Industry Committee on June 10th, 2021

[The Chair, Liberal, Sherry Romanado]

Good morning, everyone. I now call this meeting to order.

Welcome to meeting number 45 of the House of Commons Standing Committee on Industry, Science and Technology. Today's meeting is taking place in a hybrid format, pursuant to the House order of January 25, 2021. The proceedings will be made available via the House of Commons website. So you are aware, the webcast will always show the person speaking, rather than the entirety of the committee.

The first hour will be spent on clause-by-clause consideration of Bill C-253, and then we will move in camera for the second hour to review our report.

To ensure an orderly meeting, I would like to outline a few rules to follow. Members and witnesses may speak in the official language of their choice. Interpretation services are available for this meeting; you have the choice at the bottom of your screen of floor, English or French audio. I'll remind you that all comments by members and witnesses should be addressed through the chair. Before speaking, please wait until I recognize you by name. When you are not speaking, your microphone should be on mute.

Pursuant to the order of reference of Wednesday, May 12, 2021, the committee is meeting to begin clause-by-clause of Bill C-253, an act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act.

I'd like to now welcome our witnesses. Here to assist us today from the Department of Industry, we have Mr. Mark Schaan, associate assistant deputy minister, strategy and innovation policy sector; and Mr. Paul Morrison, manager, corporate, insolvency and competition directorate.

As this is the first time that INDU is doing clause-by-clause of a bill, I'd like to explain how today will go. I will introduce each clause and ask if any members have any questions or comments. If you do, please raise your hand, and we will keep track of the speaking order. I know that MP Lemire is in the room, so we'll try to make sure we can see him when he has his hand up.

Mr. Lemire, if I don't see your hand raised, please send me a message.

Thank you.

We will take care of the speaking order, and once we've finished any debate on a specific clause, I'll then turn it over to the clerk for the vote.

With that, I wanted to also introduce the legislative clerk who is with us in the room today, Monsieur Jacques Maziade.

Welcome to INDU.

[Jacques Maziade, Legislative Clerk]

It's nice to be here. Thank you.

[The Chair, Liberal, Sherry Romanado]

With that, we're going to start.

(On clause 1)

You'll have in front of you your bill. Does anyone have any questions or comments with respect to clause 1?

MP—

[Pierre Poilievre, Conservative, Carleton, ON]

On a point of order, Madam Chair, I just wanted to make sure you got my amendment. We submitted it about an hour ago, I think. Some of the other members didn't get it circulated to them, which might be a function of the lateness with which I sent it, but I want to make sure it's there and that you have it, so that when the appropriate clause arises it can be discussed.

[The Chair, Liberal, Sherry Romanado]

I have not received it, but the clerk has, and it will be distributed shortly. It's on its way. I'll give you a confirmation when we get it, so that you know it's been received, okay?

[Pierre Poilievre, Conservative, Carleton, ON]

Excellent, thanks so much.

[The Chair, Liberal, Sherry Romanado]

With that, we'll go to MP Jowhari.

You have the floor.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you, Madam Chair.

Thank you to the witnesses, although I was hoping to hear testimony from them or an intervention from them giving a sense of, in their opinion, how big the issue is or whether they have any concerns.

Let me start by asking some questions, at least for me, for those who may have joined us for the very first time in our committee, and for those who are monitoring the committee.

The question is for either of our two witnesses. My understanding is that as of December 2019, we had about 1.23 million corporations in Canada. Of those, about 1.2 million were small businesses, which is about 97.9%. Another 1.9%, or 22,905 of them, were medium-sized businesses. Only about 2,978, which is 0.2%, were large businesses. The issue we are dealing with relates to the unfunded pension. How large is it? Who are the key stakeholders? What is the amount? How many people does it impact?

Either of you, Mr. Schaan or Mr. Morrison, can comment on that first, before I get to questions regarding the pension liability.

[Mark Schaan, Associate Assistant Deputy Minister, Strategy and Innovation Policy Sector, Department of Industry]

You bet. I'm happy to start, and then I may have some supplemental information from my colleague, Mr. Morrison.

Essentially, the issue we're talking about with respect to unfunded pension liabilities relates to corporations that have defined benefit pension plans. Just by way of quick reference, there are a number of ways in which companies provide additional retirement benefits to their employees, or future promises of income in retirement. Sometimes they're as simple as supporting individual employees in making their own contributions through things like RRSPs or other savings plans—a defined contribution mechanism.

What a defined contribution mechanism means is that in a pension plan that essentially says that the employee, perhaps, but often the employer, will make a contribution into a pension plan, the contribution is what is defined; that is, the employer will make a set contribution on every pay, which will then go into a fund. That fund will be invested with some sort of investment scheme, and whatever that investment scheme is able to ultimately provide is what will be made available to the individual at the time of their retirement.

A defined benefit pension plan, however, is one where the benefit is that which is defined, which is to say that a promise is made that upon retirement an employee will receive a percentage, usually, of their pre-retirement income, often with some sort of formula based on best years, which indicates that it will be paid in perpetuity until such time as their death.

