Industry Committee on June 10th, 2021

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you.

I'm going to yield the rest of my time to the chair to assign. I'm hoping one of my colleagues will ask the question of what this does to our competitiveness, especially for large corporations—the corporations we talked about, those 3,000 corporations—especially if they are international corporations. What would it do to their competitiveness, especially among the G7, the G20 and the OECD?

I'm going yield the rest of my time to the chair to assign accordingly.

Thank you.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Before I go to MP Jaczek, MP Erskine-Smith, MP Généreux, MP Poilievre and then MP Ehsassi, I just wanted to confirm to you, MP Poilievre, that we've received the amendment and it has been circulated. Thank you for that.

MP Jaczek, you have the floor.

[Helena Jaczek, Liberal, Markham—Stouffville, ON]

Thank you so much, Madam Chair.

Thank you to the witnesses for being here today.

We've heard testimony over the last couple of sessions from individuals representing groups of pensioners in the defined benefit category, Mr. Schaan. You've certainly, through the questions Mr. Jowhari asked you, given us a sense of the size of that group of people, which is rapidly diminishing in terms of businesses employing a defined benefit plan system for their employees. I know that in my own riding there are so many people working in the gig economy or working on contract, and of course they don't have any type of pension at all.

I want to follow up a bit on the defined contribution type of pension plan, which is certainly increasingly common. In terms of that, what type of protection is given to pensioners in the face of an insolvency or a potential insolvency?

[Mark Schaan]

One thing that's important to note at the outset is that pension funds are held in trust and are sacrosanct. They cannot be used for alternative purposes. That's true both for defined contribution pension plans and for defined benefit pension plans. When a company is taking a pension contribution off every paycheque, it's going into a dedicated account that actually continues to accrue value through the investment scheme that it's put through.

In the case of a defined benefit pension plan, whatever is in the plan is absolutely sacrosanct, as we indicated. It can't be used for other purposes. In the case of a defined contribution plan, that means that essentially the risk is being shared between the employer and the employee, so in an insolvency what is available to the individual employee is whatever was invested to date.

There isn't an unfunded portion, because essentially the way that a defined contribution plan works is that the contribution has been defined; it has been made every single time and, as we indicated, any unfunded pension contributions for the previous period of work need to be remitted as a superpriority, so whatever is in that fund is available and then gets distributed. Normally that happens as a purchase of annuities.

There are some mechanisms that have existed in a couple of insolvencies where potentially they've been allowed to be converted into other investment-accruing vehicles, but essentially, for a defined contribution plan, you have very strong protections in place, because there wasn't any expectation other than the fact that the market would return what the market returned. In the case of a defined benefit plan, that's not the case, obviously, because what was defined was the benefit, and that requires a certain level of market return to be able to get to that level.

[Helena Jaczek, Liberal, Markham—Stouffville, ON]

Essentially, then, this particular bill doesn't really affect pensioners who have a defined contribution plan. In their contribution to the investment vehicle, they must be aware there is some risk in terms of the vagaries of the market or whatever. Presumably they understand that.

Is there anything in this bill that adds any protection for them?

[Mark Schaan]

No. This bill is aimed at a couple of elements. It's aimed at unfunded pension liabilities; it's aimed at terminated group insurance plans and it's aimed at severance pay. Defined contribution plans aren't treated under this bill, because essentially a defined contribution already has a superpriority for any unremitted payments into the plan for that last little period leading up to the insolvency. Then, as I said, it's subject to the vagaries of the market—in terms of investment returns—as to what ultimately those individuals will receive upon retirement.

[Helena Jaczek, Liberal, Markham—Stouffville, ON]

Thank you.

My riding is in Ontario. You alluded to the fact that in Ontario there are already certain legislative provisions that provide considerable protection. In your view, would it perhaps be more reasonable to ensure that every province institute its own regulations more in line with what Ontario has, rather than institute this particular bill?

[Mark Schaan]

I won't presume to speak for the provincial approach to pension regulation. I can say why we've approached it the way we have at the federal level. We believe pension funds ultimately should be 100% funded on an insolvency basis because we see real risks: Insolvencies can't necessarily be fully predicted. By requiring plan sponsors to be at 100% funding, we anticipate and allow for the possibility that the firm might ultimately go insolvent, and that therefore there are sufficient funds in place to allow for the promise they've made.

For provinces that don't require that level of funding, we didn't introduce that at the federal level, in part because we thought it introduced significant undue risk to workers and pensioners. It raised the possibility that you could have an insolvency that would lead to an unfunded pension liability of a significant nature.

We see real value in solving the problems of unfunded pension liabilities while the firm is actually in a position to be able to address them—that is, while they're operating and ongoing. Doing it in the case of an insolvency is extraordinarily difficult. By definition, there are insufficient funds to be able to pay those to whom there are obligations. Therefore, you are then ultimately making strategic decisions and policy mandate decisions about who should be paid and in what regard.

