Industry Committee on June 10th, 2021

[The Chair, Liberal, Sherry Romanado]

Next we have MP Poilievre.

You have the floor. Go ahead.

Right after you, we have MP Ehsassi and MP Duvall.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you very much.

Thank you, Mr. Schaan, for your appearance here. Obviously, you're extremely knowledgeable about your file, so thank you for what you do.

I'm going to go through a bunch of the contentions in this bill, on both sides.

You deal, I'm sure, with corporate and industrial stakeholders. You must interact with industry to do your job properly. Is that a fair comment to make?

[Mark Schaan]

It is. Yes.

[Pierre Poilievre, Conservative, Carleton, ON]

Where the hell are they? We haven't heard anything. I was expecting that the business community was going to be storming into this committee, warning us about the dangers of this bill, and we have heard nothing, frankly.

[Mark Schaan]

Yes. I obviously can't speak to that.

We have had representations in the past. When we pursued legislative amendments to the BIA and CCAA process, I guess two years ago, as part of the retirement security project, we ran consultations across the country and certainly had strong feedback from plan sponsors and from associations of plan sponsors, alongside very strong representations from workers, from unions, from think tanks and from academics. Certainly in previous consultations there has been active consideration by a number of parties as to what warrants good retirement security in pension and insolvency policy.

I can't speak to why they didn't storm in today or earlier and make their representations.

[Pierre Poilievre, Conservative, Carleton, ON]

I think it was the great Rabbi Hillel who said, “If I am not for myself, who will be for me?” We're told there are these people who are so worried about this bill, but they're not speaking up. I think we had one or two witnesses with concerns; the rest were in favour of it. My office made a point, in the interest of balance, to ask that the clerk invite the Chamber of Commerce and the Business Council. I understand they didn't even bother to accept our invitation. Presumably, they represent the employer. There was another organization, I think it's called FETCO, which is responsible for federally regulated employers. Did I miss it? Did we hear a peep from them? I don't think we did.

If all the plan sponsors are so worried about this bill, I don't know why they didn't come and say so. Right now, if we're relying on the evidence presented at the committee, the testimony was overwhelmingly in the other direction. I appreciate that you've come here with a lot of very intelligent insights into the statute, the bill and the technical consequences of passing it. Frankly, you're the only one doing that. I suppose that's a compliment. The industry has been asleep at the wheel.

On that point, the argument that some people have made in the past against this bill and this idea is that it would raise the cost of capital. Businesses would have a harder time raising loans if members knew they would be knocked down the bankruptcy liquidation food chain. I have to say that I find that to be a strength of the bill, because it would force CEOs in the present day to ensure their pension is properly funded to be able to go to the markets. If lenders were consistently telling the CFO and the CEO, “Well, we're not going to lend to you because we're worried that we're going to be behind a pension liability,” that would be a wonderful incentive for those executives to eliminate that liability, by ensuring they put enough funds into the pension entity.

What do you say to that?

[Mark Schaan]

I think a lot depends on the relative market prospects, the operational considerations of the entity in question, and then the duration. Sure, in pure market theory, if the only chance for me to get 100% paid was if the pension was 100% funded, I would press for the pension to be 100% funded so that I get 100% paid. The alternative, though, is that if I believe there is some other mechanism by which I could get 100% paid, I might pursue it.

Notably, if I know that you have a large unfunded pension liability, I may make a couple of other choices. One is I may charge you a lot for that capital, which may force you into a liquidation because you may not be able to access it at that price. The second is I might try to be the first. This is one of the principles of our insolvency system. We have what we term a “prevention against the race to the courthouse”. That's why we make all the creditors come together, line up and figure out exactly where they fit and how they go. Then we treat them, class by class, in that consideration.

One of the fears is that you might incentivize a race, not to the courthouse but to call in your loan, in that if you actually had an existing liability with the entity, if you thought you could go before your competitors and if you knew they had other secured lenders and you could potentially get your piece of the pie back before they went insolvent, you would do that. You would try to get paid, but that would force the entity into liquidation sooner and potentially prevent the restructuring we were hoping for.

While in theory this could put on pressure, we also potentially need to look at time frame and amount. As we noted, pension regulations vary enormously from jurisdiction to jurisdiction, so in some cases, that pension liability is going to be [Technical difficulty—Editor] up, but what's the time frame in which you're going to put pressure on me to make it back? I can only really make it back to the degree to which I either have sufficient excess working capital that I can defer to my pension obligations rather than my working capital, or I have market returns that potentially need to generate that mix.

One potential unintended consequence of that pressure is that I actually pursue a much riskier investment scheme with those pension funds in order to make back that portion. Your pressure on me when you say, “Mark, you need to be 100% funded in two years or I'm calling my loan,” means I'm suddenly saying, “Oh man, I need to make up that gap,” so I race out and make very risky investments that may or may not pay off but will ultimately lead to the outcome you are seeking as my creditor.

I think we'd have to consider a number of these factors when we look at whether it will apply pressure from lenders towards the good outcome of a fully funded pension, or whether we will see unintended consequences. These could include early liquidations, races to call in loans, and potentially riskier mechanisms and stewardship of pension funds by plan sponsors to be able to meet the requirements of their lenders.

[Pierre Poilievre, Conservative, Carleton, ON]

Right, but I guess what I have a hard time believing is that it would be in the interest of management to throw away pension funds on extremely risky lottery-type investments. That would more likely reduce the overall value of the pension fund and make it harder still to raise money under this bill.

I think what it would actually do is force management to get the pensions in order now. If you're a CEO, and your lenders are all telling you, “Listen, the big obstacle to lending to you is that you don't properly fund your pension fund,” the first thing you're going to do is try to find a way to fund your pension plan, because it's in your interest or else you can't borrow. Then your shareholders are going to say, “Mr. CEO, why can't you borrow any money? Why won't anybody lend to you?” and then you'll have to say to them, “Well, it's because I didn't fund my pension plan and that comes first in a liquidation.”