What we're talking about is companies that offer this type of pension plan. That number has largely been going down. I don't have the exact figures in front of me, but when I'm done explaining I'll see if Mr. Morrison has information. Essentially, that number is relatively small, because it is a higher-risk mechanism of providing retirement income. Ultimately, the employer is hoping that investment returns will allow them to be able to continue to offer that benefit based on the full lifespan of their employee base.

Where we have an unfunded pension liability is essentially the differential between that which was promised and that which is required. That, we calculate in two ways. One is on a going-concern basis. In a defined benefit that means, are you actually earning enough from your investment returns and your ongoing cash requirements to be able to provide for the requirements of your pensioners at the time of their retirement? Right now, if I have 10 employees and I have five retirees, am I actually earning enough on the basis of what I have in my pension fund to be able to provide that?

Then there's also a wind-up basis, essentially. Is there enough, should the company actually go insolvent, to be able to meet the promises it made to all of its employees? That wind-up basis is a much bigger number, obviously, because you need to have enough in your account that if you were to go insolvent you would be able to pay out those promises.

The vast majority of defined benefit pension plans that are currently available in Canada are actually provincially regulated, because they are provincially regulated industries. The requirements for plan sponsors as to the amount they need to have in place vary enormously, everything from the Quebec government, which actually does not require a solvency basis accounting—so they do not require pension plans to account for what would be required if they went to insolvency—all the way through to the federal government, where we actually require plans to be 100% funded on a wind-up basis or on a solvency basis—

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you, Mr. Schaan, but can you give me an understanding of how much this package is, how much of it is unfunded and how much is at risk? Are we in a position to be able to get a sense of that?

[Mark Schaan]

My information is that as of 2019 there were 4.3 million workers in total that were members of defined benefit pension plans. For federally regulated plans, those are, as I said, held at 100% solvency requirements. They then have to make up the difference between that which they have and that which would be required on a solvency or wind-up basis over five years—

[Majid Jowhari, Liberal, Richmond Hill, ON]

I apologize for interrupting.

I'm hoping that the translators also won't mind.

Okay. Now we know from a numbers point of view that there are 4.3 million people—

[Mark Schaan]

Yes, of whom 1.2 million, Mr. Jowhari, are in the private sector. The vast majority of those are actually in the public sector. In the private sector, 1.2 million have access to a defined benefit pension plan.

[Majid Jowhari, Liberal, Richmond Hill, ON]

There are 1.2 million in the private sector, which I assume is part of that 2,978, roughly, which is 0.2%.

Also, of the 1.2 million Canadian individuals who are impacted, how big is this from a dollar point of view?

[Mark Schaan]

That I would not have at the ready, because, obviously, those plans vary enormously in size.

To your earlier point, it is mostly larger employers that have defined benefit pension plans, although there are some organizations that offer only defined benefit pension plans, for instance, for their senior executives, so that—

[Majid Jowhari, Liberal, Richmond Hill, ON]

Senior executives always have a bonus package. I'm trying to figure out, for the average Canadian who works for these large corporations.... Of that 1.2 million, let's say that one million of them are not executives and don't have bonus packages. We don't have any idea of how big this basket is for the one million.

What I am trying to do is get an understanding of what the impact really is, and now I want to get into the clause. What is the specific effect of the insolvency proceeding, as it relates to clause 1?

[Mark Schaan]

This would provide a superpriority for the unfunded pension liability, and essentially that unfunded pension liability varies enormously, depending on the plan, depending on the company and depending on the particular facts. In some cases it can be very large.

In certain provinces where, for instance, a plan is held to having, in assets, only 85% of the value of the plan on a wind-up basis, you could then have as much as or more than 15% of the total value of the plan. For very large employers, we can look at some of those that have been through a CCAA process. For instance, in Stelco there were 20,000 pensioners, and that can end up being an awful lot of money and an awful lot of people.

In some of these cases—in the case of Air Canada, for instance—we've seen that the unfunded pension liability at the entry into their restructuring was very significant. If that had been in place, if there had been a superpriority at the time, it would potentially have dwarfed all the other available creditors and prevented a restructuring.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Okay. This is great, because this is where I am trying to get.

I know there are a number of stakeholders, when I take a step back. I have the federal government, I have the provincial governments that have to work together as it relates to the regulator. There are the employees and the employer. Really, those two—the corporation and the employee—are the ones I want to focus on.

As it relates to the employer, what advantages and what disadvantages is this clause going to have on their ability to get credit? What is the impact, from a percentage and from a dollar perspective on the employee, and what risk are they being exposed to?

The government works with the regulations. I really want to understand, from the two key stakeholders, the business as well as the individual, the employee, what their risks are and who is at more risk because of this.

