FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 12, 1998

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[English]

The Acting Chairman (Mr. Gary Pillitteri (Niagara Falls, Lib.)): I'd like to call this meeting to order.

Our order of the day is Bill S-3, an act to amend the Pension Benefits Standards Act, 1985 and the Office of the Superintendent of Financial Institutions Act.

Today's witnesses are from the Office of the Superintendent of Financial Institutions Canada: Nicholas Le Pan, deputy superintendent, operations; and Patty Evanoff, director, policy initiatives and communications division. Would you like to start your presentation, please?

Mr. Nicholas Le Pan (Deputy Superintendent, Operations, Office of the Superintendent of Financial Institutions): Thank you, Mr. Chairman.

I'm the deputy superintendent of operations at the Office of the Superintendent of Financial Institutions. Fundamentally, our mandate is to promote confidence in the financial system and to protect, in the context of this bill, members of pension plans from undue loss. We believe the provisions in this legislation are essential to help us do the best job we can.

What I'd like to do today is provide a brief overview. I think a copy of an opening statement was provided to the committee last week, and I'll generally follow that but add a few comments here and there, and then I'll be pleased to answer any questions the committee has.

First of all, I'd like to provide a brief background on the progression of this bill and where it came from.

From some 16,000 pension plans in Canada, about 1,100 are covered by the PBSA. It's about 10% of the value of pension plans in Canada. About half a million Canadians are involved as members. This bill is based on a discussion paper that proposed amendments to the PBSA and the OSFI Act that governs our office.

Comments were received from some 30 parties representing about 50% of active members of plans administered under the PBSA. The comments were considered and proposals were amended in the development of this legislation.

Why is this legislation necessary? Pension plans, particularly defined benefit pension plans, have some unique perspectives from a safety and soundness point of view. Pension plans do not have to run like other financial institutions with a margin of assets over liabilities, a margin of capital. They can be underfunded for a period of time. Pension plans depend on the willingness of employers and employees to meet the funding commitments in order for them to remain viable.

There are from time to time pension plans with solvency deficiencies. Protection of plan members and retirees requires up-to-date rules to deal with governance issues and safety and soundness issues.

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The PBSA has not been materially revised since it was brought into force at the beginning of 1987. In the financial institutions area, in contrast, the supervisory provisions, the prudential provisions, were strengthened in 1992, in 1995, and in 1997. We believe similar strengthening is required in the PBSA.

While most federally regulated pension plans are fully funded, some have come under financial pressure as a result of demographic factors, economic factors, downsizing, aging workforce, and so forth. The current supervisory framework does not provide the range of powers and regulatory tools needed to deal with plans, with solvency or compliance concerns. The only power available to the Superintendent of Financial Institutions now under the legislation is to actually terminate the plan, which may well not be in the best interests of plan members. Under this legislation the federal government, the superintendent, will have additional powers necessary to work with plans that are experiencing problems.

In addition, I would note some other key features related to the supervision of these plans. As a practical matter, it is not possible for us to examine every pension plan every year. Pension plans are voluntary arrangements. It is essential that the environment for those plans be reasonable so that they continue in existence. There is an incentive for people to have these kinds of plans in place. So we balance the need to recognize the fact that pension plans are a voluntary arrangement among different parties, with a need to have appropriate supervisory tools for plans that have problems.

What I'd like to do next is go through the key elements of Bill S-3 and comment on a couple of the points that have been raised, either in debate or in comments on the legislation or on the related regulations.

The first key element of Bill S-3 is clarification that OSFI's supervisory focus is primarily going to be on matters affecting financial condition. OSFI's mandate, found in the OSFI Act, is being amended, including to recognize the importance of OSFI taking prompt action to deal with pension plans in trouble.

Broadly, as I've said, our mandate is to protect members or former members—that is, retirees, in most cases—of pension plans. The mandate does recognize that administrators of plans, however, are ultimately responsible, and the plans can have funding or financial difficulty that can result in losses and benefit reductions. We've seen some of that. It has happened occasionally, and it's not ruled out, though in all cases our job is to reduce the likelihood of that happening or to reduce the potential losses of one form or another to the various interested parties.

The bill removes our current obligation to review all plan documents and all plan amendments, so it makes matters of solvency our primary focus. This is more of a risk-based approach.

I know there have been questions about whether or not things will therefore sneak through to the detriment of plan members. As a practical matter, we will not totally vacate the field of reviewing plan text. We will do it on a spot basis; we will do it when things are brought to our attention; we will do it when we think it's appropriate because we have some concerns about the governance of plans.

So it's not like we're abdicating all our responsibility for plan text, but what we are doing is removing the necessity for us to review every last document all the time, and use our resources more effectively to focus on safety and soundness issues. We think that makes sense.

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In addition, we're shifting more of the legal responsibility onto plan administrators, who will now be required to certify that documents and amendments meet all regulatory requirements. As a practical matter, from time to time some plans would actually use us as an adviser as they worked out their plan text and amendments.

We don't think, as a practical matter, that again is the best use of our resources. Our resources ought to be dealing with plans where there are compliance issues, problems, including solvency problems, and on appropriate and regular monitoring, checking, and follow-ups. Of course, we retain the right to review amendments and documents on a case-by-case basis, and we will be doing that.

The second key element of Bill S-3 is the enhancment of the powers for the superintendent to take remedial actions or require plans to take remedial action to fix problems.

The most significant power included in the bill is the authority for the superintendent to issue directions of compliance to plans, regarding their conduct, that are contrary to safe and sound financial business practices or that are potential or actual breaches of the act. This is a prime example of the kind of power that the superintendent has had for other financial institutions since the mid-1980s and that we believe should be added to the PBSA.

The power, of course, includes the appropriate due process, as it is in the other statutes I mentioned, along with the authority that exists in the other statutes for the superintendent, as necessary, to seek a court order requiring compliance with a direction. The bill also provides the superintendent with the authority to institute any court action that could be initiated by a member or another person entitled to a benefit or refund from the plan.

Some have questioned this provision in the bill. Why is it here? Is this about the possibility of people like me having undue power, and so forth?

As a practical matter, there may be, in certain cases, plans in which there is the possibility to recover moneys from some party who might have been doing a less than adequate job or who might even have been negligent, such as outside advisers, actuaries, or accountants. This kind of thing has happened in cases of financial institutions when there have been problems and institutions have been closed. People have had the right of action against third parties to recover moneys on behalf of the institution, or in this case, on behalf of the plan.

In some cases, trustees may not be in a position to do that or may not want to do that. Pensioners, for example, may not be sufficiently organized in order to bring that kind of action against third parties. This allows the superintendent, in the role of protecting the interests of plan members, to stand in the place of those plan members in order to initiate those kinds of actions.

Pension plans do not operate in all cases exactly with the same degree of sophistication and so forth that is the case with large financial institutions. So having the role for a public official to perform this task from time to time, if it's not being performed by somebody else, we think makes some sense. This is not a power that's going to be used regularly. It's a last resort kind of power because there may be circumstances—we have seen these circumstances—where it is possible that rights of action should be taken, but it hasn't been easy or possible for those involved to do it themselves.

Also with this legislation, the superintendent will be able to remove an administrator and appoint a replacement administrator when a plan is being wound up. Again, this is an example of a last resort kind of power. There are circumstances in the case of the failure or bankruptcy of an employer. The last thing the liquidator of the employer is worried about is the situation of the pension plan. They're worried about the situation of the assets of the employer, dealing with the liquidation of the employer, and so forth. The interests of the pension plan members and retirees may be second fiddle.

There may be situations in which we think administrators have had such a record of difficulty in exercising their duties that the replacement of an administrator is appropriate from the point of view of the safety and soundness and protection of members of the plan.

There are due processes built into this legislation if we were to exercise this power. It is the kind of power that we would only exercise, as I said, in extraordinary circumstances.

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On the other hand, the alternative of leaving an administrator in place when there may be potentially significant problems—those problems could only otherwise be addressed over many months or years or perhaps not at all—would in our judgment be shirking the kind of duty that exists to protect the members of these plans.

The legislation also provides the authority for the superintendent to obtain independent professional advice at the expense of the plan. We have a wide range of governance of plans. As you can imagine, with 1,100 plans from the smallest one-person kind of plan to some of the largest in the country, we have a wide range of actual quality of governance of plans. Helping to improve governance is one of our objectives. It's one we are spending some time on with guidelines and so forth with consultations.

For example, we have plans that habitually fail to meet filing requirements to provide financial information, and may not be capable of doing so very easily. Well, once that's gone on for a period of time, it may be appropriate for us to hire somebody with some financial expertise, effectively on behalf of the plan, to go in and help them prepare the appropriate documentation. Otherwise, information, both for us and plan members, about the true condition of the plan may not be available. We may need to hire independent actuarial advisers, for example, to review certain kinds of assumptions that have been made by people in valuing these plans.

So again, it's an example of a power that will not be used indiscriminately or across the board, but will be used in a more scalpel-like kind of way when there is an indication of problems.

The third area in this bill is under the category of enhanced plan governance. The bill includes the authority for the superintendent to attend and call meetings with the administrator as well as to require that the administrator call a meeting with members and other professionals.

Again, there have been concerns that this would potentially impose large undue costs on plans. On the other hand, we have seen circumstances in which information about important decisions probably should have been disseminated to members and getting the independent advisers for plans, who are key to some of their evaluation, together in the same room with administrators to express our concerns about specific aspects of how the plan is being run or its evaluation would have been very useful in order to sort things out.

This is basically useful when the superintendent doesn't believe that members are being fully apprised of a situation. It may be a change in benefits. It may be a solvency concern that may affect members' financial positions and their planning and may affect what they then want to do with respect to the plan. That's because ultimately, these are voluntary arrangements, and members have the capability, together with employers, of working out problems, changing benefit levels, changing contribution levels, and so forth. But if they don't have the information or don't have the ability to know what the situation is, their ability to solve the problem is reduced, and we can end up with financial losses that could otherwise have been avoided or lessened if there had been decisions taken earlier.

Again, in the area of governance, we know that there's a low pension plan participation rate among small businesses. That suggests that traditional plans don't necessarily adequately meet the needs and expectations of small employers. Other jurisdictions have had provisions for some time for simplified pension plans. Those have existed in some provinces.

This bill allows for the introduction of a simplified pension plan that could be administered by another financial institution using a standard plan text and standard procedures developed by the institution or the professional community. This has been a measure that's been broadly welcomed by the community. We will model any minimum requirements that we put on these plans on the provisions that exist in certain provinces that already have this provision.

The next area is funding. Under Bill S-3, it is proposed that the superintendent must approve any enhancement of benefits that reduces the solvency ratio in a plan below prescribed levels. The solvency ratio is the ratio of the assets to the liabilities of the plan calculated on a termination basis. In other words, if the plan terminated, what would be the coverage, if you will, for the promises made to current members and retirees of the assets in the plan?

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As I've said, in any one period of time, we do have a number of plans. It's at the two-digit level, if you will. It's not like half of the 1,100, but we do have 20, 30, 40, or whatever it may be, plans that are in solvency deficiencies.

That is specifically permitted under the legislation of funding arrangements, and in my judgment, it shouldn't be eliminated, because doing that would eliminate the flexibility you need to have for these plans and to figure out how to fund them. So we should not require pension plans to run like financial institutions with a current margin of excess every year. That would be too stringent, and I think that would undercut the desirability of people to enter into voluntary arrangements to have these plans.

On the other hand, we do believe that there's an issue if benefits are going to be increased when a plan has a solvency deficiency without regard to the fact that the plan has this deficiency. We think that the prime focus, in the case where a plan has a solvency deficiency, should be on figuring out how to eliminate that deficiency.

The interests here in any given plan are possibly diverse. The interests of current members may not be the same as the interests of retirees, because if benefits are enhanced and the plan can't ultimately meet those benefits and it has to be either terminated, wound down, or have significant cutbacks made, it may well impose losses on other people than the people who were involved in enhancing the benefits.

There has been a lot of comment on this provision. In particular, there's been the comment that this provision unduly restricts the ability of various parties to bargain for increased benefits and that this is inappropriate because parties in a collective bargaining setting ought to have the ability to enhance benefits. I understand that, but there is a bit of a broader picture around the mandate of protecting all the members of the pension plan, including retirees.

We put out a draft regulation because the actual solvency threshold to trigger this provision, to trigger an amendment being void, is proposed under Bill S-3 to be in regulations. The white paper from which this bill came had proposed that the threshold ought to be in the order of 105%. Assets would have to be 5% higher than liabilities before benefit enhancements could occur.

