Industry Committee on June 10th, 2021

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

Understood. Given, though, that this is a concern—this is obviously federal policy, as I say, to protect pensioners, at least as it relates to federally incorporated companies.... When we look at provincial governments that aren't doing the same thing, and we say we still care about pensioners, it's consistent with our policy rationale, because we want to see 100% funding for pensioners. Superpriority isn't something we are opposed to in principle—we want to protect those pensioners—but your argument is instead, we're concerned in practice that it would lead to fewer restructurings and that would actually make pensioners worse off.

Is that your fundamental rationale for not supporting this bill?

[Mark Schaan]

Yes, we think there are unintended economic consequences that come to bear as a function of a superpriority. One is a heightened cost of credit. The second is an incapacity for companies to continue to operate. The third is that, if it were to come to pass in the choice between a liquidation or a restructuring, it potentially would tilt the balance towards a liquidation, because there would be a pursuit by creditors of as much security of their owed capital as possible.

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

Two questions follow from that, and then I'm done. The heightened cost is less concerning to me because pensioners should be fully paid, and if it means that businesses have higher costs in the marketplace to fulfill their obligations to their employees, so be it.

I do share the concern about unintended consequences. I wonder, with the two remaining questions that I have, first, isn't it the case...? I'm counsel for a union, let's say, and the company is in receivership. I don't want the company to go bankrupt if it's going to make my folks worse off, but the superpriority gives me a position of leverage in negotiation. I can always negotiate away from that position, but why would we be opposed to a stronger position that they can negotiate from?

Surely we would be confident in counsel and a restructuring process that is looking after the best interests of pensioners to say, if it truly is the case, the facts on the ground in that particular matter show that forcing the company's hand and maintaining our superpriority over all of our claims is going to send it into insolvency and it will be unable to restructure. Surely we can make that decision, as pensioners, collectively, through counsel, in our best interests. If it is in our best interest to claim now, we'll claim now; if it's in our best interest to take a discount to ensure the company continues to be a going concern, so be it.

Why wouldn't we want them to have that negotiating position?

[The Chair, Liberal, Sherry Romanado]

I'm not sure if Mr. Schaan is having a technical problem because he looks like he's frozen.

There you go, he's back.

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

Mark, did you catch enough of that?

[Mark Schaan]

Just the last little bit of it. I think the premise of your question was—

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

Why wouldn't we want them to have a position they can negotiate from? We are presuming that they're incapable of protecting themselves, by saying they're not entitled to superpriority because of unintended consequences. They can always negotiate away from that. They can always negotiate away from that position in their own best interests.

[Mark Schaan]

I guess I'd offer a few thoughts on that. One is that one of the goals of having as few rules in place at the time of restructuring.... Well, I'll put it this way. A CCAA restructuring has a number of guardrails and safeguards put in place to ensure the preservation of a fair process that has integrity for all participants.

One of the premises of it, though, is that we walk in with a relatively blank slate to try to encourage an outcome that will ultimately allow for the company to emerge. We don't predetermine in the restructuring process who has an advantage, because at the end of the day, the restructuring is ultimately what's better for everybody. We don't put in place a significant number of impediments to that; we look for parties to come together for creative solutions.

The protection that's afforded to pensioners, to other members and to other unsecured creditors is essentially the mechanism by which you have to achieve to be able to get out of the restructuring, and that is that 50% of the total number of creditors in every class needs to approve the ultimate settlement agreement, and two-thirds of the value of each creditor class need to approve the restructuring agreement as well.

That is the fundamental preservation of the integrity, so we give everybody leverage, including for an unfunded pension liability. It's a very significant leverage, because if that's a very large, unfunded liability, that's a very significant portion of their class, which means that they carry weight in articulating the restructured outcome.

One of the challenges is, if you put that in place at the front and say, “Hey, guys, I hold all of the cards. I'd rather come through a restructuring perspective, but I could also just walk away right now and get paid,” the assumption that it will somehow lead to other, better outcomes, presumes that they will seek that restructured entity, and we have to remember that there are very different interests even within that class. You have active workers, who have an unfunded pension liability for continued capacity for their retirement security in the future, and you have existing retirees with varying degrees of life expectancy that's to be proved. Obviously, their negotiating position and their desire for payment now versus payment of a restructured entity are highly varied.

I would simply suggest that the theory here suggests that they always have the capacity to be 100% paid and that they'll use that appropriately. If it ends up that they just want a liquidation, that's okay, but if they want a full restructuring, we also need to think about those unintended consequences.

