Thank you, Mr. Chairman.
My name is John Farrell, and I'm the executive director of Federally Regulated Employers - Transportation and Communications. With me today as an advisor is Mr. Brian Aitken, vice-president, CFO, and treasurer of Nav Canada. Nav Canada is a member of FETCO.
Regarding the amendments to Bill C-501 proposed by Mr. Rafferty, the revised wording clearly extends the super-priority treatment to the entire solvency deficit, such that the entire deficit would have to be paid in order for plans of arrangement under CCAA to be approved by the courts. This is consistent with the preamble of the bill. It is also consistent with the basis upon which FETCO made its submission to this committee on November 23. Our submission on November 23, 2010, remains unaltered by the proposed amendments to Bill C-501.
It is clear that the former Nortel employees and pensioners have suffered significant losses as a result of the bankruptcy of Nortel. This is extremely unfortunate. Employees much prefer defined benefit pension plans over defined contribution plans because they reduce many of the risks to employees. However, it is not possible to remove all the risks.
Bankruptcy is fundamentally the death of a company. CCAA is a mechanism that is analogous to intensive care, where the object is to prevent the death of the company so that it can recover and continue as a going concern. However, if the company cannot be saved, bankruptcy follows, and it is a process designed by legislation to settle the estate of the deceased company in a way that is fair to all stakeholders.
The CCAA bankruptcy proceedings at Nortel happened at the worst possible time. The company failed. We all know that. Financial markets were crashing, and equity values were extremely low. The major culprit was and continues to be persistent low long-term interest rates not seen in over half a century. Low rates have dramatically increased the calculated value of solvency liabilities. Simply put, typical defined benefit pension plans' solvency liabilities, which are a proxy for the cost of settling the plan's obligations, have increased by 30% as long-term Canada bond yields have fallen over the last decade from approximately 5.5% to 3.5%. For a large, mature, defined benefit plan, a 0.25% reduction in long-term interest rates can cause an increase in pension liabilities in excess of $250 million.
I have no doubt that those advocating Bill C-501 are well-meaning. However, the facts demonstrate that Bill C-501 will inflict far greater harm than good on employees, pensioners, and companies with defined benefit pension plans. It would also hurt individual Canadians who hold corporate bonds issued by these companies in their RRSPs, their mutual funds, and their individual retirement portfolios.
There is no doubt that this a complicated matter. This committee has seen a parade of expert witnesses and has received a number of written submissions. The people who have been here include the top solvency and bankruptcy experts in Canada, the top actuaries and pension experts and consultants in Canada, a major Canadian law expert in pension law and bankruptcy proceedings, several top credit market analysts and experts, and some of the leading employers' organizations in Canada. Witnesses from the forest products industry have provided real examples of the harm that Bill C-501 can have on a company's ability to raise capital, make investments for future growth, and maintain employment for thousands of Canadians.
What are all these witnesses saying? They're all saying the same thing: Bill C-501 is bad medicine. It is medicine that kills the patient and infects everyone in the community. You've heard the witnesses say the following: companies with defined benefit pension plans that are in financial difficulty may be forced to seek protection under CCAA. Some companies in CCAA may not be able to restructure and emerge. They may be forced to liquidate, causing the unnecessary loss of jobs. It will increase the cost of capital for companies with defined benefit pension plans, particularly those companies with investment grade bonds. They would see Bill C-501 cause their ratings to fall below investment grade. It would reduce the value of corporate bonds that have been issued by companies that provide defined benefit pension plans.
As a result, countless Canadians holding corporate bonds of the companies that sponsor defined benefit pension plans will have their individual RRSPs, mutual funds, and personal retirement savings portfolios hurt. The passing of Bill C-501 would inflict serious harm and could cause a sudden event that will raise the cost of capital for many Canadian companies that provide the bulk of defined pension benefit plans in Canada. This bill will be the death knell of DB plans in Canada as we know them today.
Pensions and retirement security are a major public policy issue in Canada. The federal and provincial governments have been modifying their laws to strengthen pension plan funding rules, which will improve the security of private pension plans and benefit entitlements.
Further, finance ministers across the country—