Those regulations were of course only in draft form; the regulations could not come into effect until this bill passes. Those regulations got a variety of negative reactions, such that the test was too stringent.

We agree that a threshold of 105% is too high. We had counterproposals that went everywhere from 80%, which was proposed I think by the Canadian Institute of Actuaries, to the idea that the superintendent ought to be prepared to approve, under this legislation, amendments for benefit enhancements if there is an accelerated formula faster than the five years. It's normally there to fund these benefits or to fund the solvency deficiency.

We are in the process of conducting further consultations on the regulations with the groups that have expressed difficulty with the initial proposal. We plan to develop a further proposal that takes account of a number—hopefully, it will be as many as possible—of the kind of comments on the regulations that make some sense.

We believe that the provisions in Bill S-3 provide all the flexibility that's needed to develop a solution to meet the kind of concerns that have been expressed in letters to us and others. But we also think that the fundamental principle in Bill S-3 that there ought to be a threshold of some form or other or some kind of enhanced focus on dealing with a solvency deficiency—it's that this focus or some threshold ought to be there before benefits can just be enhanced willy-nilly—is essential in order to avoid the potential for there being promises made or arrangements struck that ultimately turn out not to be possible or workable with solvency problems, financial problems for plans and real costs for everybody involved, including members and retirees.

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Suggestions have been made. We are listening and we will be acting. Because this is a regulations issue, as we further develop these kinds of proposals in the context of this, if the committee is interested, I would be happy to come back with other details of draft regulations and so forth for consideration, if that would be appropriate. Obviously the committee can call us at any time about the progress of this kind of thing if the committee would like to express a view.

The second-last key element of the bill concerns measures to provide for enhanced harmony with other pension supervisors. The bill includes the authority for the Minister of Finance to enter into a multilateral supervisory agreement being developed by OSFI with other provincial pension regulators through the Canadian Association of Pension Supervisory Authorities. This agreement is not yet ready to be put in place. It's been worked on for a number of years and there are number of issues to be worked out, but we believe it makes sense to at least provide the authority to enter into that kind of agreement in this legislation. This authority we do not now have.

In the meantime, OSFI is taking other steps towards reducing the regulatory burden. We're working with other members of CAPSA, the pension plan regulators, to harmonize annual federal and provincial filing requirements. We're working with Ontario and Revenue Canada on the process by which pension plans are risk assessed. At the request of the four western provinces, we're providing some information and training on our new risk-based supervisory approach that we've been developing over the past year. We're supporting the work of the Association of Canadian Pension Management task force, which is suggesting that there ought to be a uniform piece of legislation drafted based primarily on the PBSA but also on provincial legislation in a number of areas. We're prepared to work with them on that.

The last major area I want to talk about is the arbitration procedure for surplus in pension plans. I've talked quite a bit about plans with deficiencies or plans with financial problems. There are also plans, either on a termination basis if the plan was terminated or an ongoing concern basis, that have assets that exceed their liabilities so they have, in some sense, a surplus. I use the word judiciously because the issue of what constitutes a surplus and what that actually means in law has been very complicated.

What is the current situation? Currently the PBSA, as a policy matter, allows surplus withdrawals. The PBSA does not prohibit withdrawals of surplus either on termination or on an ongoing basis. Superintendent approval is required and there are some thresholds the plan has to meet so that you can't take all the surplus out and create a solvency problem. We have documents generally, plan documents in many cases, that are unclear, either as to what was originally intended or whether those were agreed to because it's been amended over time. It's unclear whether those amendments created trust relationships or contract law and what kind of law should apply.

This has been litigated, as everybody knows, up to the Supreme Court of Canada and so forth. That means there's uncertainty, there's cost for us as administrators of this statute. It's very complicated to try to decide what is the appropriate thing to do in a certain situation.

We do actually approve a certain number of surplus withdrawals every year, roughly half a dozen. They are mostly on termination, but occasionally on an ongoing basis. The amounts involved are usually small, a few million dollars here or there. That's the current situation: lack of clarity, confusion, but a policy framework that permits surplus to be withdrawn under the PBSA.

I'd like to make a couple of comments about what this bill doesn't do. This bill does not legislate entitlement to surplus. It does not legislate entitlement in favour of either the employer or the employee or pensioner, the member of the plan.

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I personally believe legislating entitlement one way or the other wouldn't be right. Determining how to do that would require some incredible kind of judgment, and indeed may well depend specifically on the situation of the particular plan.

What this bill does do is provide an additional part of a framework for members of plans and former members, predominantly retirees, to reach arrangements, to reach arrangements with increased certainty that these arrangements will work, and to do so in a way that potentially avoids lengthy argument and costs.

It also provides this mechanism to reduce the uncertainty about what's going to happen to a surplus in the case where there is a failure of the sponsoring employer, where otherwise determining what happens to the surplus could take a long period of time and eat up lots of resources in determining that result instead of figuring out how to deal with the situation expeditiously.

As I've said, this lengthy process that exists now has caused some concerns for members and pensioners alike. In our July 1996 white paper we invited interested parties to make proposals on dealing with the issue. Lots of people told us that determining surplus in a statute would be a very difficult thing to do, but it was a complex area, and some help was desirable, without a lot of views on exactly what to do.

The fact that this issue is so complicated and fraught with uncertainty also causes us some concern, because the inability of employers to access surplus assets can create some unusual stresses on the funding of these plans. Employers may decide to keep their contributions to a minimum, or possibly even underfund the plan, if they know they can never recover any excess that might arise if there were improved experience in the plan beyond what was assumed in its funding or if there were better than assumed investment performance.

Some plans may even be motivated to terminate in order to access the surplus in the plan. Remember, these are voluntary arrangements between parties, so our ability to prevent a termination is really not there if one of the parties to the agreement doesn't want to continue the plan but is prepared to terminate it.

Because of this uncertainty to do with surplus, those kinds of pressures on funding are not desirable.

What is the proposal in the bill? Simply put, the proposal for a mechanism involves a number of features.

The employer may propose a surplus withdrawal to members. That starts the process. Unless more than 50% of both the members and the former members—i.e., for the sake of a simple case, the retirees—unless 50% of each of those groups separately agree, the proposal goes nowhere. It's dead in the water, so to speak, at that point. So because of this provision, there is not the ability for employers to willy-nilly go in and take money out. In order to have the proposal get to first base, you have to have at least 50% of the members and the former members agreeing to the proposal.

If more than two-thirds consent to the proposal and the solvency thresholds are met so that the plan isn't getting into a solvency problem because of this, the superintendent may approve the withdrawal. If it's between half and two-thirds, then the employer may elect to take the proposal to arbitration. That's not necessarily required. The employer might decide they want to drop it at this point, because they're not prepared to take the risk of arbitration, and to provide some further enhancement of benefits to members is not in their interest. The employer may decide they would be prepared to go back and revise the proposal to make it more attractive to get to the two-thirds level.

Again, our expectation is that this is a framework for reaching arrangements under which, because of the need to get the minimal and other degree of member consent, employers will be trying to reach arrangements that are in the interests of both them and members and former members of plans.

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What can those cases be? They can be a wide variety of cases. They can be cases in which the employer has financial difficulty and accessing some of the surplus in the plan may be important to the viability of the employer, which is important to the current members in their employment. It may be that it's appropriate that benefits be enhanced for some members or all members or retirees as part of an arrangement where the employer gets something out of it, the retirees get something out of it, and the current members get something out of it. That should be left to the arrangements made between the relevant parties. This is a framework for making those arrangements, which we expect will lead to benefits to all parties who would want to come to that kind of arrangement.

I'd note that the requirement for consent applies to each separate group, because the interests may be different between the different groups. Former members may have somewhat different interests from current members and so on.

For plans that are being wound up, in order to expedite the pay-out process, the arbitration is mandatory if the 50% threshold is met or if the parties can't reach an arrangement within 18 months of the employer terminating the plan because the employer has gone bankrupt, for example. So that leaves 18 months for the parties to reach an arrangement before this mechanism even kicks in, but if they can't reach an arrangement in 18 months, then the mechanism kicks in in order to provide some certainty to everybody about what's going to happen to the money that's in the plan.

A lot of the details of how the mechanism works are left to the parties. They get to appoint the arbitrator. We only step in to appoint an arbitrator if they can't agree. We would normally expect that they would agree, and we would exercise some degree of a push on them to try to agree. But if they can't agree, we will have to end up choosing an arbitrator.

The legislation contained in this bill provides a lower-cost alternative to going to court and promotes a reasonable framework where employers and employees can choose to work towards a mutually satisfactory arrangement. This approach is pragmatic and provides an option where an option is warranted, given the state of this whole territory around surplus.

Lastly, I'd note that as a complement to this legislation, we are following a variety of other initiatives to focus more on issues of safety, soundness, and governance. We are in the process of putting out a variety of guidelines on things such as disclosure, plan governance, and investment policies. Those all go through a process of being in draft form and taking comments. For example, we put out one on governance.

These are not formal, legal requirements. They're assistants to plans. They give some indication of what we expect, so that plans aren't surprised when we come to see them and say, “You have a problem with this, this, and this.” It's so they won't say, “Well, you never told us.” We think we ought to be more transparent about what we expect plans to do.

Similarly, these guidelines can help plans that are trying to enhance their own effectiveness. We've gotten a number of comments on these guidelines. We normally revise them to take account of those comments before they go forward.

We also issued what we call our stages of intervention, which indicate what we would normally expect to do in intervening in a plan with material difficulties at different stages of those difficulties. It matches the stages of intervention we published a number of years ago for financial institutions. Again, it increases the transparency for plans so they're not surprised by what they would expect us to be doing as the regulator.

I can obviously elaborate on these in response to questions, if you wish. Some people have made comments on these in submissions. I think we're aware of all of those comments and we're making an attempt to deal with them.

Those, again, are not legally binding. They are part of our consultation and development process that we'll be continuing to work on.

Thank you very much, Mr. Chairman. I'm happy to answer questions on anything I've said, anything in the bill, or anything related.

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Thank you, Messrs. Le Pan and Evanoff. That was a very thorough presentation.

We're going to move to the question-and-answer session. Mr. Ritz, do you have a question?

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chairman.

Thank you for your presentation this morning.

When you're getting into the wrap-up at the end here, you're basically happy with this legislation? You think it's the right direction to go?

Mr. Nicholas Le Pan: Yes.

Mr. Gerry Ritz: Okay.

The simplification idea is good—stay out of the courts and all that type of thing. It's an excellent way to go.

Under “Simply put”, you say the employer can propose a surplus withdrawal. Can the employees and retirees also trigger a withdrawal?

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Mr. Nicholas Le Pan: This normally would start with an employer proposal. I think if the employees were prepared to have some kind of withdrawal, that sort of indicates that there's likely to be a willingness to start to reach an arrangement. We would normally expect that they would sit down with the employer.

Mr. Gerry Ritz: I'm thinking in terms of a company winding down and this type of thing. Is this something with which the employees would then say that because there's surplus in the pension, let's include this in our pay-out packages, our early retirement packages. They would say that there's $100 million in their surplus pension, so can they access more of that now? I'm thinking more in terms of that.

Mr. Nicholas Le Pan: No, the way this works is that it starts with the employer. If it gets to an arbitration stage, you're going to have possibly a variety of proposals on the table from all sides. We would normally expect that if a group of either current members, retirees, or whatever, had a proposal, they would start to approach the employer, and that would then trigger a employer proposal back. Then we would end up in this situation.

Mr. Gerry Ritz: Good. Thank you.

The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Hello, Mr. Le Pan and Ms. Evanoff.

On page 3 of your presentation, you seem to say that many plans do not comply with the declaration requirements. You even said a moment ago that several of these plans had administrators who were not necessarily the most competent. Are such situations common?

When you find out that there are administrators who repeatedly fail to comply with the requirements or do not have the necessary competence to manage the pension funds, are the participants in the plan notified of this situation, or are things kept between you and the administrators?

[English]

Mr. Nicholas Le Pan: First, I don't want to leave the impression that there are a large number of incompetent administrators. The answer to your question really depends on the case.