As to your point earlier about the fact that you weren't necessarily concerned about access to credit, one of the things that we have to recognize is that access to credit is what allows for the working capital that allows for this organization to continue to be operational and make pension obligation contributions. That access to capital and the cost of that capital factors in to the capacity of the entity to be able to continue to run, make profit, and then ultimately make determinations of payments into their pension plan.

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

Thanks for that.

There are two very quick things, and then my last question.

One, there are secure creditors over and above those with unfunded pension liabilities who, in many cases, would have less interest in the company proceeding as a going concern. They're just interested in getting their money back in many cases. The interest of the pensioner would be, in many cases, not only getting their money back, but they certainly don't want to see the company go down if it means that it's going to negatively impact their pension going forward. I think, as you look at classes of creditors, you'll find that pensioners, more than most creditors, are interested in the company continuing as a going concern.

The second thing I would say that relates to unsecured creditors, and I think this gets to the fundamental point, is that, if we think that employees, those who have worked a lifetime for a business, are sui generis, I think they are. They shouldn't be treated the same as other unsecured creditors who have obligations to any number of third party businesses.

My last question is in relation to a cap. We heard some testimony from the Canadian Federation of Pensioners related to better striking the balance, and they pointed to other jurisdictions that do better at striking a balance in relation to having a superpriority or some preferred status, but subject to a cap. In Canada, we seem to have had this conversation as only between superpriority for everything or, in your view today, no superpriority because of unintended consequences.

If we are to address your concerns in supporting this bill, potentially, do we not address them by virtue of a cap? What are your thoughts on that?

[Mark Schaan]

There are a number of considerations that are both fact-specific and recommendation-specific. Is it a capped superpriority? Is it a capped preferred claim? For some of the considerations around international, I think it's worth noting that no one has a superpriority. No other country in the world has a superpriority, so to the questions earlier about competitiveness, we actually have a superpriority for unfunded pension contributions that were due off employment from their most recent wages. We don't have a superpriority for unfunded pension liabilities. It is worth noting that the recognition of international examples is that no one actually has such a system. There are some that have looked at some of these preferred claims.

On the questions of caps, again, it would depend on whether you're talking about a capped superpriority or a capped preferred claim, and on whether or not that would be a capped claim in restructuring or a capped claim in insolvency. Those have very different functions, as indicated. If there's a capped preferred claim in restructuring, it would still rank below secured creditors in an insolvency, which would prompt secured creditors to potentially seek a liquidation to ensure they had greater access to their assets.

It's also worth noting that in some cases even a capped claim potentially has two consequences. One is whether or not it would still have the capacity to scupper the chances of a restructuring. In a given example, if we look at a recent restructuring of a steel company, a capped preferred claim for unfunded pension liabilities when there are 20,000 pensioners, even at $20,000 per pensioner, would still result in significant losses for pensioners.

In that example, 20,000 pensioners would have a claim of $400 million. The capped preferred claim would likely have to be paid as part of the CCAA restructuring plan to be effective, because otherwise, essentially, we're going to prompt the insolvency, as we indicated. Secured creditors would have no reason to support a CCAA plan that would pay unfunded liability in full and reduce their potential recovery. In this particular case, the liquidation value of the entire entity was $400 million. Secured creditors would prefer a BIA liquidation that would pay secured claims first.

The capped preferred claim could result in some recovery for pensioners after secured claims, but the loss would be very significant. In this particular instance, what we ended up seeing was actually a restructured entity with a continued going concern company that was making pension obligations.

I'd have to see very specifically what the proposal on caps was and how exactly it was noted. I'll just note that caps themselves don't necessarily take away from some of the theoretical considerations, as well as real-life considerations around whether or not they will still lead to liquidations and not restructurings, increase the cost of capital and see more entities potentially fail to survive and therefore actually place pensioners and workers at risk.

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

Thanks, Mark.

Those are all of my questions.

[The Chair, Liberal, Sherry Romanado]

Our speaking order is MP Généreux, MP Poilievre, MP Ehsassi, MP Duvall. That is the list I have.

Mr. Généreux, you have the floor.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Madam Chair.

I'll turn to the two witnesses.

Mr. Schaan, I gather from your comments that Bill C‑253 isn't perfect. Compared to other bills introduced on the same issues or for the same reasons over the past 20 years, is this one better, in your opinion?

Could the entities regulated by this bill be spared the potential consequences of the legislation?

