Industry Committee on June 15th, 2021

[The Chair, Liberal, Sherry Romanado]

MP Ehsassi, do you have any other questions?

[Ali Ehsassi, Liberal, Willowdale, ON]

Yes, I just have a follow-up question.

You're essentially saying that this would be adverse in interest to the employees as well on certain occasions.

This is my fundamental question. Over the course of the past decade, we've seen many companies manage to work through a liquidation and actually manage to save the farm, if you will. What would the impact of this have been if it had been in effect? Some or all of these companies that we understand have restructured would probably not have had that opportunity. Would that be correct?

[Mark Schaan]

Yes, obviously we think that the general premise is that the best way to ensure the ongoing vitality and the security of retirement income is for a going-concern entity to be continuing to make pension payments and have its pension plan ongoing. Winding up at any given moment, just given the vagaries of the market, obviously you leave some risk that, on a solvency basis, they may not have sufficient funds. The best way to continue that is obviously to have the entity continue to be economically active, allow themselves to be restructured and maintain the jobs of the entity, as well as, then, the continued opportunities for pension payments.

Therefore, there are two considerations for a superpriority and the potential implications of the lack of restructuring. One consideration on the superpriority is that it's not in all cases necessarily the case that the assets at hand would still allow for full payment of the unfunded pension liability. There are actually instances where the unfunded pension liability exceeds that of the assets on hand of the entity. In fact, even in some cases with a superpriority, you still may actually have individuals who potentially will not receive the fullness of their pension promise.

There's obviously also an implication in terms of the considerations for active workers who are making active payments to the pension plan on the premise that they will one day be able to retire and, obviously, if the entity is unable to restructure and instead proceeds toward a liquidation, those individuals need to find new sources of active income and potentially with or without the pension. Even if there were a superpriority, as I said, it may be fully funded, but certainly it would only be fully funded at the contributions to date of their participation.

Then when we actually look at some of the restructurings that have occurred, those active pension plans have allowed for the continuation of those payments to both retirees and active workers. There are a few successful restructurings that have involved a significant number. We've talked of Air Canada [Technical difficulty—Editor] of the employees, this was over 29,000 employees who were covered by the plan and as a function of that restructuring there was a plan of compromise and arrangement that allowed for the pensions to continue to be paid without reduction. In the case of AbitibiBowater, this was again another 10,000 employees covered by the plan, where a restructuring plan of compromise and arrangement allowed for the pensions to continue to be paid without reduction.

Even in some cases where there potentially wasn't the allowance of a plan to allow for its continued operation, for instance in the case of Hollinger, the plan was 100% funded on a wind-up basis as a result of the distribution from the plan of arrangement. The restructuring produced significant financial outcomes in terms of asset sales and other measures that allowed for the plan to be terminated and ultimately for it to be 100% funded on that wind-up basis.

There are a number of these indications where we have seen companies enter into restructurings and allow for the ongoing participation of the plan. That is the potential concern vis-à-vis the potential superpriority of unfunded pension liabilities as a disincentive.

[Ali Ehsassi, Liberal, Willowdale, ON]

Thank you.

[The Chair, Liberal, Sherry Romanado]

I have MP Jaczek, and then MP Lemire.

MP Jaczek, go ahead.

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

Thank you, Madam Chair.

I want to pick up a little bit on where Mr. Duvall was going. There's no question that, during the hearings that we've had at this committee, the overwhelming majority of witnesses were very firmly in support of this bill. Quite honestly, I'm a recipient of OMERS, a defined benefit plan, a very fortunate recipient of that pension plan, and I have received a number of pieces of correspondence from OMERS in support of this bill.

You, Mr. Schaan, are clearly not in favour. You've detailed your concerns, but to what extent have you consulted? Can you give us some examples of support for your position? I don't want to in any way question your credibility, because you're obviously extremely knowledgeable, but it would be really good to have some specific examples of organizations, banks, lenders, quite honestly anybody who is opposed for the reasons that you have given us.

[Mark Schaan]

It should be clear that this is an analytical view and not a personal one. I come to this from the perspective of simply the analysis that we have been able to undertake as the government department responsible for this statute. I'm trying to bring to bear what we have heard, seen, analyzed and understood through the research and other that we've undertaken.

It is worth noting that, leading up to the changes we made to the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act, alongside significant changes, as well, to the Canada Business Corporations Act, as part of the retirement security project in 2019, we held significant cross-country consultations that actually were wide-ranging in terms of the number of options and considerations that we raised vis-à-vis the possibilities for enhancing retirement income security. Those retirement income security consultations did look at a number of potential options for implementation, including that of a superpriority for unfunded pension liabilities.