Let me also say that our approach here is evolving as we move away from reviewing all the plan text to focusing on compliance and governance and risk. If we have a situation in which there are problems, but there's clearly a willingness of the administrator to improve the situation, the problems may simply be through lack of experience, so we will work with the administrator. Because we're seeing progress, the situation is not necessarily threatening to the plan at that point, so we will work with the administrator. We will provide suggestions as part of our examination process and so forth.

If, at the other end of the spectrum, we think that there is a problem that is so potentially significant that it could cause material losses to a plan, yes, we will consider disclosure options. That's one of the issues around calling a meeting, quite frankly. It would be very rare, I would hope, that we would be in that case, but it's not impossible that this would occur.

Let me also say, with respect to the disclosure, that we are in favour of more disclosure to pension plan members, but in a cost-effective way. Other aspects of this legislation expand the amount of disclosure that is available to members, and we think that's important. I think we have a duty, first of all, to work with administrators of plans to try to deal with the problem, and only in a last resort kind of case should we be exposing them to all their members. We think that disclosure to members is important because ultimately, members are part of the governance process of the plan.

Sometimes we have seen administrators who are reluctant to hold meeting with members. It's not often, but it's occasionally the case. That's why, for example, that provision is in the bill.

[Translation]

Mr. Yvan Loubier: You talk about a simplified pension plan with a standard text, which is written mainly for small and medium- sized businesses.

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Do you know if the plans under provincial jurisdiction are simplified plans like that one? This is an innovative idea. I think it is very interesting.

Mr. Nicholas Le Pan: This exists in a few provinces, but I do not remember exactly which ones. One moment. Québec has some, as well as Manitoba.

Mr. Yvan Loubier: This is interesting for small businesses that cannot afford to efficiently manage a—

I go back to the question you were asking about the solvency ratio. In provincial jurisdiction plans, are there determined ratios, or is it the same level as the plans under a federal charter?

You said a moment ago that the regulations should normally be more specific about the ratio you required from the plan. In the other plans, those that are not under federal jurisdiction, are there specific predetermined ratios?

[English]

Mr. Nicholas Le Pan: I'm not sure I understand the question.

There are certain elements of the funding rules for plans that are similar or identical between the federal government and the provinces. There are other rules that differ. Some provinces have adopted different approaches from the federal government with different kinds of plans. Sometimes that depends on other things that are in a province's rules that are not part of the federal government's PBSA system.

In some cases, the rules in the provinces are, quite frankly, tougher. They require tougher limits on plans with problems than we do. In other cases, it's the other way around. So in the case of this issue of a solvability threshold, I don't think there's sort of a general standard in this area I could refer to.

A good example of differences, however, is that in some provinces, for certain types of multi-employer plans, if there is a deficiency, the plan is required to reduce the benefits to the level of the funding, period. There's no possibility for there to be a gap that then is worked out over time. That's a tougher rule than we have.

In the other case, in some cases provinces require employers to fund any deficiency if a plan terminates, no matter how large it is. I think if employers were required by law—that's been suggested by some witnesses—to fund any deficiencies, I think this would open up the surplus issue on the other side. Because if employers are responsible for absolutely all the downside, they're going to want to have some rights to the upside. That's a very contentious area that I don't think is a good thing to get into.

So there are differences. Sometimes people suggest that we ought to adopt this part as the best thing because it would be the best for their circumstance from this province or that province.

We've tried, in this area, to do something that I think is reasonable and not as disadvantageous to one group or another group as some other options might be. We think it's reasonable and practical, particularly if we can work out this threshold and move away from the 105% threshold that we initially proposed. It was proposed in the white paper. I think it makes some sense.

[Translation]

Mr. Yvan Loubier: Thank you.

[English]

The Chairman: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you for your presentation. It was mentioned before that it was very thorough and helpful to all of us.

As for the 66% for withdrawals, some employers feel this is awfully high, given that it includes all present members, retirees, spouses, and the rest of it, and that it's almost impossible to reach. Why did you set it so high?

• 0955

Mr. Nicholas Le Pan: That's a very good question. We tried to reach a judgment about what we thought was a reasonable balance between the potential interests of employers and members of plans and former members, like retirees.

On the one hand, you go to certain kinds of other areas of federal law, let's say, where a certain proportion is deemed to be consent and it's much higher. It's 90% in certain areas of corporate squeeze-out provisions. High thresholds are often there for CCAA kinds of restructurings and so forth. On the other hand, too low a threshold will buy a result the other way.

We have a number of people in the employer group, as you say, who think it's too high. On the other hand, we have a number of people on the other side who think it's too low. That tells me that we're probably in the right territory. So my gut sense is that it's not a bad position.

If I look at other kinds of statutes and so forth, a fundamental change in a variety of organizations requires a two-thirds kind of majority in a variety of other statutes and so on. The whole regime works together. The 50% I think is at least as important as the two-thirds, because we don't want to create a regime in which it's just possible for you to get a few people on side willy-nilly, then all of a sudden, the money's gone, and there's concern about that. I think the 50% is really important in that regard.

We've had a number of comments from employers that separate groups is a problem, and yet we know that the interests of members and retirees may be different. So we thought having separate votes was a very important part of the arrangement.

So I'm pretty comfy with what's here, but I recognize that this comfort comes from the kind of thought process I've just laid out to you and also partly from seeing the reaction during the consultation process. We had people on both sides of the issue who were fairly strong about this, therefore, having been involved in situations where one had to make a judgment and having a sense that there were people with views on both sides tended to be a good indicator that we were pretty close to the right ball park.

We spent quite a bit of time looking at this at the front end, and ultimately, the government made a judgment that that this was a good level to be at and that this was a reasonable balance between the interests of the employers and members and former members.

After all, this is a framework for reaching an agreement ideally or reaching an arrangement. It's not a framework where we think anybody has the absolute control over what the outcome is going to be. It's a framework for people to try to come together.

Ultimately, if they don't want to come together at all, there's going to be a problem. If there's some range of overlap of interests, of views, I think this framework will allow them to come together and get something done. If there is virtual unanimity, they don't even need this framework, except that to use it may provide them with some more certainty that the agreement they reach will ultimately stand up over time. So it's even beneficial in that case.

Okay? That's the best I can do.

Mr. Scott Brison: I have one more question, Mr. Chairman.

The criteria for getting involved and taking some sort of action, if you're not in agreement with the strategy of the pension or the administrator, are fairly nebulous. I guess I have some concerns. It's based largely on solvency as opposed to investment strategy, I believe. Investment strategy may play a role, but even investment strategy is fairly subject.

There are a number of people who would have felt that Orange County's investment strategy, when the numbers were extremely good and things were going extremely well, was brilliant. So it would have been very difficult, in fact, to get any public support to criticize the investment strategy of Orange County in California when it was doing extraordinarily well. Based on a solvency perspective, arguably it was doing quite nicely, but from an investment strategy perspective, obviously the administrators—I think Mr. Brown was the guy's name, and I think he served time—ultimately were pursuing a course of action that wasn't consistent with sound practice for that type of fund.

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With external organizations and self-regulating organizations like the Canadian Institute of Financial Planners or the Investment Dealers Association, both have done incredible jobs in terms of being self-regulating. Did you look towards some of their criteria for getting involved and for investment management and strategy?

Mr. Nicholas Le Pan: The broad answer is yes. This is the legislative framework for our regulatory structure in Bill S-3. There are other aspects to that framework. We don't just sit back and wait and not put out any other kind of guidance or expectation that evolves over time as problems come up or issues arise. We lean on the experience that we ourselves have had in our office with other institutions.

I'm the director of operations and supervision for our program related not only to pension plans, but federally regulated insurance companies and all of the deposit-taking institutions. They have a number of investment subsidiaries and affiliates and so forth. We are constantly evolving informal or more formal guidance in particular areas that we publicize, and that becomes, if you will, expectations or benchmarks against which we will determine whether we act or not.

Let's take derivatives, for example. About three and a half to four years ago we published guidelines for use, investment strategies, and appropriate control mechanisms around derivatives. We started with the financial institutions area because we thought it was most pressing there. That was based on what had been done with a number of the organizations you mentioned, what had been done by a number of other regulators internationally, and a few of our own ideas. We went through a consultative process and so on.

At that point in time, the few pension plans that were into derivatives at all were end users, as opposed to market makers or any of that kind of thing. We decided the priority ought to be to deal with the other institutions and so forth. We then moved, roughly two years ago, to put guidelines out on the use and appropriate risk management for derivatives in pension plans.

That is an example and there are a variety of other guidelines we have. They are not legally enforceable and should not be because they're at a level of detail often that is too much to have firm rules, but they're best practices, that sort of thing. They then become a guidepost, a benchmark, against which we supervise. We do conduct on-site and off-site supervision programs for plans. We will try to tailor that increasingly to areas of risk, the plans that have potentially more risk based on the information we get from filings.

As we've set out in our stages of intervention, we would normally go through a hierarchy. To go back to Orange County, if a plan has a huge derivative position but we ask some questions about the control structure around that against the kind of standards in our guidelines or in a similar area, whatever it might be, and the answers aren't very good, obviously the orange to red flags start going up.

What are the kinds of tools we have? Right now, without Bill S-3, we don't have a lot of tools. That's part of the point of Bill S-3. With Bill S-3, the tools become everything from moral suasion and pressure down to formal directions of compliance—you have to have this or you're out of this business kind of stuff—to ultimately termination.

In the backup behind the legislative structure we do look very closely at the kind of guidance that exists from other authorities. I've used derivatives as an example, but that's not the only example. It could also be managing interest rate risk, managing this or that kind of risk, investment approaches. There are both regulations and guidelines on things like what is a prudent portfolio. There's a range of that and we try to tailor that very much in a way that meets what other regulators are doing. Does that give you a sense?

The Chairman: Do you have another question, Mr. Brison?

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Mr. Scott Brison: I have just one quick one on the foreign content rule.

Many pension planners and investors are looking to eliminate or reduce the Canadian content in their investments. We're in a global economy, etc., and they're looking to diversify and achieve better returns and less risk, ultimately. How do you feel about the idea of eliminating or reducing the Canadian content rule in terms of investment?

Mr. Nicholas Le Pan: I don't think it's primarily a supervisory safety and soundness kind of issue. Again, this is a personal view at this point. From our responsibility, the issues around that, as I understand them—and I did spend some time in former lives in the finance department, around several of the former, kind of looking at this—from what I've seen in the public generally, are about improving investment returns, impact on the Canadian financial markets, Canadian economy and so forth, one way or another. Those are the important considerations from a policy perspective in deciding whether or not to make any change. It's not basically a safety and soundness or prudential kind of issue.

The Chairman: Thank you, Mr. Brison.

Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): I have two very brief points. As has been mentioned, your overview is certainly quite helpful for the committee.

In a surplus situation, if the support is less than two-thirds but more than one half, it will go to arbitration. Who would choose the arbitrator? How would that evolve?

Mr. Nicholas Le Pan: The arbitrator would be chosen by the parties. Only if the parties could not agree within a period of time would the superintendent choose the arbitrator.

Mr. Tony Valeri: They would have the ability to intervene and choose an arbitrator.

Mr. Nicholas Le Pan: But that is only as an ultimate out, so the process isn't stymied.

Mr. Tony Valeri: Okay. Secondly, could you describe perhaps more completely what you mean in your brief by letter of compliance?

Mr. Nicholas Le Pan: We have developed a document based on our supervisory approach that conceptually places institutions in various stages of difficulty. Stage zero is no difficulties essentially. There may be minor stuff, but no difficulties.

You then move to stage one, which is some difficulties, but not materially threatening at the current point. I'm paraphrasing. I can provide it to the committee subsequently.

Stage two is difficulties that, if not corrected within a reasonably short period of time, could lead to material financial problems and potentially losses. It goes up to stage four, I guess, which is imminent demise, to use that phrase.

We describe each of those stages and for each of the stages we describe the kinds of actions we, as a regulator in an ordinary situation, would be looking to take. Obviously we would tailor the actions to the particular case.

This was an attempt that started in the financial institution side for our supervision program for deposit-taking institutions such as banks, trust companies, and insurance companies, as a response to the need for us to be more transparent about our supervisory approach. We've drawn up the same thing for pension plans.

We use institutions and pension plans that are at various stages and get different degrees of monitoring attention from us. They know that because they've seen the document we set up. We developed it, got some consultation on it, and sent it to all the plans and so forth. So there's more understanding of how we operate, and that tends to enhance our effectiveness, quite frankly.

Institutions at different stages also get different degrees of attention from senior management within the office, who report to ministers more regularly that they're potentially in serious problems, and those kinds of things.