[Mark Schaan]

On the degree of risk, I'll come at this in two ways. The degree of risk varies, as I said, depending on the regulation that the pension plan itself is subject to. Obviously, if the pension plan isn't required to be fully funded on a solvency basis, that creates greater risk for workers, because there's not enough that's actually being held in assets to be able to make those payouts in the case of an insolvency.

Where those pension regulations are stronger and require greater degrees of funding, that obviously places less risk on the employee in that case.

Your question, though, is in terms of where the risks would go with a superpriority and what the potential impacts would be.

If there was a superpriority, the theory is obviously there's less risk for workers, because they will be paid first, so that unfunded pension liability would be there. In some cases, though, that unfunded pension liability actually would still not be fully serviced by the assets on hand of the organization. In one of the insolvencies that covered over 24,000 pensioners that went through in 2004, the unfunded pension liability in that case was $1.8 billion. That would have significantly dwarfed the assets that were on hand of the individuals, so they still wouldn't have been fully paid, even with a superpriority.

However, because there wasn't a superpriority, that restructuring ultimately brought all of the other creditors to bear, and that entity was able to restructure and allow for those 24,000 pensioners to emerge into a viable entity that could still continue to make pension contributions and ultimately pay out pensions.

If you're a lending institution and there's a superpriority in place, it means that superpriority gets paid out before you do as a secured creditor. There's a couple of potential behaviours that you would keep in mind to ensure that you'd mitigated your potential risk.

One is, obviously, that you potentially charge a higher premium to the cost of credit, because now there's a possibility that you will not actually be paid on a secured basis because there's someone who ranks above you in—

[Majid Jowhari, Liberal, Richmond Hill, ON]

I apologize, if I may interrupt you.

I'll draw a parallel with...let's say I have a mortgage and I renew it every five years, or if it's a variable I renew it annually or every two years. During each renewal, they still ask for the same documents, the same financials, to make sure I still can service the debt.

Is there a procedure you'd suggest that these large corporations put in place, so that on a regular basis, whether it's annually, quarterly—the same way I think all the executives get some of their bonuses, on a quarterly basis or an annual basis—they would be able to monitor that portion of the pension and be able to highlight risk, which would reassure the financial institution you're talking about that they're still tracking, their investment is solid, and they still would be able to fulfill the commitment that they had made?

[Mark Schaan]

That's called an actuarial evaluation. An actuarial evaluation is required under federal pension regulations on an annual basis where you are less than 100% solvent on a wind-up basis.

That actually does continue to calculate the unfunded pension liability and then requires special payment. We actually require the gap between a fully-funded pension on a solvency basis and that which is within the account to be paid through special payments over the course of the subsequent five years.

We then require—

[Majid Jowhari, Liberal, Richmond Hill, ON]

I apologize for interrupting.

What is the concern that the financial institution has, because they're getting—

[Mark Schaan]

The concern is that they may know what that unfunded pension liability is, but if that unfunded pension liability is going to be paid ahead of them in an insolvency, that obviously creates increased risk for their ability to be paid back, which means they're going to calculate that into the risk premium they charge, or they won't lend at all.

One of the other fears we have is if there actually is an unfunded pension liability and there is a superpriority for that, one of the potential strategic behaviours that might actually come from lenders is not to assert pressure on the company to fully fund their pension, which is what some people theoretically imagine would happen, especially since that often would mean that you'd be taking it out of working capital, but instead that those lenders will call their loans, and they'll call their loans early to ensure that they get paid, therefore putting the company into liquidation.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Yes. Thank you.

This is my last question, because I want to be cognizant of my other colleagues who have their hands up. When we look at this clause in summary, in bullet points, how is this clause 1 different from the existing law and how would it change the current law?

That's my last question.

[Mark Schaan]

Clause 1 creates the superpriority for unfunded pension liabilities in Bankruptcy and Insolvency Act restructuring. Essentially, what happens right now is that unfunded pension liabilities are treated as unsecured creditors alongside other unsecured creditors, like small and medium-sized enterprises and other suppliers that have aided with and provided services that have yet to be paid for by the organization.

In the current scheme, superpriorities are afforded in a couple of categories. First of all, we provide a superpriority for unpaid wages, up to a cap of $2,000. We also provide for a superpriority for unpaid payroll taxes—employment insurance and CPP. That's to ensure that employees can actually get their last bit of pay and that doesn't actually go unpaid. We actually have a program federally that doesn't even require the employee to participate in the insolvency process. We take their spot in the insolvency through the wage earner protection program and provide that piece for them.

We then have preferred claims. Preferred claims are relatively rare. There are a small number of them. They exist in a couple of instances.

Next there are secured creditors, which are those who actually lent on the basis that they were insured against assets and that those assets would be utilized to provide them with the security of their loans, and then there are unsecured creditors. In this particular case, they would take that unfunded pension liability in their restructuring and provide for it at the same level at that very early stage. As we've indicated, in certain situations that can actually wipe out available assets for other sources of creditors, or other scales of creditors, and potentially prevent a restructuring from existing.