and the result today is due to our having been living in a very long, protracted period of very low interest rates, which are the underpinning cause of the actual valuation, coupled with what I would call a very onerous and stringent solvency test that companies have to perform on an annual basis now, and which is regulated by OSFI. It's as plain and simple as that.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Mr. McKenna, did you want to...?

[John McKenna]

We've been talking about pension deficits. I would like to say that Bill C-501 covers severance and termination super-priority as well. That will impact every single employer across the country negatively. You heard from the CBA, who said that the availability of credit for smaller and mid-size companies is purely driven by the asset value—the recoverable value from those assets if liquidation is required. If there is a priority ahead of the bank's security, it will come off the availability they calculate, and every single employer will suffer.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

The question was asked: if the status were moved to preferred, would that change your position on the bill?

Could you respond very quickly, each of you?

[Stephen Dafoe]

If there is no one who has a super-priority, then the person who has preferred status effectively is super-prioritized.

Again the illustrations come up. Imagine a queue on the day of bankruptcy. Who is in the front of the line?

So preferred status unfortunately wouldn't be better than super-priority, because it still puts them ahead of the senior unsecured bondholders.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Dafoe.

Thank you, Mr. Van Kesteren.

Be as brief as possible, Monsieur Bouchard.

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

Thank you, Mr. Chairman. My question is for Mr. Boychuk. I would like to go back to the topic of severance pay. You clearly explained to us the cost of the super-priority for pension funds. With regard to severance, if we compare the super-priorities, which costs the most? I believe that's quantified with respect to pension funds. Has it been quantified for severance?

[Michael Boychuk]

I didn't hear the last part of your question.

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

For example, AbitibiBowater closed its Dolbeau and Gatineau plants. Under the collective agreement, workers were entitled to an amount of money. Because the company had placed itself under the protection of the Companies' Creditors Arrangement Act, that amount became a normal claim.

If that money had been protected, if it had been a super-priority, would that have had an impact on costs? You said there was a capital cost in the case of pension funds. I would like to know what the cost of that super-priority for severance would be in the event of a plant closure.

[Michael Boychuk]

I think it would be better to put the question to someone in the restructuring field rather than to me.

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

Mr. Breton answered on that point. Would anyone else have a response to offer on this point?

[Bill Kennedy, Vice-President, Special Loans, Canadian Bankers Association]

Perhaps I can answer that.

The wide-ranging effect would be that it would affect a lot more companies, because small and medium-sized companies generally borrow by what we call margined operating lines of credit. Generally speaking, there's a formula; in other words, a bank or a lender will provide 75% of accounts receivable, plus 50% of finished goods inventory, less priorities.

Right now we can define what the severance and pay is under WEPPA, the Wage Earner Protection Program Act: it's $2,000 per employee. That comes right off the top. Very simply, if you have a company that has 200 employees, at $2,000 per employee that's $400,000 of lesser availability that they would have on their line of credit.

If the total amount of severance—and it could be up to 42 weeks—becomes a priority, I would think it would constrain credit greatly and might even take away availability of credit.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Kennedy and Monsieur Bouchard.

I want to thank you very much, particularly for the last answer, which was very precise.

And to witnesses far and near, thank you very much for coming.

I'm going to suspend for two minutes for the next panel to come in.

[The Chair, Conservative, David Sweet]

Gentlemen, welcome back.

We're now going to hear from witnesses. I'm going to begin with witnesses who are from the same organization, but who are going to come from two different aspects. I'll begin with the national and then the local from the Communications, Energy, and Paperworkers Union of Canada.

I understand, Monsieur Caron, you'll be speaking for about two and a half minutes and then Monsieur Carrière will speak for about two and a half minutes.

Go ahead and begin, please.

[Guy Caron, Director, Special Projects, Communications, Energy and Paperworkers Union of Canada]

Thank you very much, Mr. Chairman.

Thank you, committee members, for agreeing to hear us.

You will not be surprised to hear that we support Bill C-501. We think the present system really works to the detriment of workers, as demonstrated by a number of examples from the great recession. I would like to talk to you about a specific example.

In some cases, we were able to salvage the situation. In the case of AbitibiBowater, for example, we were able to negotiate with the company to protect retirees' pensions. Of course, that required concessions on the part of workers, but pensions were protected during the major crisis, particularly as a result of the fact that it was possible to work with AbitibiBowater.

Fraser Papers is a much sadder story. A company, Brookfield Asset Management, owned a 70% interest in the business. It was one of the most viable forest companies. Fraser Papers was able to weather the crisis and to come out of it stronger than the rest of the industry.

And yet Brookfield Asset Management decided to place Fraser Papers under Bankruptcy Act protection. Under the restructuring plan that was adopted, a new company was created, the major shareholder in which was still Brookfield Asset Management, and it managed to secure repayment of the money that Fraser Papers owed it on paper and to repay secured creditors. Ultimately, what that meant for workers was that the Thurso plant shut down. Workers have yet to receive severance pay.