Mr. Tony Valeri: Okay, thank you.

The Chairman: Thank you very much, Mr. Valeri.

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman.

We talked about employers bringing down the surplus by maybe not investing as much money as they should or could. How easy is it for an employer to underfund to bring down a surplus? Is that a common occurrence?

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Mr. Nicholas Le Pan: There's no simple answer to that. There are no absolute prohibitions because it depends on what the arrangements were in the plan in the first place and what the requirements are. Contribution holidays are possible. The funding arrangements vary, plan by plan.

The key point from my perspective here, as I emphasized in my opening remarks, is that contrary to other financial institutions, there is not a minimum set of required margins that every plan has to meet. It's a much more fluid kind of situation that depends on the documents, the original deals that were struck, behaviour under the plan, the extent to which people meet those contributions when they're due, and so on.

The legislation of regulations explicitly permits plans to run with deficiencies for five years, which is a long period of time, given the pace of change to businesses these days.

I don't want to leave the sense we'll just wake up this morning and decide we're not going to fund the thing. It's not impossible, and decisions are taken that affect funding position and can move funding position 10% this way and 10% that way in terms of being more solid or less solid, more risky or less risky. Those kinds of decisions can happen in a variety of ways.

Mrs. Karen Redman: When you talked about the 20, 30, or 40 pensions you would deem as being in trouble, would this be the kind of thing that would flag that, as long as both parties agreed it wasn't anything unusual?

Mr. Nicholas Le Pan: Yes. First, I don't want to characterize the 20, 30, or 40 plans as being in trouble. For the sake of discussion, suppose we have 30 plans that right now have assets that are less than the value of their liabilities. Not all of those plans are in trouble. For some of them it may be only a minor difference. A good number of them would be let's say between 95% and 100% funded, so it's only a 5% difference. As long as the employer is solid over a period of time and there is a plan to fund the deficiency over the five-year or whatever period of time, that plan is not in trouble.

On the other hand, sometimes that is an indicator of a plan being in difficulty. One has to get behind the pure numbers to go into the case about whether that's an indicator of difficulty or not.

We are also hampered, in part, in these kinds of assessments because plans do not have to have a valuation on an actuarial basis every year. There is an inherent lag in this information. The main reason for that is to require a full-fledged actuarial valuation every year gets pretty costly, and because these are voluntary arrangements, we can't have the costs so high that people don't want to have these plans. So we can actually have surprises where you have a plan that was more than 100% funded three years ago, and at the next valuation, whoa, it's below.

Broadly then, being in that position in a solvency deficiency is an indicator. One of the reasons I think people criticized the 105 rule was because it was too arbitrary. I understand that. They're right. Having one kind of rule to apply across the board, given the fact there are different situations, is a problem.

I still think, broadly, that if you are in a solvency deficiency, particularly if it's a significant one, you ought to focus on how to get out of it, and your priority ought to be to either eliminate it or have a credible plan to get out of it.

On the issue of this solvency threshold, that leaves us looking at the kinds of proposals that have been made for what is the right kind of threshold. Some people have proposed a lower number than 100. Maybe that makes some sense, because a 5% or more difference, if you have a strong employer, is no big deal.

We need to work on that. We need to analyse the situation in those regulations and come back with some kind of idea about what a reasonable threshold is.

Does that help you?

Mrs. Karen Redman: Yes.

Can you define a significant funding deficiency?

Mr. Nicholas Le Pan: Again, we don't have an absolute trigger that says once you're below x it immediately puts you in this category and we're all over you no matter what, all things stop, etc. It ultimately depends on a judgment call about such things as the financial condition of the sponsor, the situation in the industry, and so forth.

• 1015

Clearly, in my mind, 5% deficiency, assuming it's reasonable and based on current information and is not heading in the wrong direction, is not a significant problem, but we can have plans that are significantly below that. We have had a couple of plans where there have been, for the first time in many years, significant enough financial difficulties that benefits had to be cut. That's not a pleasant thing to have happen. In some cases, that was based on some surprises to the plants.

So I wish there was a magic number and you could flip things. It would make my job, and my people's, easier.

It's a bit more art than science, unfortunately, but I'm giving you a sense of the range.

The Chairman: Thank you very much.

Mr. Szabo, a final question.

Mr. Paul Szabo (Mississauga South, Lib.): For a corporate pension plan there are rules prescribed under a couple of jurisdictions. The Canadian Institute of Chartered Accountants has disclosure requirements and also recommended guidelines with regard to at least a noting of an unfunded liability as well as a plan to deal with the unfunded liability.

Something like just under 20% of the plans in Canada are under the federal umbrella. Is that right?

Mr. Nicholas Le Pan: About 10% are federal plans.

Mr. Paul Szabo: Are there any significant and adverse differences between the proposed jurisdiction over federal plans, or the administration of federally controlled plans, or plans under the federal umbrella, compared with those that are not?

Mr. Nicholas Le Pan: Significant differences? Oh, boy. Do you mean more than just with relationship to this disclosure issue—that is, broader differences?

Mr. Paul Szabo: Absolutely. Is it more flexible under the federal scheme, and if it is, why?

Mr. Nicholas Le Pan: I understand the question.

Let me start at the big picture and then we can come back and go into different details as necessary, depending on how far we want to go here.

Broadly speaking, legislation related to pension plans comprises two elements. The same is true in the PBSA and in provincial legislation. One element is the provisions dealing with safety and soundness, funding, governance, that kind of territory, which is primarily the substance of this bill.

The second area in legislation deals with matters of social policy, which are primarily not parts of this bill but are parts contained in the PBSA around things like definition of a spouse, vesting, portability, those kinds of issues.

Mr. Paul Szabo: I'd like to stop you there, because we're going to have to leave before you know it.

Is it your view that those plans under the federal umbrella have more latitude or less control over them than would have to be exercised by those plans not under the federal umbrella?

Mr. Nicholas Le Pan: No, I don't think there is one way that is more or less. I think broadly the federal rules are—

Mr. Paul Szabo: Let me ask the question in a different fashion, then. Would a corporation prefer to be under the rules guiding federal umbrella pension plans or to remain under the rules to which they are presently subject?

Mr. Nicholas Le Pan: Most of the corporations we talked to really want harmonization, because a lot of them are subject to several.

Mr. Paul Szabo: You didn't answer the question.

Mr. Nicholas Le Pan: But the problem I have is that, first of all, they don't have a choice. You can't just opt in and so forth. So it's hypothetical. A lot of them haven't thought that way, quite frankly.

• 1020

I'm not trying to duck the question, it's just that a lot of them haven't thought that way. There are certain areas in which the federal rules are looser. I indicated a couple in response to a question from Mr. Loubier around the funding kind of stuff. Broadly, I think the safety and soundness stuff is closer to being equivalent between the federal government and the provinces than the social policy kind of stuff.

I'll tell you that the other thing that's big on the corporate side is the cost issue. One of the reasons why we want some of the changes in here is that we're actually a relatively higher cost kind of regulator. The costs that we bill back—this is all charged back to plan members—are relatively higher compared to that of a number of our provincial counterparts. And part of what this is doing is trying to get that down.

Is that at all getting at what you're after?

Mr. Paul Szabo: Oh, I understand perfectly. Thank you.

The Chairman: Thank you very much. That was a very thorough presentation you provided us. We certainly appreciate it. It's certainly going to help us with the examination of Bill S-3. Thanks again.

Mr. Nicholas Le Pan: I gather I'll be back later as appropriate.

The Chairman: Yes.

Mr. Nicholas Le Pan: Thank you very much.

The Chairman: We're going to have to go vote at approximately 10.42. There's the half-hour bell.

I'm going to invite Réal Proulx and Stan Horodyski, from the National Council of Canadian National Pensioners Associations. Could you kindly come up and make your opening remarks?

Welcome. You probably know how the committee operates. You have approximately 10 to 15 minutes to make your introductory remarks. Thereafter, we will engage in a question and answer session. Perhaps, though, the question and answer session will happen after the vote. Thank you.

Mr. Réal Proulx (Federal Liaison Officer, National Council of Canadian National Pensioners Associations Inc.): Thank you, Mr. Chairman.

First, I'd like to introduce myself. I'm Réal Proulx. I worked for Canadian National in the running trade for 43 years. I retired in 1989. I fully contributed to the pension for 35 years, without indexation. I've been on pension now since January 1, 1990. In the meantime, I became a member of the retirees association, which is a pensioners association. I'm very active in that. I've followed a number of things, such as court cases, etc. I will be prepared to make a small presentation.

The man who could have answered a lot of your questions on finances is unfortunately in the hospital. He's Mr. Hunt, a former senior vice-president of Canadian National. There are others who cannot be here. Nonetheless, to my right is our newly elected president. He was elected about a year ago and has been very active. He's Stan Horodyski, from Langley, B.C, and he also has a trade union background.

I will start immediately, in the interests of time, to get to what we want to say.

First, we want to thank you for allowing us to appear before you. Our presentation is verbal, as I indicated in my application, and our comments will be brief.

We recognize S-3 at first glance as being very positive in a number of areas. It's definitely very positive in a number of areas, and for the record, I would like to quote from the PBSA. Maybe I don't have to quote it, maybe I can leave it with them afterward.

Bill S-3 has been passed in the Senate, and first reading in the House of Commons was on November 26, 1997. We are currently awaiting second reading.

Some of the implications of the bill are that administration will be responsible for ensuring compliances with pension plan provisions with PBSA and regulations; administration will not be able to amend the plan to increase benefits if the plan is poorly funded on a solvency basis; administration will be required to permit former members access to pension documents; active members, former members, and pensioners will have a right to view the stable of investments and procedures. These are all positive.

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The drafting of regulations to support the changes to PBSA include: the definition of insolvency ratio level for void amendments; requirements for simplified pension plans; disclosure of solvency in ratio to members; the specification of additional information to be made available to members; and clarification of section 28.5 of the regulations regarding supplementary pension plans.

These, in our view, are all positive, and we think they're overdue. However, there is one requirement in there that we take strong objection to—that is, the requirement for surplus withdrawals. The provisions in the bill, as previously stated, are positive; however, the requirement for surplus withdrawal is, in our opinion, most detrimental to pension plan members.

We could make a case history of that. I will say to you gentlemen today that legislation that advocates a method by which employers, plan sponsors, can make any claim to a surplus when pension plan rules do not so specifically state, is legislation that provides a vehicle for employers to get at moneys in a trust fund—and Canadian National Railway's is a trust fund—that under trust laws and trust principles is for the sole benefit of plan members—employees and retirees.

In our opinion, to provide legislation in any form getting plan sponsors and employers to do indirectly that which they cannot do directly is tantamount to abuse of trust. God knows, gentlemen, there is little enough trust in our elected officials now without further mistrusted legislation.

At this point in time we would point out that our primary concern is with the CN pension plan. In that context, we could write a book and produce volumes of evidence as to why, with the CN pension plan being subject to trust law, the employer, CN, cannot claim a right to any surplus.

In conclusion, while our presentation may be very brief, we trust that our comments will clearly clarify the position of the national council regarding Bill S-3, specifically that of proposed section 9.2.

We had a brief, but we've deliberately reduced it to this, because I think you've heard anyway all the things we may have said, and we didn't want to trouble you with any more. We thought we'd get right to the point of where we are concerned.

The Chairman: Thank you very much, Mr. Proulx.

We have ten minutes for questions and answers. Mr. Ritz.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you, gentlemen, for appearing today. I understand your dislike of the surplus withdrawal. The way we understand the legislation is that it's going to take two-thirds to trigger it, which is a very high number and hard to reach. It can go to arbitration. Again, the members then have to control a certain amount of it.

Do those not safeguard somewhat the idea that the employer is just going to abscond with the funds, as you may suggest?

Mr. Réal Proulx: They do not, sir. I submit to you that with regard to this particular clause in the bill, all these other things are great, but that is the catalyst we don't want, because everybody believes this is how it's going to be. The language is clear about how the procedure is going to be.

I'll put it this way. I have a gentleman who is 90 years old. His pension has never been indexed. You can say it is, but I'll prove to you that indexing is a farce.

By the way, we don't believe any funds should be touched until pension plans are fully indexed and all the benefits under the Income Tax Act, etc. are afforded to the plan members, both active and retired.