In Bill C‑253, that isn't the case. However, the guaranteed amounts that you just mentioned, which total $50,000 U.S., in the United States, are they guaranteed, not only by the entity or company and the funds set aside for retirement, but also by the government?

Do any governments in other parts of the world guarantee these types of amounts?

It's okay for one of you two to answer.

[Mark Schaan]

Thank you for your question.

Regarding the first question, it's difficult to compare this bill to past bills. However, what sets it apart is some innovative aspects.

I'll continue in English, because there are technical terms.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

That's fine.

[Mark Schaan]

This one has a few interesting pieces to it. One is that it has a superpriority for pensions, but it also has a preferred claim for terminated group insurance plans. It has a preferred claim for severance pay in BIA liquidations, which is also relatively novel. It has some aspects that go beyond what some other bills have aimed to do, in the sense that it has a very wide definition of, potentially, employee pay, which would include, for instance, executive bonuses and a number of other zones that potentially are different from previous attempts in this space.

As I said, I'm not one to compare, and I can't speak from a government perspective or a public service perspective. I can just say that the consideration we have here is that our goal is to return as much value back to workers and the economy as possible. We think the strongest way to do that is to ensure that as many businesses as possible, where possible, continue operations and continue to offer their pension plan. We see real risks in this bill to the capacity to be able to do that.

If it wasn't for the fact that we've seen strong restructuring that has actually allowed for pensions to be able to continue.... I can look to a number of recent examples. We have now a well-funded Air Canada pension plan as a function of restructuring, which has allowed for that pension to continue to be open and providing for its workers. Some of the potentials of that, given the unfunded pension liability at the time of its restructuring, may have actually resulted in a liquidation. We've seen that in a couple of other zones, like Stelco. This is the challenge.

Could you repeat your second question?

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Are the amounts guaranteed by governments?

[Mark Schaan]

Thank you.

What you're speaking of, in the United States and United Kingdom cases, is sometimes referred to as a pension benefit guarantee fund. It is essentially a fund that's funded by a plan's sponsors collectively—all plan sponsors—to be available in the case where a plan sponsor is incapable of being able to pay out their full amount.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

It's like a pool.

[Mark Schaan]

Yes.

A portion of contributions is actually required, based on the size of the plan, to be remitted to the pension benefit guarantee fund. It exists in the United States. It exists at the federal level. It exists in the United Kingdom and it exists in Ontario.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Does it guarantee the full, 100% of the amount? I guess not.

[Mark Schaan]

No. They vary. Each of those three schemes varies. Ontario has a scheme upon which it essentially guarantees a portion of the first payments—

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Could it be a balance beside what's already in the plan?

[Mark Schaan]

Essentially, if there's an unfunded pension liability—for instance, in Ontario, it goes up to $18,000, but it's on a percentage basis, so it essentially makes up the difference. On the first thousand dollars, for instance, it guarantees all of the difference up to that, and then it has a trailing amount that goes on to a cap of $18,000.

It's worth noting a couple of things about pension benefit guarantee funds, just in general terms. One is that because defined benefit pension plans are relatively uncommon these days—they are less and less common—you have a decreasing pool of people able to insure them. If you are using additional contributions from plan sponsors to make up that pool, that pool is increasingly small, which is why when you have a very large insolvency, you have the potential to use up the entirety of the pool.

That actually happened in the Nortel situation, for both the U.S. Pension Benefit Guaranty Corporation and the U.K. Pension Protection Fund, such that essentially the fund was broke. It had insufficient funds to be able to pay out its requirements, and it needed recapitalization. The problem, of course, with recapitalization is that it then requires you to go back to those same plan sponsors that are having difficulty making their pension obligations, to provide additional funds to make up for that pool.

I would note that one of the considerations of a pension benefit guarantee fund in a federal context is that the vast majority of defined benefit pension plans are regulated by provincial pension regulators, so if there were a federal fund that essentially said it would make up for part of this gap, we could potentially have a federal government with obligations to make up for gaps while not controlling the actual requirements of plan solvency, for instance. In provinces where you have very low solvency requirements and where funds are essentially allowed to grow very large unfunded pension liabilities, we potentially would have this backstop mechanism but no “frontstop” mechanism to ensure pension health, so that is one of the challenges.

It should be very clear that pension benefit guarantee funds are not superpriorities. They are additional means by which to make up for pension gaps and unfunded pension liabilities where a plan sponsor has insufficient funds, but they are in some ways separate from the insolvency system and separate in the consideration of the rank or the priority order in which creditors are dealt with in an insolvency.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you very much.