We also wanted to be mindful of the fact that we are very supportive of the desire for incentive to restructure and allow for entities to emerge as a going concern and continue to make the contributions that ultimately will lead to greater security.

[Helena Jaczek, Liberal, Markham—Stouffville, ON]

Thank you very much. Of course, I understand the sensitivity around the federal-provincial situation.

Madam Chair, those are all my questions. Thank you very much.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Next we have MP Erskine-Smith.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Thanks very much, Chair.

I have four questions. First, you mentioned that contributions are a deemed trust. We heard testimony, and I think the Supreme Court has upheld this general view, that pensions are deferred wages. Just from a principle rationale, before we get into the details of this bill, forget superpriority: Why wouldn't all pensions be a deemed trust when they're deferred wages?

[Mark Schaan]

You ask an important question. Essentially, we see it as deferred compensation, not necessarily wages. We see compensation as a promise made in a way similar to the promises made by that same organization in a number of different domains. The promise, upon receipt of a service, to pay for that service is also akin to that, which is where you find other unsecured creditors.

In an insolvency process we need to be able to look at all those who, essentially, have IOUs and promises held, and figure out a mechanism by which to provide for an orderly treatment of those. While we've deemed what's in the fund as absolutely sacrosanct, what is not in the fund is held to be akin to that, which is other creditors and their unpaid bills as well.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

With regard to the federal policy, you've mentioned today a few times that we require 100% funding on an insolvency basis for the sake of pensions. That's in relation to not only the contributions, which would be in deemed trust, but also this promise of return as it relates to DB pensions. Is that right?

[Mark Schaan]

I'm not sure I follow the second half of that.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

On an insolvency basis, you just said to me that you treat them on an unsecured basis alongside other creditors. However, you're telling me that the federal policy is that there needs to be 100% funding of pensions on an insolvency basis.

[Mark Schaan]

Yes. The regulatory obligation is to be at 100% funding on a wind-up basis. However, when that is not the case, we require special payments to be made over the course of the subsequent five years to be able to make up that gap.

While there is a 100% requirement, not all pension funds are going to be at 100% on a wind-up basis at all given moments.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

I understand that, but the overall policy.... My point is that in the answer to my first question, you effectively said that contributions are deemed trust, because those are deferred wages, and that this other is deferred compensation, so it's unsecured. However, actually, federal policy is that they should all be funded on a wind-up basis. We want to make sure that pensions, regardless of whether they are contributions into the pension or just the return that is promised to them in an unsecured manner right now.... All of that we want to see funded on a 100% basis.

[Mark Schaan]

We see strong funding levels within pensions as an important parameter to ensure the continued vitality of the promise. We then treat the missing portion, essentially, as a creditor alongside other classes of creditors in the case of an insolvency.

The goal of the policy is strong, well-funded pensions. The reality of an unfunded pension liability in insolvency is that it's an unfunded credit that needs to be paid, and it needs to be paid alongside the other creditors.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

I take your point, but the federal regulatory policies—

[The Chair, Liberal, Sherry Romanado]

My apologies. Sorry, MP Erskine-Smith. I hate to cut you off, but the bells are ringing.

In order for us to continue, I would require unanimous consent to continue, so I'd like to know if I have unanimous consent to continue while the bells are ringing. Do I have unanimous consent?

I see Majid Jowhari shaking his head.

MP Jowhari.

[Majid Jowhari, Liberal, Richmond Hill, ON]

No, Madam Chair. I know this is the crisis season.

I am logged in, and I am ready to vote. I don't know what the vote is, but I'd like to get caught up on it before I go to vote. I need that time.

Thank you.

[The Chair, Liberal, Sherry Romanado]

Okay, we will suspend for the vote.

If everyone can please make sure they're logged back on as soon as the vote is called, we'll then continue.

MP Erskine-Smith, I'll make a little note that you still have the floor.

With that, I'll suspend.

[The Chair, Liberal, Sherry Romanado]

Welcome back, everyone.

I'm not sure if MP Erskine-Smith had finished. He had the floor, so I'm going to turn it over to MP Erskine-Smith.

Had you finished?

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Not quite. I just wanted to pick up from where I left off. In the federal policy the idea is that through regulation we ensure that there will be funds in an insolvency to fulfill pensions 100%, and provinces have different thresholds—lower thresholds in some cases, and no threshold in the case of Quebec. To get at what we want, which is protecting pensioners, that would be the policy that would do the most.

Is that fair to say?

[Mark Schaan]

Yes. I think our view is that the moment at which it is most easy to influence the security of pensions is when the firm is up and running and operational. That's why we require firms, while operational, to be dedicating capital towards the requirements of their pension obligations.