So this gentleman of 90 years old said to me, well, that looks good. They tell me there's a surplus, and I'm entitled to $1,000, but there's no method by which I can get it. So the company says, fine, we'll vote on it, and if you agree that we can have half of it, you'll get $500 tomorrow. If I don't agree, I don't know if I'll ever get it, because I'm almost dead.

So that is the scenario they have set up. A lot more could be said in answer to that one.

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Mr. Stan Horodyski (President, National Council of Canadian National Pensioners Association Inc.): In response to your question, another difficulty we have in respect to this particular provision in the bill is in our particular instance CN, with some 48,000 pensioners, has been waiting for the day when our indexation plan and our survivor plan finally see some significant improvements. And the day that the fund reaches a fully funded status and surplus is realized, this particular provision will enable in this case the plan's sponsor, CN—and they've made no bones about it that this is what they're endeavouring to attempt to do—to get at the surpluses.

If you compare our plan, while it's not one of the poorer plans across the country, it has made strides over the years, but there are some significant areas that are extremely weak in terms of protecting the pensioners and survivors. So from that point of view, this particular legislation will facilitate CN's strategy, if you will, in meeting its bottom line and making their shareholders happy.

For years and years the argument from CN was we can't make these improvements because we're carrying such a heavy unfunded liability. That's no longer the case. And the timing of this legislation just slots right in with CN strategy.

It's ironic, in our particular case we're some 48,000, but the collective bargaining units on the railway number approximately 21,000. So you can see, in terms of the ability to achieve what I and the national council would consider reasonable improvements that ought to be funded by these newly gained surpluses, that they won't be there unless we can somehow either do it through the collective bargaining agents or muster whatever forces we can as pensioners.

Mr. Gerry Ritz: But does this bill not create a vehicle where you can sit down at the table and say you want the cash surplus out of here but then we have to cover this and this and this item too? Does this not give you another lever to work with?

Mr. Stan Horodyski: We haven't been successful up to now leading up to this particular time in getting the railway, the sponsor, to sit down and come to some agreement on the utilization of surpluses.

Mr. Gerry Ritz: So they have a surplus and they want their fingers on it. Does this not give you a lever to say let's get to the table? If you want this surplus then we have to address the indexation. We have to address the other issues that are pertinent to what you're talking about. Does this not open that door for you?

Mr. Réal Proulx: The fact remains that the surplus does not belong to the plan sponsor. It's a trust fund for the plan members. Why should we have to sit down and bargain with the plan providers for the use of that surplus?

I know that this is late in this bill. It's going to pass. I've been around Ottawa long enough and I can understand some of the things. But you gentlemen can make room to clarify.

There are some pension plans that this bill will address, that this very question will address—for instance, if there's a case of bankruptcy or something. I've written to Mr. Le Pan; I've got a lot of his testimony to the Senate and so on. And in that context, if my company were going to go bankrupt and I had to share the money in the fund, that's another story; I could sit down and come to some terms on that.

So we believe that the least you can do is regulations to cover the specific and special conditions whereby the surplus could be touched for other purposes than the plan's members, because there is—

In 1985 I was involved in that. It took two years to draw up the regulations. For PBSA 1985 the regulations didn't come out until 1997. They were deemed to be effective in 1985, but there's a lot of work there. Laws are one thing; they say what the courts will do. But the regulations are really the meat of a bill applicable to that.

The Chairman: Thank you, Mr. Proulx.

Mr. Brison.

Mr. Scott Brison: Would you say your membership would be opposed to any surplus? Would your membership overall be opposed?

Mr. Réal Proulx: My answer to that is simply that a vast majority haven't the slightest idea of what we're talking about at their age and time, and some of them never took an interest, but those who are still around like myself and who are cognizant of all this are certainly opposed. And the more we hear in the country— The latest thing is that a week ago something came out in the paper about the president doing that. It cuts on this very issue. We started with phone calls from all over the constituency, because we have chapters everywhere, we have chapters across the country. At least at those chapters those people who participate in that and rely on and trust the people who represent them to do the right thing are totally against it. I would have their full support.

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Mr. Scott Brison: I would suggest that it would be very difficult to get over 66% of their support for a deal that isn't sound.

Mr. Réal Proulx: Then you go to 50%.

Mr. Scott Brison: Well, 66% is an arbitrary—

Mr. Réal Proulx: But then the second time you go to 60%.

Mr. Stan Horodyski: There's another element here, and I touched on it, and that is you have the bargaining units that are at the bargaining table in effect making plan rule changes that impact pensioners and survivors we have no real control over. It's an element whereby, yes, we'll be faced with a decision at the end of the day if those unions ratify agreements that basically permit the railway to use surplus.

As the gentleman raised earlier, we can take the issue on and attempt to get CN to understand where we're coming from and hopefully agree, but what incentive is there for them to agree with pensioners not to use the surplus? This is exactly what they've been aiming for for the last 30 years.

Mr. Réal Proulx: I will give you a definite answer: the study that was made of the various lawsuits by the law faculty of the University of Western Ontario. We had to go to the extent of spending our funds. We're voluntary. It's a lot of money to get a legal opinion and put the unions and the company on notification. This came out in the study of the case laws. I'll just read you one paragraph:

“If the funds were subject to trust principles, the use of the funds to increase benefit levels for active plan members”—which the unions are obligated to try to do for their membership—“but not for retirees would be a breach of trust”.

This has been one of our problems. I was in the union. I negotiated for my members and the retirees took second thought and didn't even get a vote of course. So that is what we're getting at, sir.

Mr. Stan Horodyski: And by the way, I should add that not all unions are taking that position. There is one union that is saying hell will freeze over before we agree to CN utilizing surpluses until the plan is enhanced to a reasonable level for the benefit of pensioners and survivors. And when you look at roughly 80% of 48,000 receiving less than $1,500 a month, there are some staggering figures in terms of the minimum benefits that are paid now, particularly to survivors. It's a sad state as we enter this period of CN's history where they are bare bones, they've cut right down to the bottom line and now they want to access and utilize the surpluses before they bring that pension up to a reasonable level for the benefit of the pensioners.

Mr. Réal Proulx: There's one final thing on my part, gentlemen. I have to get this lick in. I apologize: I mean ladies and gentlemen.

[Translation]

I am sorry. Many apologies.

[English]

Whether it was done intentionally or not, I believe in the people who were doing it. I don't believe they did it intentionally. But in terms of the retirees, when the Canadian National became a private company in the prospectus it was clear that we were going to be allowed to buy some shares at the prospectus price. As you know now, we were gypped out of that. They were all sold, and we were waiting to be told how from the investors. With hindsight, had we all been able to buy, had we been given that privilege— If you're a shareholder and you've got good dividends and you can reduce the cost of the company, you don't mind too much. But we're not shareholders. And now, to increase dividends for the shareholders who got the shares over our backs—they were supposed to scale them back and give us some, but they never did—we hold Canadian National, the securities department, and this government responsible for that. You might hear more about that later.

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As long as I'm around, I'm going to look to my members of Parliament to support me. Until plans like Canadian National that have a surplus are, at the very least, brought up to snuff in all areas that are allowable under the tax law— You should have heard; that's one of the reasons they register with the federal government. It's not only registered under the Pension Benefits Standards Act, but under tax law. Until that's brought up to snuff, I will fight this, and my member of Parliament, who happens to live in Aylmer, as you probably know, has indicated a number of times that I was right.

Mr. Stan Horodyski: I suppose I could add one point, ladies and gentlemen.

The plight we're in is since this legislation provides a means to in fact stop any utilization, it would be very difficult to do that. On the other hand, I suppose we're saying as a national council that given the history of CN—and I think a large price has been paid, and a lot of it was done on the backs of the very people we represent, in terms of building CN up to where it was a corporation that was put to a privatization process, and all those individuals who have enhanced their own pockets have an obligation—we would look to this committee and others to recognize the plight we're in here.

As I say, what is being done under this legislation is not totally negative, but we're caught in a very unusual position, to say the least.

The Chairman: Thank you very much, Mr. Proulx and Mr. Horodyski, for your contribution to the study of this bill. You've certainly given us many things to think about.

Mr. Réal Proulx: That was the purpose.

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The Chairman: The meeting is resumed. We will hear this morning from representatives from the United Steelworkers of America, the Canadian Labour Congress, the Canadian Union of Public Employees, the International Association of Machinists and Aerospace Workers, and the Canadian Auto Workers Union.

As you know, you have approximately 10 to 15 minutes to make your introductory remarks and thereafter we'll engage in a question-and-answer session.

We will begin with Ms. Sheila Block from the United Steelworkers of America.

Mr. Robert Baldwin (National Director, Social and Economic Policy Department, Canadian Labour Congress): Chair, I wonder if I could request an alternative way of approaching this.

The Chairman: Absolutely.

Mr. Robert Baldwin: We've had a chance to review Bill S-3 among ourselves. I think all of us have prepared written briefs for the committee members, which have been distributed to you, with the possible exception of the Canadian Union of Public Employees, which only got theirs to the clerk I believe yesterday.

We're more or less agreed among ourselves about what the major problem areas are, and we thought it might make this session more useful and interesting to you if we made separate presentations focusing on particular areas of concern rather than having each of us try to cover Bill S-3 from stem to stern.

The Chairman: Sure.

Mr. Robert Baldwin: We had a little discussion beforehand about how we might divide up duties. I'll explain it to you and then see if it's agreeable to you and the members of the committee.

The Chairman: Sure. How you use your time is entirely up to you. If you have decided you're going to focus on one particular area, that's fine with us.

Mr. Robert Baldwin: Okay. The one thing I'm a little concerned about is the total allocation of time for opening presentations, because each of us, when we were contacted by the clerk's office, was told we'd have somewhere from seven to ten minutes. I don't think any of us need to go over that time, but we may need that much time each, if that's okay.

The Chairman: Oh, that's fine.

The Clerk of the Committee: It's seven to ten minutes per group, not in total for all of you.

Mr. Robert Baldwin: Okay, great.

The people who are with me today, you know what unions they're from. Collectively they have a membership of about one million members. All of them have members in the federal jurisdiction who would be covered by the Pension Benefits Standards Act and all of them are pension specialists with their own organizations.

I should say that within Bill S-3 there are three major areas of concerns that we'll be focusing on in our comments to you. One is what we see as a tendency to withdraw from the active regulatory process, and this is manifest most clearly in the provisions to stop reviewing plan documents. That issue will be addressed by Jo-Ann Hannah from the Canadian Auto Workers Union.

We also have some really serious concerns about provisions in Bill S-3 that appear to want to link the approval of pension plan amendments to solvency ratios for the plans. We have some very serious concerns about that proposal, and that will be addressed particularly by Mr. Erlichman and Ms. Block.

We also have some concerns about surplus, which Mr. Skerrett from CUPE and I will speak to. Plus there are a number of minor areas that both Mr. Skerrett and I will touch on in our remarks.

With that, I'd like to turn it over to Jo-Ann Hannah from the auto workers, if I could. She'll speak primarily to this question of where the regulatory process is going.

Ms Jo-Ann Hannah (National Representative, Canadian Auto Workers Union): Thank you.

In addressing the issue of the supervision of pension plans, the summary to Bill S-3 states that OSFI would focus on the funding, not the planned text amendments. The proposal would be that the staff would only inform a plan administrator of an amendment that was unacceptable. So rather than having that process where the plan administrator finds out whether it is or isn't acceptable, they only find out if it isn't.

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While that might sound like a reasonable approach, there are some problems with that approach. First there's the time factor. It takes a long time for a pension plan amendment to be reviewed. So you could have a situation where the administrator just assumes it was accepted, when in fact it wasn't. It was just taking a long time to inform the administrator it hadn't been accepted.

I think this also starts to make the review process less important. If anything, because the pension legislation is very complex, administrators often have a lot of trouble interpreting the regulations. There really needs to be an open dialogue between OSFI and the plan administrators to discuss the interpretations and make sure everything is being administered correctly. One of the concerns is that this is leading toward a more slack environment for the administering of pension plans.

I also want to say that OSFI is the key actor in looking out for the interests of the pension plan members. You have the plan administrator, who is most likely going to be the company, so even though they want to interpret the legislation fairly and accurately, they're always going to be interpreting according to their own interests. You have the actuaries, who are paid by the employers to do that work. So really, the independent body here is OSFI and it plays a very important role in looking out for the members' interests.

One of our suggestions is that when an amendment is filed with OSFI, the employer or the plan administrator be required to inform the union of the amendment that's been filed, so we can also act as watchdogs on the process. We may have our own concerns about the amendment that we would want to raise with OSFI and the plan administrator.