We heard from insolvency professionals, from the Canadian Bankers Association and from the Association of Canadian Pension Management. We had submissions from FETCO, various federal employers, pension experts, [Technical difficulty—Editor] pension benefit experts, credit unions and others.

The subsequent piece of legislation that emerged from that was clear in terms of the consultations, so I think it is worth going back to the many entreaties that were made as part of that. Obviously, many of them were similar to what you heard in the witness testimony, suggesting that there is positive support for a superpriority for unfunded pension liability, sometimes with some caveats around the notion that, obviously, recognizing that—

[Scott Duvall, NDP, Hamilton Mountain, ON]

I have a point of order, Madam Chair.

I'm just wondering if we could have some precise questions and answers and not be going on. We have to finish this, but we're just going on and on, and time is running out. I think it's just proper that we do this clause by clause.

Of course, there are important questions, but we don't have to be going on with the long answers.

Thank you.

[The Chair, Liberal, Sherry Romanado]

We have not had a chance to have officials prior to last week and this week, so I want to make sure that all members have a chance to ask their questions.

I'll ask that your questions be succinct with respect to the clause we're on, if possible, so that we can make sure that we can get through it.

I will yield the floor back to MP Jaczek.

Mr. Schaan, could you wrap up a little bit on that response? Then we'll check if MP Jaczek has any other questions before we go to the next MP.

Thank you.

[Mark Schaan]

I think the summary is just that I think it's worth looking at the consultations that were held in 2019. Then there was a similar statutory review of the act in 2014 that also yielded significant amounts of consultation and response.

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

Would I be correct, then, in saying that you're going to look carefully at those consultations and at, potentially, other ideas to support workers in this potential situation of losing their pensions, their defined benefit? Where are you in that process?

[Mark Schaan]

[Technical difficulty—Editor] changes to the law in 2019 as a function of significant consultation. It did make changes to the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Canada Business Corporations Act, amongst others. Those projects of law are actually in their infancy. They've only been implemented for a short period of time. They included a duty of good faith in insolvency proceedings. They required for boards of directors and officers to contemplate and have the capacity to consider additional issues of well-being and the financial value vitality of their organizations, including that of their pension plans. It specifically indicated that companies will have an obligation to comply or explain, with a requirement to bring before their shareholders, the measures by which they are contemplating and considering the well-being of their workers and pensioners in their ongoing operations.

There have been a number of shifts in the law, but we do, obviously, continue to look back to those consultations and continue to hear and meet with intervenors and stakeholders to make sure we are canvassing for any and all good ideas that would improve the overall state of retirement income security and the well-being of pensioners and workers.

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

Thank you, Madam Chair.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Mr. Lemire, I see that you have raised your hand as well.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

The goal of my remarks, Madam Chair, is similar to the purpose of Mr. Duvall's remarks. Out of respect for workers and retirees, and perhaps even for the tens of thousands of people who have sent emails that you received, as I did, in support of this project, we must complete our process. To that end, today's meeting is essential.

I would sincerely urge the witness, whose objectivity was called into question by Ms. Jaczek's preamble, to give shorter answers so that we can get to the end of the agenda.

Thank you, Madam Chair.

[The Chair, Liberal, Sherry Romanado]

Thank you for your comments. It isn't really a point of order. All members should have the opportunity to speak and to ask the witnesses questions.

Do any other members have questions about clause 2?

Seeing none, I will turn it over to the clerk for a recorded division.

(Clause 2 agreed to: yeas 6; nays 5)

(Clauses 3 to 5 inclusive agreed to: yeas 6; nays 5)

[The Chair, Liberal, Sherry Romanado]

We have a new clause 6 in the amendment by MP Poilievre.

With that, I'd like to open the floor for any questions or comments with respect to that. I believe it was circulated by MP Poilievre at the last meeting, so we all have it in front of us.

Mr. Poilievre, would you like to speak to it?

[Pierre Poilievre, Conservative, Carleton, ON]

Yes, it just gives a grace period of three years for its coming into force. This will allow companies that might be in a difficult financial position to ready themselves, to bolster their balance sheets and to properly fund their pension fund plans in order to stay solvent.