As for other retirees, their pay was cut by 30% to 35%, and all that was because Brookfield Asset Management had no remorse in shutting down a plant that was profitable and was doing better than other companies in order to secure its concessions under the Companies' Creditors Arrangement Act. That was a flagrant abuse of the CCAA for specific purposes that ultimately hurt the workers.

In that sense, the CCAA is currently an obsolete tool, and we advocate passage of Bill C-501. With regard to the issue of investors—I know that has been the subject of extensive discussion and that you have heard from companies and restructuring experts who tell you that's impossible—and we have a proposal, which I won't have time to present to you, but I invite you to ask me questions on the subject. I will be pleased to answer them.

[The Chair, Conservative, David Sweet]

Monsieur Carrière.

[Gaston Carrière, President, Local 142, Communications, Energy and Paperworkers Union of Canada]

Good morning. I want to thank the committee, ladies and gentlemen, for hearing us. First I want to emphasize that we agree on Bill C-501. However, we sincerely believe that additions should be made to it to give it more teeth.

Why? Who is currently suffering most from the deficiencies of Bill C-501? The situation of AbitibiBowater's Gatineau and Dolbeau workers should be enough to bring about changes to Bill C-501. But as my colleague said earlier, we need more than that. What happened at Fraser Papers was abominable.

They took away 35% of total benefits from retirees who were already receiving retirement benefits, in addition to scrapping the pension plans, before other owners started the plant back up.

An even worse situation is that of White Birth Papers, formerly Masson Papers, where they are in the midst of negotiations. There too they are working to try to save pension plans and working conditions. Negotiations are underway, and a conciliation meeting is being held this morning.

The worst part of all that is having the courts sanction all the actions taken against workers in the pulp and paper industry. It has been accepted by the courts that our working conditions have been greatly weakened. The companies are entitled to do that in order to restructure. It's abominable and terrible. Let me tell you that the situation is extremely serious and a major concern because it's all being done with the courts' authorization under the Companies' Creditors Arrangement Act.

The companies now have a right and the opportunity to liquidate their debts. Do you think they hesitate to do so? No, not at all. That's why the act has to be revised and corrected in order to provide better protection for the amounts owed to workers, while equipping them to maintain their pension plans and so on. What's being done is abominable, abominable, and it's spreading to other sectors. Employers have found a crack because Bill C-501 is weak; it has deficiencies. They are weakening our working conditions, our pension plans, termination and severance pay, in addition to penalizing us for unemployment purposes. We'll have to pay money back.

Thank you very much.

[The Chair, Conservative, David Sweet]

Now we'll move on to Mr. Markham for five minutes, please.

[Ian Markham, Senior Consulting Actuary, Towers Watson]

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.

[Karen Figueiredo, Member, Towers Watson]

The cost of preferred creditor status is not evenly distributed among all employers who issue bonds. The impact of Bill C-501will depend on their credit rating, the relative size of their DB plan, their DB plan's funded position, and on prevailing economic conditions. Although the average impact on corporate bond interest rates may only be a quarter of 1% in normal market conditions—for example, moving from 5% to 5.25%—some companies will pay much higher costs than others.

Ian has a page that has the top 60 bond issuers in Canada, all of them investment grade, and visually you can see the ones in orange are the ones rated triple-B. It's those triple-B-rated companies with DB deficits that are likely to experience a downgrade in their credit rating and could see their financing costs increase by 2%, 3%, 4%, or even 5% as a result of the bill. If the rating drops them below investment grade, this would—as opposed to could—result in forced sale of their bonds by most Canadian pension plans.

It's important to note the dichotomy in the Canadian bond market. Most of the corporate bonds that are highly rated—i.e., that pay the lowest interest rates—are issued by financial institutions, whose DB plans tend to be less material relative to their corporate balance sheet and income statement, and by regulated utilities that arguably have an automatic ability to pass the pension costs through to ratepayers. Many triple-B-rated companies are household-name industrial companies, such as CP Rail, Telus, and Bell, where the DB plans are hugely material. In effect, it's Canada's industrial base that would take the majority of the hit if preferred creditor status or super-priority were given to DB plan deficits.

There will be increased volatility for corporate bond issuers, and that may deter foreign investors from investing in Canadian corporations with DB plans. Several fixed income experts indicated to us that they would develop new models to assess risks associated with DB plans, something that many foreign investor firms may be unwilling to do, given the time and complexity involved. By the same token, investment capital could focus more on investment opportunities outside Canada. While many DB plans face risk for their members' employers, market upheavals will happen. No one predicted how far along bond interest rates would affect DB solvency in the last five years. We can absolutely assure you that the best form of security for pension benefits of DB plan members is the existence of financially sound employers, combined with pension benefits legislation that enhances the funding of ongoing plans in a balanced and sensible manner.