We think there are several ways the union could be involved in the process, just to ensure we have a keener environment for the registration of amendments. We'd like to see something more like what we have in Ontario, where the employer is required to inform the unions of the plan amendments, including the application for surplus withdrawal, and any amendment that may adversely affect plan members.

There's also a provision in the Ontario act that allows the union to go down to the pension commission of Ontario and review any employer's document. When I phone OSFI to see if I can review documents for one of our federally regulated companies, it says “No, go to the employer.” “Well, I wouldn't phone you if the employer was being hospitable and allowing me to come in.” So there are ways of building a better relationship between OSFI and the unions, because we will be looking out for our members' interests in the administration of the pension plan.

The fourth and final point, which we did not include in our submission—it is in the CLC submission, and I think it's a very good one—is that the highest body should not be the superintendent. There should be a pension commission, as we have in Ontario, where you have representatives from labour and from the employer's side, as well as academics, who adjudicate the disputes but also establish policy, which is very important, because you have the input from the different stakeholders developing those policies. They supervise the superintendent and the staff. It creates an environment that is very comprehensive in looking at different policy issues and also a very open process where all the stakeholders feel they have some input and continue to be involved in a topic that can sometimes be very complicated and stand-offish for some.

Those are my remarks.

The Chairman: Thank you very much, Ms. Hannah.

Who will follow? Mr. Erlichman.

Mr. Robert Baldwin: Mr. Erlichman will lead off the comments on this issue of linking plan amendments to solvency ratios.

The Chairman: Thank you.

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Mr. Louis Erlichman (Research Director for Canada, International Association of Machinists and Aerospace Workers): Thank you.

I want to start by making it clear to members, if they're not aware, how important defined benefit pension plans are to the incomes of seniors in this country. There are approximately five million members in registered pension plans. About 90% of those are in defined benefit plans, and registered pension plans account for about 20% of the income of Canadians over age 45.

We're talking here about what I'm sure you'll consider a technical area and an area that is difficult to understand, and I want to make it very clear this is not a minor technical change. I'm talking specifically about proposed paragraph 10.1(2)(b) of the Pension Benefits Standards Act. This is an amendment that says there cannot be an amendment to a plan that lowers the solvency ratio of the plan below a prescribed level. That probably sounds like gobbledegook. I'm sure it sounds very technical. I'll try to explain what that means and condense my two-day pension funding course into a couple of minutes here for you.

Defined benefit pension plans are operated on the basis that actuaries regularly, at least once every three years, calculate what they forecast the cost of that plan to be. They make a forecast for the next 50, 60, or 70 years. You can be in a situation in a plan where benefits are being paid out to members or beneficiaries 50, 60, or 70 years down the road. So they have to make all kinds of assumptions about rates of return, turnover, mortality, and a variety of things well down the road.

Actuaries typically do two kinds of valuations. One is called a going concern or an ongoing valuation, which assumes the plan goes on forever. The second kind of valuation, which has only relatively recently been added, is called a solvency valuation.

A solvency valuation basically asks what would happen if the plan terminated at this particular point. It's done with respect to a point some time in the past. You would do a solvency valuation and a going concern valuation now as of December 31, 1997. Both of these valuations are snapshots; they're sensitive to assumptions, and they're not magic.

Right now the rules say you have a solvency deficiency if the solvency ratio is less than one. In other words, if the plan were to terminate as of this date in the past, given all the assumptions and everything else the actuary has made, we don't think you would be able to pay off all the benefits. It's a snapshot. Right now, if there's a solvency deficiency, it has to be paid over five years. That's common across jurisdictions in the country.

This legislation proposes that if there is a solvency deficiency—an amendment that creates a solvency deficiency, and you'll get that any time you make an improvement to a pension plan in which you're improving past service that's service prior to this date—it will be paid off immediately. This is a really fundamental change in the way plans are funded. I don't think it's an exaggeration to say I'm kind of doubtful how many defined benefit pension plans we'd have in this country if these rules were in place 30 years ago. We'd certainly have one hell of a lot fewer.

In one sense you would look at it and ask what's wrong with improving the solvency of pension plans. What's wrong with tightening these things up? What's wrong is there is no clear reason why, in the same way you amortize or pay off a mortgage, this is a problem in pension plans. We've tried to find out from OSFI why it is proposing these changes. They tell us there have been cases—more than one and fewer than ten, and it's not very clear which case isn't and so on—as to why they're bringing this in. We've seen no evidence that there's a real problem.

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The fact of a plan having a solvency deficiency at a given point is not evidence that the plan is in financial difficulty or there's been anything imprudent done. In fact, quite commonly now plans are in a fully funded or a surplus position on an ongoing basis, but because current interest rates happen to be somewhat lower and those rates are prescribed in the way you do a solvency valuation, you have a solvency deficiency, but the plan on an ongoing calculation, which is done on different assumptions, is in surplus.

This is a real straitjacket, this proposal, for pension plans. At a time when the government is tightening up on public benefits, when, if anything, there's going to be greater expectations out of the private pension system, they shouldn't be putting this kind of a straitjacket on.

We have heard from OSFI that I guess they're considering being flexible. In the past they've talked about a solvency ratio of 105%, which means the plan has to be in fact overfunded before they would allow an amendment. Now they're saying maybe that figure's too high, and maybe there are other kinds of alternatives.

Our concern is that if this legislation passes, and proposed paragraph 10.1(2)(b), that's the last we'll hear of it; the government will pass an Order in Council and there will be a prescribed level. Our problem is not with 105% as opposed to 102% or 98% or something. Our problem is with a fixed level.

If there are problems—and again, we're not all that clear as to what the problems are—we're not sure that setting any fixed level is going to deal with those problems. They talked about consent benefits. Those are benefits where supposedly the employer has to consent before the benefit is offered. Plans have been underfunded because those were actually automatic benefits but treated as consent benefits. This particular clause won't deal with that.

There are other ways to deal with these problems, if there are in fact problems. We would very much hope that this committee would specifically delete this clause.

If there are problems in terms of funding, in terms of long-term plans and imprudent actions in various plans, then let's sit down and look at what the real problems are and figure out some way to deal with them. We're very concerned that this piece of legislation and this one particular clause is going to cause an enormous amount of difficulty.

The Chairman: Thank you.

Mr. Baldwin.

Mr. Robert Baldwin: I think Sheila Block wants to address this issue, speaking particularly to the situation of flat benefit plans, which are the most common type in the mining and manufacturing sectors.

Ms. Sheila Block (Research Associate, United Steelworkers of America): While we would echo all of the concerns that have been outlined so far, I'd like to clarify the devastating impact this clause would have on the majority of our members' plans.

To explain the differential impact on the different kinds of pension plans, I need to give you a little bit of background on how different plans are structured.

There are two basic kinds of defined benefit plans. The first is a final average earnings plan. These are plans that are more prevalent in white-collar occupations and in the public sector. In that kind of plan, your benefit is a percentage of your final earnings. It can be over the last three years prior to retirement and it can be up to 2%. So it's your final earnings times some percentage times your years of service. That's how your benefit under that kind of a plan is defined.

In flat benefit plans, your benefit is a certain dollar amount. You would get $40 per month per year of service, or $35 per month per year of service.

There are two fundamental differences between these two types of plans, and they have a major impact on the funding.

The first is that the final average earnings plan, which is more prevalent, as we said, in the public sector and in management, escalates automatically with wages. When your wages rise because of inflation or when your wages rise because of increased productivity, your pension automatically goes up.

That's not the case in flat benefit plans. In flat benefit plans the level of benefits has to be continually improved and renegotiated. Otherwise, your benefit is eroded by inflation.

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In addition, final average earnings plans, because these benefits automatically escalate, have to be funded according to OSFI regulations and the regulations in the various provincial jurisdictions, according to what the benefit is expected to be at retirement, so that when you're trying to find out how much money needs to be put away today and what the funding requirements are, there is an anticipation of the increase in wages.

In final average earnings in flat benefit plans, the plans that are more prevalent for our members, where your benefit is something like $40 per month per year of service, they're funded at the current level of benefits.

The reason I'm going into this kind of detail about the funding is to explain the fact that in order to improve a flat benefit plan, an improvement in a flat benefit plan is automatically going to create an unfunded liability and almost always also results in a solvency deficiency. If employers had to pay off this unfunded liability all at once, the 105% level that we've been hearing about, they would be very reluctant to agree to that kind of plan improvement. If our membership couldn't negotiate this kind of a plan improvement, they would frankly be very ill-advised to participate in a flat benefit plan, because without those improvements your benefits are constantly being eroded.

In general, we would say that often a final average earnings plan is a better form of pension, because you automatically have those increases. But there are a couple of important benefits in this flat benefit plan that we need to point to. One of these is that in cyclical industries they're very important because they give the plan sponsor, the employers, more flexibility about how to time improvements.

A good example is the steel industry during the recession of the early 1980s. Our pension plans were not improved in negotiations. In the late 1980s, during the steel boom, we had a big improvement in our plans, and that allowed the plan sponsors, the companies, to time how they were going to make these contributions to these plans.

So the devastating effect that this regulation will have on flat benefit plans will essentially mean that this form of pension benefit, which again primarily benefits blue-collar workers and is of benefit to plan sponsors and employers in cyclical industries, would no longer be feasible if the legislation goes ahead as is proposed.

Thanks.

The Chairman: Thanks, Sheila.

Kevin Skerrett.

Mr. Kevin Skerrett (Senior Research Officer, Canadian Union of Public Employees): Thanks very much for this opportunity to speak.

I would like to start by simply saying that CUPE shares all of the concerns expressed this morning, in particular all of those outlined in the written submission from the CLC.

I'd like to take my short time this morning to outline that we have these concerns about the substance of the bill, but we have also a number of ideas about how the legislation and the federal jurisdiction could be improved and developed. I would like to start with a short list of positive suggestions, things that could have been considered and maybe should be considered by the committee and by the government in the future.

First and foremost, and this connects to what I was saying, I think we would all appreciate a more developed consultation process, in particular, an opportunity for the representatives of plan members to address these kinds of questions. I don't speak for everybody, but I think we were a little bit surprised by how serious and how dramatic the shift is as captured in Bill S-3. As Louis suggested, these are not minor technical amendments. This is a very big change of direction for pension regulation in the sector.

If we had such a consultation, we would probably have a number of suggestions to make, including, among other things, some improvement in the provision for employer access to pension fund surpluses, both in the event of plan termination and in an ongoing plan. This was addressed by several others, so I'll be very brief.

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Pension fund assets, including all surpluses—at least this is CUPE's perspective, and I believe it's widely shared in the labour movement—are plan members' deferred wages. They are a product of the negotiation process at the bargaining table and the sacrifices that workers make at the bargaining table to not only contribute their own earnings but also urge their employers to make a contribution on their behalf.

As the CLC submission points out, employers will often argue that since they face the downside risk in the event of unfunded liabilities or deficiencies, they should gain from the upside in the event of a surplus. The fallacy of that is that when there are deficiencies and employer pension costs increase, those risks are passed directly on to workers, to plan members, when they go to the next round of bargaining. When pension costs increase for an employer, that is seen at the bargaining table.

So our suggestion is that the federal legislation would be greatly improved if it were to follow the Ontario legislation in respect of plan terminations, where union consent is required for any surplus distribution to the employer in the event of termination, or, in the absence of a union, a two-thirds vote of plan members and former members.

In the event of ongoing plans—this is not what's in the Ontario legislation, but this is our feeling—no access to surplus should be allowed to the employer in an ongoing plan, particularly given that so many plans are in serious need of improvement, particularly in their indexing provisions.

Those are my comments on surplus withdrawal. I have several other shorter ones.

The CLC submission points out, very valuably, that this review of the legislation was a great opportunity to strike a particularly regressive and annoying provision in the act that allows plan texts to provide for an offset of the death benefit paid from pension plans in the event of a pre-retirement death.

That offset, as the CLC submission points out, is really a punitive measure that has to be borne by survivors of a plan member who dies before retirement, and it doesn't really understand that the credit or the benefit that should be payable to a survivor is in fact a transfer of the equity that had accumulated on their behalf and a product of the sacrifices that both the plan member and perhaps their spouse had made through the course of their work life and their contributions to the plan.

This was a great opportunity to strike that provision. It should be struck, and I would encourage the committee to consider that.