My worry is that if we go ahead with the bill without any coming into force delay, you will have some companies that are on the verge of bankruptcy that will no longer be able to borrow money, because lenders of lower-grade debt will say that the risk is too high, given that the pension obligations would come before the loans. If that happens, what might occur is that the company would just go bankrupt now. Ironically, the pensioners would be in a worse position than at present.

If a company has an underfunded pension and it goes bankrupt because it can't secure lower-grade debt to stay a going concern, then not only would the workers all lose their jobs but there would be no time for the company to recover its financial position and bolster the pension. You could lose jobs and pensions if the change in this law is too abrupt.

Some of the witnesses agreed this was the best solution, including witnesses who supported the overall bill. This is just to have it coming into force in about three years, so that businesses can focus aggressively on bolstering their pension plans, perhaps buying an insurance product, a large-scale strategic insurance product that will back up the pension, thus reassuring lending markets that their loans are in safe hands.

I think this is a good amendment. It would make the bill more successful. It makes the bill stronger, not weaker, and it's good for pensioners. I encourage everyone to support it.

[The Chair, Liberal, Sherry Romanado]

We'll open up the floor for debate on the amendment.

Are there any questions or comments with respect to that?

Go ahead, MP Jaczek.

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

Thank you very much, Madam Chair.

We certainly did hear some testimony talking about a three-year transition period. Could Mr. Schaan give us his opinion in relation to this as a possibility?

[Mark Schaan]

An unfunded pension liability, as we've noted, particularly depending on the jurisdiction, could be quite large. Three years is not a lot of time, depending on the nature of the markets at the time.

There are a few things that should be considered.

One is, obviously, that employers that are already in financial difficulty could have difficulty reducing their unfunded pension liabilities during that transition period. Lenders who face the risk of nonpayment from borrowers with a large unfunded pension liability, when the superpriority comes into force, may use the transition period not to actually put pressure on employers and the plan sponsors to make pension payments but instead [Technical difficulty—Editor] reducing that unfunded pension liability, so that when the transition period ends, they are essentially made whole rather than the pension fund.

The other is that employers may actually decide to discontinue defined benefit pension plans or group insurance plans during the transition period to avoid the impact of higher insolvency priorities on credit availability by either winding things up or closing health insurance, dental or other plans, because that would impact their bottom line. Lenders with exposure or employers with unfunded pension liabilities or group insurance plans may pressure employers to take such action before an insolvency.

It is also worth noting that one of the things.... There are three categories that are of superpriority within this bill. There are unfunded pension liabilities. There's also the claim for terminated group insurance plans, but there's also severance pay and, obviously, severance pay can include many things, including the potential for severance for significant executives.

One thought is also that, if this is ultimately going to lead to a liquidation, you may actually see some gaming behaviour wherein people increase their overall severance payments, particularly for a particular cadre of their employees, because they're recognizing that they potentially might be heading toward a liquidation and their severance pay would have a superpriority above all secured and unsecured creditors.

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

If I could just follow up, would it be possible for an employer to shift from a defined benefit plan during that time period? How does that work? Can an employer do that in just the normal course of events?

Surely it's part of union negotiations that there is a defined benefit plan. Could you elaborate on that piece?

[Mark Schaan]

It's going to vary on a case-by-case basis, and it's going to vary based on the pension regulations they are being held to. Plan sponsors can ultimately make a determination, dependent on their unique circumstances, to terminate and close a plan or potentially to propose to their workforce to convert a plan from a defined benefit to a defined contribution, or to some other retirement scheme.

They are obviously on the hook for the pension payments that have been made to date to those individuals. The reality is that active workers within one of those organizations may potentially find themselves no longer having access to a defined benefit pension plan but a defined contribution plan, so that the employer can essentially minimize the risk of the unfunded liability that's been accrued to date for those workers.

On health benefits, it really depends on the nature of the negotiation between the workers and the employer. There are often changes that can be made to planned sponsorship in those regards, so the employer could simply say—as a function of these ongoing liabilities and the risks that they pose—they've chosen to scale back benefits or, potentially, to change the nature of the insurance plans that are on offer.

Those can be made as a function of a collective bargaining agreement, but depending on the employer sometimes that may not be required.

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

It's possible they can do it arbitrarily in some instances.

[Mark Schaan]

In some instances it is possible. It is obviously dependent on the nature of the situation. If it's deemed to be extraordinary they may very well find other mechanisms to justify it, but in the case of collective bargaining, it may also be used as a negotiating tool to say, “This is my approach, now articulate the best potential outcome,” knowing that the plan may potentially die and wind up or potentially be converted, either in the case of insurance or in the case of a pension.