[The Chair, Conservative, David Sweet]

Thank you, Madam Figueiredo. I'm sorry that I have to interrupt you, but I'm over time.

We'll now go to Mr. Benson for five minutes.

[Phil Benson, Lobbyist, Teamsters Canada]

Thank you, Mr. Chair. Thank you very much for having us here.

The documents I gave are a snapshot of our activity on this file from 2005 to 2010.

The year 2005 is relevant because that's the first time corporations came asking for relief for pension funds with pension deficits underwater and things like that, and that was at the end of the longest boom time we've ever seen in the western world.

The years 2009 and 2010 are relevant because that was when the latest round of consultations on pension issues took place. We would like to thank Mr. Menzies and Minister of Finance Flaherty for including Teamsters Canada so meaningfully in those discussions. We would also like to recognize the action the government has already taken. As an example, one of our major companies, CP, has put $850 million into their pension fund in the last two years, and that will go a long way toward relieving the problem.

I think what we're really talking about here is costs and risks. The people who oppose this bill are really saying that they want somebody else to bear the cost and the risks. This bill is about closing the barn door after the horse has bolted, and I agree that most of this fix has to come from our consultations on how we can fix it before, not after, the horse bolts through the barn door.

We've been discussing this before three committees in the last year and a half. In one of them, one of the corporate executives stated that they couldn't put money into pension plans because they needed it to build their business. Really, that's what people are saying. They need cheaper interest rates to build their business, they need this to build their business, they need that to build their business, yet workers and pensioners are the only group of all these creditors or lenders who have a trusted relationship with a fiduciary duty applying.

When I examined that and looked at fiduciary duty, I didn't see anything that said I can use the money to build my company. At the end of the day, we're really asking whether it is acceptable for government policy to say that the risks of running a business should be transferred onto pensioners and workers, that the importance of building our economy is so great that we have to transfer it onto pensioners and workers, and that the need for bondholders to make their money is so great that we're going to transfer that risk onto our pensioners and workers.

In a marketplace it's usually much more efficient to have the costs properly allocated. That's how we get efficiency. It's not through artificial means, and what we have here is really an artificial means. We have banks basically lending money.... Let's imagine it was a mortgage. They lent money to people for mortgages, but they didn't look at their entire financial background because they didn't have to. That's what happened in the U.S., wasn't it?

Here what we have is a situation of people saying that because they do not have to look at it, they do not have to put the cost factor in. I'll tell you that for an efficient market and for bringing discipline to the market, it's something that should be done.

I think the arguments opposing this bill may be a matter of timing. Should the front end be fixed first? It might be an issue of phase-in, it may be an issue of capping, but surely it's not government policy. It can't be the policy of Parliament to say “We want to transfer risks onto the people who can least afford it”.

In our case, we have worked with the Nortel people and the Nortel people's group of teamsters, Flextronics. They're getting 26¢ on the dollar. They just got a letter last week cancelling all of their policies. Everything else is cancelled. Do you think that's fair? That's not a good answer in front of a committee, but do you think that's an efficient running of the marketplace? We'd submit it isn't.

What we'll say to you is this: if this isn't the right bill, what's the right bill? We will tell you that we will work with the government, with the opposition, and with our employers. We'll work with anybody who's interested in getting something that will achieve the ends we want, whether it's closing the gate with the horse in the barn or afterwards, but I think this is something that we must do. It's something we have to do. The argument that says that we want to transfer risks and costs onto workers and employers simply doesn't wash.

Second, though I heard today their grave concern about employees, when we deal with employers they are usually more concerned about driving up share values and making money for themselves and for their shareholders. If rules and regulations aren't in place, they will not put into the pension funds. That's what happened. I will give credit to the government for taking some steps to force companies to do the right thing--not do the right thing, because they don't, but to do what is required: to treat that trust document, that relationship, with the sincere responsibility it requires and to respect fiduciary duty.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Benson.

We'll go now to Madam Bastien for five minutes, please.

[Leigh Ann Bastien, Partner, Mercer (Canada) Limited]

Thank you for the opportunity for Michel and me to speak today.

I'm Leigh Ann Bastien. I'm a pension lawyer. I have expertise in pension legislation across Canada, including the Pension Benefits Standards Act, as amended by Bill C-9.

Michel St-Germain is a pension actuary. He has 36 years of experience providing advice on the funding and design of employer pension plans.

Our statement today, in simple terms, is that defined benefit pension plans are good things. They deliver pensions to many people through most market downturns and through most downturns in an employer's business. But the retirement system is struggling. Governments are trying to strengthen the defined benefit pension plans and to strengthen the retirement system. Bill C-501 would work in the other direction, making plan sponsorship less viable for employers.

Private sector sponsors of defined benefit pension plans will likely change the funding and design of their plans or leave defined benefit plans entirely if the bankruptcy laws change to make the pension deficit a fully secured creditor.

I'll turn it over to Michel, who will provide more details.