Fourthly, as others have pointed out, this was an opportunity also to increase the involvement of trade union representatives in the supervision process. We all have a very difficult time, as some have pointed out, getting access to information, copies of plan amendments, and certainly anything to do with employer access to surplus. We have to work very hard to get ourselves involved in the process, and sometimes we are the ones to turn up violations of legislation or situations where an employer is not respecting the basic terms of the plan.

The legislation could well enable us to provide an assistance to the regulator in that supervisory function, certainly by keeping us involved in all communications—for example, copies of planned amendments, planned text, or anything filed with the office.

Lastly, I'd like to point out that every effort should be made to make sure that the Office of the Superintendent has the resources required to fulfil the functions described in the act. I'm not sure if the argument has been made that some of the changes suggested in Bill S-3 are on the basis of a lack of resources, but certainly that's a terrible reason for allowing the regulation and protections offered to pension plan members to fall by the wayside. These are very important protections.

The body of pension regulation is far stronger and more developed in jurisdictions such as Ontario, as has been pointed out, and there's no reason the federal jurisdiction should have any less protection or quality of supervision.

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I'll make just one last little point in conclusion. CUPE is also—I think all the unions here feel the same—very concerned about what is happening with the public pension system. As some of the comments have pointed out, some of what Bill S-3 is doing is either making it more difficult to bargain improvements in defined benefit pension plans in particular, or it's increasing employer access to surpluses that would be required to improve pension plans.

Now this is happening at the same time that we've already seen cutbacks to the Canada Pension Plan. We are all anticipating a terrible blow to future retirees with the elimination, or at least the proposed elimination, of the Old Age Security Program. It leaves a bit of a vacuum. If we're not going to have access to these indexed public programs that have been proven to be so crucial for retirement income, the only secure option for providing retirement income that would have some level of protection against inflation is in fact workplace defined-benefit pension plans.

Yet this legislation, which is quickly following Bill C-2 on the CPP, is actually making that harder. It may well make it far more difficult for unions and plan members to use the legitimate pension plan surpluses, which are a product of their contributions and the contributions made on their behalf, to be used to improve their pension plans.

The Chairman: Okay. Mr. Baldwin.

Mr. Bob Baldwin: Mr. Chairman, I think this bill may have been presented to you and your fellow committee members as a housekeeping bill. The fact crossed my mind that you may never have found housekeeping so complicated before.

Ms. Paddy Torsney (Burlington, Lib.): You should see my house.

Mr. Bob Baldwin: Well actually I had better reflect on my own too.

Anyway, my colleagues have covered most of the main issues we wanted to cover. But there is one thing I do want to say with this issue of funding improvements, though. You should know that the Pension Benefits Standards Act is tending to push pension plans in the direction of trying to pre-fund benefit improvements at the same time that the Income Tax Act, as amended in 1990, is really working against that possibility. There is a real conflict there that you should be aware of.

There's another thing that I wanted to say. I don't want to go back to surplus at the level of principle, but there are a couple of aspects of proposed section 9.1 in terms of detail that you may want to look at. You may want to make sure you're comfortable with that before the bill goes ahead. One of them is that proposed section 9.1 makes reference to a union executive representing the membership. Certainly we're reading that to mean that the union executive can vote on behalf of however many members of the union are covered by the plan when a vote is taking place. Certainly if that's the intent, we support the intent, but it's not 100% clear, so we would really like to know whether we read the intent correctly.

The other thing is that we're not sure why reference has been made here to “union executive”. The more common term you'll run into in legal documents covering union rights and obligations is “collective bargaining agent”. I have no idea whether a decision was made to use this language of “union executive” for any particular reason, or whether it was just an accident. I don't know. Anyway, you may want to clarify that.

I do want to turn to some of the less significant issues where from our perspective there may be a bit of confusion about the act. Bill S-3 includes some provisions with regard to reciprocal agreements among jurisdictions.

Reciprocal agreements among jurisdictions have been around for a long time. The basic intent of them in the past has always been to allow one jurisdiction, say Canada, to administer the law of another jurisdiction, say Ontario, in situations where members of a plan are in both the Ontario jurisdiction and the Canada jurisdiction.

Bill S-3 appears to be on the brink of breaking new ground in the sense that it seems to anticipate situations where a single jurisdiction might apply the law of another jurisdiction. That is brand new.

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I'm not sure how the government intends to see this implemented, but it certainly has to be implemented in a fashion that avoids the creation of jurisdictions of convenience. For example, the regulations in Newfoundland are not nearly as tight as the regulations in most jurisdictions. Obviously you don't want to see this new reciprocal agreement provision implemented in a way that ends up causing all plans that can to register in Newfoundland as a way of avoiding Canadian jurisdiction.

So it's a detail thing. I think it's important for the committee to see how that's going to be implemented.

Bill S-3 makes provision for pension councils. Again, the intent seems all right, but I guess we have three questions about them.

It's not clear to us how the pension councils really differ from the pension committees that are already provided for in the PBSA, and you may want to sort that out.

One problem we have with the provisions in the existing PBSA governing pension committees is that it appears to require a petition signed by at least half the members of the pension plan in order to trigger the requirement in law that a committee be created. Well, in the federal jurisdiction, you can imagine, there are some pension plans where that's an enormous hurdle to get over. Think of the banks, for example, or Air Canada. Unfortunately, the existing PBSA has been interpreted to mean that in this context, pensions cannot speak on behalf of their members with regard to triggering the need to require a council.

In other words, if you had a situation where half the members of the pension plan all belonged to one union and the union made a request to the employer to establish a committee, that would not satisfy the requirements of the existing PBSA. We think there should be some way for unions to be able to trigger that request effectively.

It's more a matter of principle than of detail implementation, but it is disappointing that the PBSA does not make any progress in terms of allowing plan members to demand anything more than advisory rights to the pension plan. It has been our view for years, and remains our view, that if plan members want to jointly administer a plan or jointly trustee the fund, they should be allowed to do so.

Finally, Bill S-3, somewhat surprisingly, has opened up the issue of information disclosure requirements. Again, we don't have a big problem with the intent, but we're not sure why new section 13 was created dealing with information disclosure, which is already dealt with in section 28 of the act.

We think the information disclosure requirements should be clear that union representatives are among the classes of people who have a right to ask for information. Among the types of information that should be provided the plan members on request, it should be clear that plan members can ask for a statement of the assets of the pension fund, not just the amount of the assets but how the assets are allocated, what securities are owned through the fund.

Finally, a small but annoying provision of the existing act is that the existing act says that plan members can get certain information at the head office of the employer. We'd like to see the reference to the head office deleted so an employer can't tell a union member you have to travel from Pouce Coupé, British Columbia, to Montreal in order to get information about the CN pension plan.

So those are some issues. They're quite detailed issues. From our perspective, they're not unimportant. I think I must say in closing, though, I'm disappointed that there was not more active involvement of labour organizations and organizations representing plan members in the development of Bill S-3.

As I noted a moment ago, there's a lot of housekeeping here, but it's not unimportant stuff, even the detail. We bear some responsibility for not having leapt at some opportunities that might have arisen, but neither OSFI nor the government really made much of an effort to engage us as this bill came forward.

The other thing I want to mention is that there are many parts of the bill whose implications will only be understood when the regulations are available. I think as a committee you should consider the possibility of asking for draft regulations. I know the House of Commons finance committee has done this in the past. It is really important to subject them to public debate.

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Finally, I want to repeat the comment of my colleague, Mr. Skerrett, that this whole regulatory review exercise seems to be uncoordinated and quite out of step with the government's positions on public pension plans, and I think that's regrettable.

Thank you.

The Chairman: Thank you very much, Mr. Baldwin.

We will now move to questions and answers. Mr. Ritz.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you, ladies and gentlemen, for your presentations today. A couple of points were brought up. One of them was that the 105% solvency benchmark, if you will, is a problem. It tends to be a disincentive to expanding the pension programs to maintain all of the goodies available in your workforce life—the dental plans and all those types of things.

Where should that indicator be so that we don't drive people away from the programs, or don't have the things in the programs that they want to see?

Mr. Louis Erlichman: The short answer is that it shouldn't be anywhere. I guess one of the points we were trying to make was that there is no magic to a specific number, that if there are solvency problems, they are going to have to be dealt with in different ways.

What I can say is that, for example, you could be in a situation where a plan for which the most recent valuation could be almost four years old is, according to that, in a surplus situation or solvency basis. In fact, employers might be taking contribution holidays. It may be totally inappropriate for them to be taking contribution holidays, but because of that particular number, they're allowed to do it.

The point, I think, is that there's this notion that there's this magic number out there, that, well, 105% is a little too high, so maybe we'll do 102% or 98%. But we'll have the same problem.

If they wanted to put a number in at a level like 50% or something like that, which said, okay, this is a red flag to OSFI to say that with this amendment, we are bringing the solvency ratio down to a particular level, so we now have to do some justification as to why that's okay, then maybe that's an option, but right now, the way it's written, you stick a number in there and—to quote a former prime minister—zap, you're frozen. That's it.

So that's the answer. In our various briefs we do talk about different and alternative ways of dealing with this problem. If the problem is that the plans are going to terminate and people are going to be left out in the cold, then you say, okay, perhaps the employer should have liability, as they do in other jurisdictions, to pay that off if there is an unfunded liability at that point, or there is a priority. If the plan sponsors made an imprudent improvement just prior to the plan terminating, or within a couple of years, then you say okay, we're going to reduce the priority for that improvement.

There are a lot of different ways to deal with it. This number, whatever it is, is a problem.

Ms. Sheila Block: Perhaps I could add something to that.

There are existing disincentives in the legislation. For instance, if you have a solvency deficiency, you have to pay it off over five years rather than over fifteen. It also presumes that pension plan sponsors are running around trying to make massive increases to their pension plan benefits. Our experience collectively bargaining is that it's difficult to push for plan improvements. Plan sponsors aren't all looking for ways to do this. They're looking for ways not to. They're very aware of solvency deficiencies. They use the problem of solvency deficiencies to argue against plan improvements.

This isn't a burning problem that needs to be immediately addressed, from our perspective.

Mr. Gerry Ritz: Thank you.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: I want to ask for your comments with regard to surpluses generally. Considering that a surplus may be generated by a better-than-assumed investment return, it could be that the actuarial assumptions were at the more conservative end, and over time it came up.

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I'm finding it difficult to think of cases where surpluses would be created for reasons other than errors and assumptions, unless plan benefits were withdrawn. Pension plans do have prescribed benefits, and generally they remain static or improve, which would be the other case.

So with regard to ownership, as it were, of surpluses, can you give me the arguments I need so I can defend the retention of surpluses when it's warranted within the plan?

Mr. Robert Baldwin: I just want to make sure I'm clear on the question. The question is how do you defend the retention of surpluses in the plan?

Mr. Paul Szabo: Yes.

Mr. Robert Baldwin: As a practical matter, they play an incredibly important role in pre-funding past service benefits. In recent years they have arisen most frequently, as you implied in your remarks, from actual rates of return on investment exceeding valuation rates of return.

The higher rates of return have in many cases been a response to actual or anticipated inflation, which is why the surplus debate in fact was closely linked to debates over how to handle the indexation of benefits in workplace pensions. Regrettably most jurisdictions walked away from mandating indexation of both deferred pension benefits and benefits in pay.

As we note, somewhat but not totally as an aside, in our brief to the committee, it's really regrettable to see the combination of a lack of strong action on the surplus issue and still no action on the indexing issue.

The Chairman: Jo-Ann.

Ms. Jo-Ann Hannah: Thank you.

Another way the surplus accrues—and we have the situation at VIA Rail right now—is you have downsizing, so you have a loss of members and the plan then becomes overfunded. What's happening there is the employees have set contributions they're making to that pension plan, and then the employer merely contributes as required. So we have the situation now at VIA where the employees make 55% of the contributions to that plan and the plan has a $63 million surplus.

At the same time, we have retirees who have not got a penny out of the indexing proposal over the last five years. VIA has not paid anything in indexing, because of the structure of the indexing formula. So we have retirees who have lost 20% of the value of their pension in the first 10 years of retirement.

What I find unacceptable is that now we're looking at legislation that would allow the employer to withdraw the surplus when we don't have good regulations in place to ensure decent indexing for plan members. It's troublesome to be allowing employers to now get at that surplus rather than looking at ways to strengthen the benefits the plan members are getting.