That's the incentive I think this bill creates, and I think that's a positive—

[Mark Schaan]

I guess that depends on whether or not we think that lenders are going to be that singular. One thing is that if I'm a lender, I'm actually going to look at your full P and L and I'm going to say, yes, you have an unfunded pension liability. That makes me scared because I might not get paid, but if you're going to divert working capital, which is actually the means by which you are in profit, to go and fund your pension liability, I'm also not going to love you and be super interested in funding you because now actually the means by which you earn, which is ultimately the mechanism by which I'm going to get paid after you've paid that pension liability, is also now in jeopardy. You'd want a balanced approach from the entity.

[Pierre Poilievre, Conservative, Carleton, ON]

That's right, but what you're really saying, Mr. Schaan, is that absent this bill, the business would invest in working capital instead of in the solvency of the pension fund.

[Mark Schaan]

It depends, I guess, on two things. One is the degree to which there is actually excess capital, and that is very much fact-specific, depending on the company. The second is their pension regulations. We don't give them that luxury in federally regulated pension plans. They have to be 100% funded, and then they make special payments over the subsequent five years to make up that gap.

That's not the case in all regulated pensions, so if I know I only have to be at 85% funded on a solvency basis, that 15% I can play with. I can make decisions about that. We don't give that luxury. We don't think that's something that's dispensable in a federally regulated context, but that's not necessarily the case.

If you actually see some of the companies—

[Pierre Poilievre, Conservative, Carleton, ON]

I'm sorry, the 85% rule that exists in certain provinces, is that what you're referring to?

[Mark Schaan]

That's right.

[Pierre Poilievre, Conservative, Carleton, ON]

I don't want them to have 15% of the pension fund as play money. That's what I'm trying to avoid.

[Mark Schaan]

In my consideration, I think one of the things we need to look at is the degree to which pension obligations are actually requiring of that, rather than trying to fix it in insolvency. To go back to one of my initial comments, fixing a policy problem at the tail end is much harder than trying to fix it at the front end when you actually—

[Pierre Poilievre, Conservative, Carleton, ON]

I know. I guess what I'm saying—and I guess we'll have to agree to disagree on this—is that this bill would actually force them to fix it on the front end, because it would require that they get the money in place as soon as they go to bond markets. If you're doing a bond issuance and you're a CEO, all these extremely sophisticated analysts are going to tear apart your balance sheet, and they're going to say that, on the liabilities side, there's this pension thing, and they're only 84% or 85% funded in the pension thing, and they're getting away with it because they're in this province that allows it. As a bondholder, I would have to come behind that liability, so I'm going to make it known that I'm not bidding on these bonds because their pension is not properly funded. The CEO is then going to be in a present-day position where he has to get the pension in order if he wants to raise money and grow the company.

I think that's actually a positive market discipline to impose on CEOs who are promising pensions to workers and deferring their wages into those pension funds. It's not a bad thing that the CEO is put in that position; it's a good thing. That's the first point, I guess, that I would make.

The next point I would make is that you continue to raise the concern that if companies had to properly fund their pension funds before paying out other creditors in the case of a bankruptcy, they would be inclined to go bankrupt or fall into insolvency. What if we gave them three years for the coming into force of this bill, so that they could use that time to get their act together and replenish their pension funds, eliminate liabilities and present a positive balance sheet to markets when they raise money?

[Mark Schaan]

I'll offer a couple of considerations to that without weighing in one way or the other. I'll just say that our federally regulated pension obligations right now make special payments over five years. That's what we see as a reasonable planning window to allow people to make back up their current deficit, because oftentimes that deficit is not necessarily a function of their own making. It's the market returns. It's a number of factors. I believe there was a proposal at some point to make special payments in a certain province only three years, and there was push-back to the effect that three years was seen as insufficient.

The second is that there's nothing in a restructuring context right now that prevents that from happening with the consent of the pension regulator and the workers' union. In fact, that's exactly what happened in the case of Air Canada, where there was an agreement in the restructuring to forgo pension payments for a period of time to allow for the company to get back on its footing after the financial crisis and the complete decimation of air travel. That ultimately led to a restructured entity that came back.

[The Chair, Liberal, Sherry Romanado]

My apologies, Mr. Schaan. I don't want to interrupt you or MP Poilievre, but I'm receiving a note from the clerk that there is a hard stop at one o'clock because of a lack of translation services.

[Pierre Poilievre, Conservative, Carleton, ON]

Is there no way that we could requisition other services?

[The Chair, Liberal, Sherry Romanado]

Unfortunately, we can't continue, from what I'm understanding from the clerk. We're going to have to stop there, but what I can do is....

MP Poilievre, you still have some questions outstanding, so I can keep the list. I have you, MP Ehsassi and MP Duvall on the list to speak, and what we can do when we pick this back up is start with you, MP Poilievre. I don't want to cut you off, but we're being told by the table that we have to adjourn.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

Thank you.

[The Chair, Liberal, Sherry Romanado]

With that, I'll work with the clerk to see when we can work with the schedule on this so that we can continue.

I want to thank the translators.

I also want to thank the witnesses for being here today. That was incredibly pertinent and helpful testimony that's going to assist us with this bill. I would like to thank you all again.

I want to do a special little shout-out to all of our staff members, who have been working incredibly hard, to the whip staff and the House leader staff. You are helping us do what we are doing, and I know we ask a lot of you. I just want to give a special shout-out because you are the unsung heroes of the Hill that we don't often recognize. Thank you so much for what you're doing.

With that, I will call this meeting adjourned.