Thank you, Mr. Sweet.
Good morning. My name is Bill Randle. I am the assistant general counsel at the Canadian Bankers Association. With me today is Bill Kennedy. He's vice-president, special loans, with the National Bank of Canada. We appreciate the opportunity to appear before the committee today to discuss Bill C-501.
We sympathize with Canadians who face a reduction in their current or future pension benefits upon the bankruptcy of their former employer, and we applaud MPs and senators who are championing efforts to find solutions. We believe that every effort should be made to attempt to prevent Canadians from experiencing such hardship, but we are here today to raise our concerns about the particular solution that is proposed in Bill C-501 and about its potential impact on the ability of employers who sponsor defined benefit plans to invest in research, new equipment, and expansion; on the ability of employers to successfully restructure and maintain jobs and operations when they themselves are in difficulty; and on the savings, including the retirement savings, of millions of Canadians who hold corporate bonds through their RRSPs, employer-sponsored pension plans, the Canada Pension Plan, and the Quebec Pension Plan.
There is a delicate balance that has been achieved over the years in the order of priorities in bankruptcy legislation. This balance aims to ensure that the rights of various creditors can be met while also ensuring that companies are able to access reasonably priced credit to fund their operations and make the investments they need in order to grow and be successful in an increasingly international marketplace. Changes to the order or priority in bankruptcy threaten to seriously undermine this delicate balance, with ripple effects across the economy.
Our major concern with this bill is that giving priority to potentially very large pension deficits will decrease the funds available to repay other creditors. As a result, both lenders and investors would experience a significant increase in their risk.
Financial institutions, as you know, manage risk very carefully, and the amount of risk they are allowed to take is closely regulated by the federal government. As the recent financial crisis highlighted, there are very good reasons for paying such close attention to the risk in financial institutions.
One of the main methods financial institutions use to manage risk is to carefully assess the amount that will be available to repay a loan if a company enters bankruptcy proceedings. As a result, if funding deficiencies in a company pension plan are given priority, as proposed in this bill, and therefore the amount a lender can expect to recover is reduced by the amount of the pension plan deficit, there will be a corresponding reduction in the amount a company will be able to borrow. Indeed, prudent lending practices, which require an abundance of caution, will probably result in further pressure on the availability of credit in order to reduce the risk of losses.
Large and well-established companies often turn to the financial markets to borrow funds. For investors who purchase financial instruments such as bonds, a change in the order of priority once again increases the risk that they will recover a smaller proportion of their investment if the company experiences financial difficulties. This increased risk means that investors will be more reluctant to buy a company's bonds, thus depriving it of financing, or would do so only if there was a higher risk premium on the bonds, making financing more expensive. In effect, higher risk means increased financing costs, which in turn will prevent some businesses from effectively financing their operations or expansions. Ultimately this leads to reduced economic growth and job creation.
Beyond the direct impact on the financial markets and the cost to businesses of raising funds, the super-priority contemplated in this bill will have a number of other negative consequences, including the following: first, companies with a defined benefit pension plan would find themselves at a competitive disadvantage either to companies without such a plan or to international competitors in other jurisdictions. This may provide a further incentive to employers to switch to defined contribution plans or to close their defined benefit plans to new entrants, to the detriment of younger Canadians. As well, other unsecured creditors, such as suppliers--many of them small businesses--will have a significantly reduced likelihood of recovering the amounts they are due, which may put pressure on their own finances. Since lenders and investors will be less likely to agree to advance funds to help save a company due to the additional risk, it may be more difficult for companies to restructure and ultimately avoid bankruptcy. Finally, by increasing the risk for many corporate bonds, a super-priority would have a detrimental effect on the investments and retirement savings of millions of Canadians.
As I noted earlier, the challenge for lawmakers and stakeholders is to find the appropriate balance in addressing the problem of unfunded pension liabilities without damaging the ability of companies to raise capital to invest in research and development or expand their operations, which may limit their growth and their potential success. In our view, amendments to bankruptcy and insolvency statutes are not an appropriate solution and will tip this balance in a way that could impair economic growth and ultimately be detrimental to workers when companies find it more difficult to restructure or invest in projects that could lead to job creation and higher wages.
We would be pleased to answer your questions.