The position of our union is that companies can use surplus to cover their contributions. However, we also want the right to be able to bargain so that the employer is going to have to use that surplus to improve the pension benefits. If you start bringing in legislation where the employer can simply go and get two-thirds of the members to agree—as one of my brothers before me said, “Oh, you get $500 if you agree to this”, and they think, “Well, $500 is better than nothing, so yes, okay, I'll agree to this”—you're not doing anything to improve the pension plans for the current workers and retirees and/or workers who are going to come along in the future, because you've stripped the surplus from that pension plan.

The Chairman: Mr. Skerrett.

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Mr. Kevin Skerrett: I have one little point on where surpluses come from. Exactly as has been described, another important point that has led to the creation of surpluses, especially in recent times, is the big gap between the assumption on wage rates and the reality. Many workers have not been receiving any wage rate increases or have been receiving very minimal wage increases in recent years, and actuarial assumptions have them much higher. So really, the surplus is reflecting that.

For employers to gain access to those surpluses is like taking sort of the other half of their wage. Not only did they already beat us back by taking away our current wages, or a fair share of economic growth, but also for our retirement in the form of indexing or whatever other benefit provisions that surplus could be used to fund.

The Chairman: Mr. Erlichman.

Mr. Louis Erlichman: I guess the usual justification in defined benefit plans for the employer having the right to the surplus is they take the risk, right? If results are bad, we have to ante up, and if the results are good, we should have access to the surplus.

The problem with that is if in fact the risks are symmetrical, in other words, if the long-term assumptions that the actuaries made are realistic, if in the long term you're as likely to have deficits as surpluses, then you shouldn't be allowing anybody to take surpluses out of ongoing plans, because you need that money.

It's particularly inconsistent in this legislation, where they on one hand, in paragraph 10.1(2)(b), seem to be extremely concerned about prudence of improvements and everything else and protecting members in the case of plan terminations, that they should be opening up an avenue for employers to take surpluses out of ongoing plans. You can make a very strong argument that this is imprudent.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: In your knowledge of how actuaries work, do they take into account existing surpluses in determining funding requirements when they do their work, and if they do, then isn't that effectively withdrawing surplus?

Mr. Louis Erlichman: You can make the case, as you point out. In fact, the argument I made actually would say they should not even be allowed to use surplus for contribution holidays. But I was using the softer argument in the sense of saying at least they shouldn't be able to take the money out of the fund.

The Chairman: Mr. Baldwin.

Mr. Robert Baldwin: I would add the point that the speed with which the money disappears matters.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney: Thank you.

My question is actually outside this bill. I thought while you're all here I'd get an opinion. I hope that's okay with the committee members.

Some people have suggested, in changes to the seniors benefit, that we really need a fair bit more equity on pensions and on RRSP contributions, that one of the issues related to family income is the fact that generally it has been men who were out there and had the pension plan and the RRSP contributions, and that if we could change the system so that to get the tax benefit of putting into an RRSP you had to put equal amounts in spousal RRSPs, and rework the pension system so that we got fairness for both partners, we would actually create an income stream for the women—generally it has been women, not always, but it has been—and that would address some of the concerns over the seniors benefit. Have you guys thought about this at all—guys being a generic word?

Mr. Louis Erlichman: It's all thrown together. Any time you have a pension system that is related to pre-retirement income, to some degree you're going to be duplicating the inequalities of pre-retirement income.

Ms. Paddy Torsney: Right.

Mr. Louis Erlichman: It's wide open in terms of spousal RRSPs. The working spouse can put all their RRSP money into their non-working spouse's RRSP; that's open. There's a certain amount of credit splitting and so on available in the Canada Pension Plan, but basically, if you want to equalize post-retirement, then, number one, you don't go to something like a seniors benefit proposal that lumps all the family income together. That's a bad thing to do.

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Secondly, you keep and expand elements like OAS, which are universal, or used to be universal, and are not related to income before retirement. So rather than getting rid of OAS, which is what seems to be the proposal, you want to expand that element.

Ms. Paddy Torsney: There are three pillars: OAS on the CPP side, RRSPs, and pensions. What can we do to pensions to ensure better fairness?

Ms. Jo-Ann Hannah: I'm sorry, I thought your question was about tinkering with the tax system to encourage that third gear, which is contributions to RRSPs. To address that issue, our position is that we really need to strengthen the public pension system, which is what primarily benefits women.

We know; we've seen the statistics before the guaranteed income supplement was introduced, before some of the changes in the OAS. I think the poverty rate among elderly women was something like 75%. Today it's down to 45%. That's still shameful, but we can see the impact of the public pension system.

So our position is to improve the public pension system, to strengthen it. I think we have somewhat of a window now that the seniors' benefit hasn't actually been brought in. That's where our resources are going.

When you start looking at changes in the income tax system to encourage those contributions to RRSPs, you're really doing something for the high-income people. The tax revenue that is lost from giving people tax breaks to their own little private RRSP pension system is not as beneficial as what you could be using that tax money for in a public pension system.

The Chairman: Mr. Baldwin, please.

Mr. Robert Baldwin: If you want to look exclusively, though, at workplace pensions and their relationship to RRSPs, we've known for a long time that employed women are probably going to be less covered than are employed men, although the coverage has converged somewhat.

Let's imagine a world in which you want to move this thing along further. One of the things that's really important in terms of whether people with moderate and low earnings are in a pension plan is whether they're members of a union. If they're members of the union, the odds of belonging to a pension plan are hugely higher.

In fact, I think I saw some numbers over the week—

Ms. Paddy Torsney:

[Editor's Note: Inaudible].

Mr. Robert Baldwin: Yes, but facilitating the organization of workers in the personal services sector, the retail sector, the wholesale sector, is incredibly important in terms of whether a lot of employed women are going to belong to workplace pensions.

What has to happen in the world of pensions itself is encouraging the creation of multi-employer pension plans—that is, pension plans that cover a whole bunch of different workplaces—because in some of those sectors, individual employers will never run a plan. Another thing you have to do is deal seriously with indexing deferred vested benefits, because one of the things is that because women change jobs more often, they suffer much more regularly the limited indexings.

Don't encourage RRSPs as an alternative to pensions, because one of the things about RRSPs is that you cannot take account of periods spent outside the labour force without reducing benefits. You can do that in a defined benefit pension plan.

There's a little agenda for you.

The Chairman: Thank you, Mr. Baldwin.

Mr. Skerrett.

Mr. Kevin Skerrett: I have one little addition to that. The security of retirement income comes from protection against inflation, and the public pension system provides that with 100% indexing from the CPP and the OAS. We try very hard to negotiate indexing protection in our defined benefit pension plans as well, wherever possible.

RRSPs do not provide that, and it is nearly impossible to tinker with the tax system or change the structure of them in order that they do that.

What that means is that even if limits are expanded and there is some kind of extra incentive created, you are still ending up with a lump sum of money at the time that you retire or need that income, which you then need to somehow translate into a stream of income. It will be next to impossible to secure that stream of income to protect it against the effects of inflation over what is becoming a longer and longer retirement life.

I think that's really important when you think about looking at RRSPs as an alternative to the public pension system.

The Chairman: Thank you, Ms. Torsney.

Do you have a question, Mr. Valeri?

Mr. Tony Valeri: I have a couple of comments, and hopefully there's a little question in there.

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As a point of clarification, Mr. Baldwin, you indicated that in clause 9, you're asking for the replacement of some wording. You want “the executive of a union” to be replaced with “a collective bargaining agent”. I wanted to make sure I was correct in that.

Mr. Robert Baldwin: What I said was I was surprised to see they chose to use the term “executive of a union”, because “collective bargaining agent” is the more common terminology in law. I guess I was just inviting you to inquire whether there was some particular reason the government wanted this language, and if there's not, we probably would have been more comfortable if they had used the term “collective bargaining agent”.

Ms. Sheila Block: Part of our concern about that is that “union executive”, because it doesn't exist in labour legislation, could create individual liability for the individual union executive members; you'd have an individual without a particular amount of training making decisions that can have a large monetary impact on a large number of people. We don't want our leadership to have that kind of liability in that kind of manner.

Mr. Tony Valeri: Okay. Fair enough.

The other point I wanted to make is this. I think, Ms. Hannah, you made reference to the fact that in the Ontario pension system, a union does have access to documents, and that with OSFI you do not. I stepped away and checked, and my understanding is that although OSFI may ask, depending on who you get on the phone, whether you have checked with the employer, they do provide access to documents as long as your union has members in the plan. That's my understanding, just as a point of information, in the event it comes up again. So there is some similarity there between how Ontario deals with it and how OSFI is dealing with it.

Other points were made with respect to the idea of indexing and the one issue of premature death, and there being an opportunity here to deal with that particular aspect of it. Bill S-3 is really intended as a supervisory type of bill. I think what you were talking about are really plan design issues. I don't want you to walk away thinking this was a missed opportunity. I don't believe the intent was ever to deal with plan design issues within the context of this bill. The intent was to deal with ensuring the solvency of pension plans and some of the other supervisory issues that OSFI deals with.

The one question I do have is on the flat benefit plans, because a very good point was made with respect to the 105% ratio. I'm sure average earnings benefits would be better for most individuals. Is there a number that would satisfy you at all in order to deal with the flat benefit earnings plan? If that 105% dropped to 80% or 75%, is there something in your research that says— If there is in fact going to be a number, is there a number that would help us deal with the flat benefit issue you've brought up?

Ms. Sheila Block: There are a couple of issues here.

Our basic position is that there shouldn't be a number. There are a number of checks in the legislation as it stands, so there's a disincentive to try to improve benefits beyond some level that's affordable. An improvement in a pension plan is a very real cost to an employer, and the employer is going to be aware of that cost and the actuary is going to be aware of that cost.

I would echo Mr. Erlichman's comments that we don't know what the problem is that is trying to be addressed by this number. If we knew where the problem was more clearly, we could suggest a solution. Because these funding issues are such snapshots in time, we're really seeing the enormous impact that changes in interest rates have on them. At any given time, something that would be reasonable in a different interest rate environment wouldn't be.

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What is the problem you're trying to address? If we had a clear view of that, we could propose some solutions.

The Chairman: Mr. Baldwin.

Mr. Robert Baldwin: Just to repeat the point, our suspicion is there are qualitatively better ways of getting at the same problem. We've suggested some of those on pages 6 and 7 of the CLC brief.

I also want to say on the group life issue that while you're absolutely right in saying the general orientation of the bill is to deal with administrative and solvency issues, the bill in fact opens up several benefit issues. We would not have raised the group life offset were it not for the fact that the bill actually opened up the section dealing with pre-retirement survivor benefits. Our reaction was if you're going to open this up, why not clean up a really annoying provision of the current section 23.1 of the act. It's opened up in clause 15.

Mr. Kevin Skerrett: May I add a point on that as well?

The Chairman: Sure.

Mr. Kevin Skerrett: On the solvency issue, I found an interesting citation in the 1996 PBSA annual report that reports on the responsibilities of the regulator. It points out—now this would be between 1987 and 1996, so there may have been some changes since 1996—that since 1987, when the act came into force, 392 plans have terminated. Only nine terminated in a less than fully funded status, out of almost 400. In most of those nine, the loss of benefits to members was minimal and the plans had very small memberships. In one plan only, members received less than 95% of their pension benefit credits. In that case, the members received approximately 80%.

That tells me it is questionable how many plans are at risk of solvency underfunding. As Mr. Erlichman pointed out, it's not exactly clear how many plans are at risk here, but Bill S-3 is introducing a provision that would apply to all plans covered in the sector and create problems for many, if not most.

The Chairman: Mr. Valeri.

Mr. Tony Valeri: I think that was it.

The Chairman: Are there any further questions from the members? I don't see any further questions.

On behalf of the committee I would like to thank you very much. I would also like to thank the members of the United Steelworkers of America, the Canadian Labour Congress, the Canadian Union of Public Employees, the International Association of Machinists and Aerospace Workers, and the Canadian Auto Workers Union. This committee has really been helped quite a bit by all these groups providing a unique perspective on issues of the day. Once again, thank you very much.

Before you go I'd like to give you an early invitation this year to pre-budget consultation. As you know, the Minister of Finance has stated that for the next couple of years we'll have a balanced budget. So it's very important for this committee, as we enter the pre-budget consultation phase, to start hearing from people about what they think the values and priorities of the next budget should be. This year we will begin this a little earlier, on June 8, so perhaps you can get ready for that week.

Thank you very much. The meeting is adjourned.