Madam Speaker, before us today is a bill the summary of which says it will give priority to unfunded liabilities and solvency deficiencies in pension plans during bankruptcy proceedings.
As a quick background, right now when a company goes bankrupt, its assets are typically liquidated and a court, a judge, will allocate the proceeds of that liquidation to creditors of all shapes and sizes. Some of them are bond holders, others are contractors with outstanding invoices, and others of course are employees with pension benefits that are deficient. They are not properly funded and therefore require injections of capital in order to make them whole.
These are ugly situations we have seen time and time again. They are particularly ugly because they tend to coincide with major drops in the stock market that reduce what is in a pension fund's assets, so we have a “when it rains, it pours” phenomenon. When companies typically go bankrupt, it is usually when the economy is doing badly. Therefore, the stock market drops and all the money in the pension fund that has been invested in the stock market drops with it. Therefore, the pension is under-capitalized and there is not enough money to pay out the beneficiaries.
What happens then is that the pension is given over to a guardian, usually a company like Morneau Shepell, for example, which just happens to be the case, and that company then converts it into an annuity, which pays out an annual salary to the pensioners that is inferior to what they had been promised in their defined benefit plan.
The problem with bankruptcies is that there are too many people who want what is too little money that is left over. What do we do about that? I will come to my view on that in a moment, but let me describe why this bill is important, especially today. Our corporations in Canada are now more indebted than ever before. Let me read a report from TD Economics, which states:
In fact, nonfinancial corporate debt is high also when compared to international peers. According to the Bank for International Settlements...Canada’s...debt-to-GDP ratio of 118.7 percent ranks third amongst G20 countries, trailing only China and France....
The report also says that debt payments are “close to historical highs” and “a higher share of corporate income is going to servicing debt”, even with today's low rates. What will happen when rates rise to historically normal levels? The answer is bankruptcies, because all this corporate debt, which is unsustainable today, will become doubly unsustainable when normal rates of interest are applied to it. Then those companies will go bankrupt and their workers will simultaneously see their pension fund depleted by dropping stock markets, and they will be left without the benefits they were promised.
The proposal from my hon. colleague is to see that in the case of bankruptcy, the pensions would be treated as currently unpaid wages are treated: That is to say, they are put at the front of the line, ahead of all the other creditors. The corporation would then liquidate its assets, and the first proceeds would go to make the pension whole. Only then would other lenders and creditors get a payout.
The counter-argument against this is that it would make it harder for companies to borrow money. After all, lenders would say that if they are behind the pensioners in the lineup in the event of a bankruptcy, then their risk level is higher. They stand to lose more and therefore will not lend the money. That is the thinking, and that is true, but the question I ask is whether that is entirely a bad incentive.
Should we not create a present-day incentive for CEOs to ensure that their pensions are not just well funded but rock-solid? If the pension is rock-solid, then lenders would have nothing to worry about in the event of a bankruptcy, because the pension would be able to stand on its own two feet. In other words, the proposal in this bill in principle could act as a present-day incentive for CEOs to put their pensions on a more solid ground lest they face penalty from lending markets.
Right now, we have a perverse incentive. CEOs often underfund pension plans because in the present it causes them no problems. However, down the road, 15 or 20 years later, when they are long gone and have been paid all their bonuses and benefits, the pensions go under and it is not their problem anymore. We saw that with the bankruptcy of the automotive companies. For many years CEOs made promises to workers without any ability to keep those promises, and then taxpayers had to come in and clean up the mess of long-retired corporate management.
The benefit the bill might provide is that it would force companies to fund, and even overfund, their pensions in order to give confidence to lenders that, in the event of bankruptcy, their pensions would not consume more of the proceeds of bankruptcy. That kind of market incentive might be helpful in ensuring that present-day management gives our pensioners a solid ground and protects its financial viability against the worst unexpected events that could come down the road.
Let us imagine if a CEO said that instead of contributing the minimum amount to the pension fund to get by, he would contribute as much as it would take to make it foolproof against a massive recession, against a massive drop in the stock market and against even his company's own bankruptcy. That would be the ultimate benefit of a regime that incentivizes corporate management in the present to back up pensions in order to have the viability to raise money on debt markets.
I will not lie. There are certain challenges with the bill, and I think the member might even agree with that.
First, there are challenges of transition. Let us say a company today has committed some of its current assets in collateral to get loans. If we were to change the law all of a sudden, that collateral relationship, which is written into a contract, would be broken, and we would have a potential interruption of our financial system and some companies would end up in lawsuits with their present-day creditors.
Second, we would have to find a way to ensure there could still be collateralized arrangements. We do want our businesses to be able to point to their assets and say they are going to the markets to borrow some money against their assets to hire more workers, buy more machines and create more wealth here in Canada. However, what we need to do with the bill is ensure that it is crafted in a way that allows that to go on and, at the same time, incentivizes businesses to put their pensions on solid ground by ensuring that pensioners come at the front, rather than at the back, of the bus.
While I am not sure the bill has been perfectly crafted, and I do not know for sure if it could pass in its present form, I do think it is worth sending to committee for some study. What is clear is that if somebody works hard all their lives and their company goes bankrupt through no fault of their own, the pension on which they rely, and with which they were intending to pay for their housing, their food and even their long-term care, should not be stripped away from them. Businesses, within the context of the free-market system, should be incentivized to make today's decisions for tomorrow's pension security.
The principles in the bill may allow that to happen. Therefore, on behalf of Her Majesty's loyal opposition, I am here to announce that we will support sending the bill to committee at second reading.
We pledge to work with the hon. member to improve this bill and take her concerns into account in order to respect the principle of the bill while protecting the financial system, which includes all investments in our businesses.
We will be supporting the bill to send it to committee in order to advance the cause of pension security, and we will look to amend any problems so that we protect the financial system that is the lifeblood of jobs, while protecting the pensions that are the reward of a lifetime's hard work.