Thank you, Mr. Chairman.
Good morning, honourable members.
I do appreciate the importance of the request to be here with you today. I do take your own inquiry very seriously, and I look forward to a very transparent and open discussion.
I believe I have ten minutes of opening comments. I'll try to be as transparent and direct as I know how, and I will try to address most of the issues. I do look forward to a quite robust discussion after that.
Before we get into the details, let me just say that not a day goes by when I do not think about the implications of our difficult decisions, which have hit both former and current employees. Nortel is a company with a very historic past, and I take this history very seriously.
When I came to Nortel three and a half years ago, many people said it was a mission impossible; but I, and many within Nortel, believed Nortel was a great global icon that could in fact be fixed. We did set a very ambitious agenda for the company, and together the employees made tremendous progress on multiple fronts. We fixed our accounting and legal issues, we improved the quality of our products, and we improved our cost structure. But most important—and this is specifically for the Ottawa-based centre for R and D—we went from legacy technologies to new technologies. We made significant investments, multi-hundreds of millions of dollars of investments, in technologies such as fourth-generation wireless and 4800 gig optical unified communications.
Just a year ago at an investor meeting in Toronto, we were very proud and had lots of enthusiasm in discussing how we had planned to finish the transformation and about the real prospects for sustainable growth going forward. Then, frankly, we hit a wall. The global financial crisis and recession compounded our challenges and impacted our ability to complete a transformation.
On January 14 we filed for protection from our creditors in Canada, the U.S., and parts of Europe. We did not take this decision lightly, but it was authorized unanimously by our board, after thorough consultation with advisers and extensive consideration of the alternatives.
Nortel today is not completely or solely under the control of Nortel management and the board. Now we have the active involvement of the court-appointed monitor and several creditor committees.
It is not where we want to be. We'll be the first ones to say that. But rest assured, we are pursuing maximized value for Nortel and are trying to preserve as many jobs as possible with the same passion I had when I came to this company three and a half years ago.
We are trying to run the company based on three principles. First is not to lose the customer. It's very important to give confidence to our customers that we are here to stay in business. Second is to operate in the mode of reality and to see the world the way it is, not the way we wish it were—but also, in that same world, to work with a level of optimism. Third, time is of the essence.
Nortel employees have done a tremendous job under very challenging conditions stabilizing our business and delivering outstanding service to our customers. Again, I cannot tell you how much I appreciate the support of not only our employees but also of companies and our suppliers during this period.
Let me move to the matters we are here today to discuss. I do realize the sensitivity of these compensation decisions. One thing that Nortel confirmed right from day one was that we would continue to fulfill all obligations to existing employees. This was a combination of continuing to pay base wages—we did freeze salaries for 2009—and also allowing vacation to accrue, and we continue to pay medical and health care benefits.
At the time of filing, we also believed it was very important to continue our annual incentive plan, and also to have some sort of a retention program for the most important employees. I'll just make a couple of comments here on both of these.
First of all, there's the annual incentive plan. It's available to virtually all Nortel employees—95% plus. It's an ordinary course of business to give incentives, and this plan has been in place for many years. It's very much an industry standard. We do view the incentive plan as very much part of the wages we pay to our employees.
The decision regarding the 2009 annual incentive plan was developed by management, with input from the Mercer consulting group and very active discussions and negotiations with the creditor committees and the monitor. It's based on achieving three very important targets. The first target is to maintain the revenues of the business. The second is for us to be able to fulfill very high customer performance matrices. The third is to preserve the cash balance.
In addition, since we filed, all equity base compensation programs have been terminated. As you also may know, prior equity awards have been cancelled. Therefore we no longer have the ability to compensate our employees with equity awards, which traditionally make up a very significant part of the compensations for management and the employees.
Now to our retention programs. Let me just make a couple of comments about the employee incentive program and the overall employee retention program.
In this company's situation and in a highly competitive industry, retaining key employees and preventing unwanted levels of attrition are critical to preserve the value and to maximize the assets for a company's stakeholders. We have two programs. One is a key employee retention program, and this is for 900 non-executive employees. So this is a rather large number of employees, unprecedented, but we thought this was very consistent with the significant challenges facing the company. In addition, for 92 of the more senior employees, we have our key employee incentive program, and this program is based on achieving very specific incentive targets. Executives who are participating in this program are required to waive their rights under previous change of control programs.
I personally chose not to participate in the key employee incentive and the key employee retention programs. I have also waived the rights to my change of control provisions.
With respect to severance, this is a most difficult issue. It has weighed on me greatly. Most importantly, the decision not to pay severance was not taken lightly. We have a great level of appreciation for the employees. They're highly skilled. And frankly, although I have been with the company only three and a half years, I have felt as a Nortel employee from the day I joined the company. However, in light of the economic reality of the company's constrained cash resources, particularly in Canada, and the fact that in the legal environment severance payments have equal weight with all other provisions for other creditors, we did not have a choice but to follow the legal jurisdiction. This was an extremely difficult decision. It was not taken lightly by management or the board of directors. It was made after extensive consultation with financial advisors and the monitor.
Let me move on to pension-related matters. I do think it's important to summarize that all moneys of Canadian registered pension plans belong to employees themselves. They're not available to the company or to the creditors. We'll continue to make both regular and special contributions to the pension plans, and we continue to make payments to our employees on a scheduled basis.
I know there has been lots of discussion in the press with respect to reducing the commuted value paid to employees who are getting out of the plans. Prior to filing, Nortel had said we've been paying commuted values at 100% based on exception to legislation, but starting in January 2009 we reduced the commuted value to approximately 86%, which is based on the estimated deficit shown in the last-filed valuations of December 31, 2006.
Unfortunately, since those last-filed valuations, the deficits have grown as a result of the well-reported declines of the equity markets, and we consulted with actuarial advisors and believe that the deficit is currently close to 69%. We asked for approval to go to 69%. This was approved, but I do think it's very important to highlight that the reduction was not designed to prejudice anyone but rather meant to ensure equal treatment of members and former members.
Let me just wrap up on two things. First of all, on my compensation, I do realize this is a very visible and explosive issue. For all the executives, myself included, we do try to follow a 50th percentile of the market for executives in the high-tech industry.
For executives, particularly at higher levels, most of the elements of the compensation program are at risk, meaning they are linked to individual corporate performance as well as to the stock price. For example, 88% of my compensation in 2008 was based at risk.
There is a significant difference between what's reported as compensation on the proxy statements versus the actual amounts received. For example, in 2009 the cash compensation was $1.29 million, which was 12% of the total intended compensation for that year. No bonuses were paid in 2008. As I have indicated, we have cancelled all equity awards--both the historical, and we're not giving any equity awards in 2009.
There have also been comments on pension benefits. For me, it is based on five years of active employment. I've been with the company for three and a half years. Assuming I'm with the company for five years, that pension payment is not guaranteed. It will be the same as all other unfunded pension programs. It will become an unsecured claim.
What I can guarantee to you is that where we're driving, with the utmost passion and commitment, is to optimize the value of Nortel and at the same time preserve the greatest number of jobs in this environment. I cannot overemphasize the strong appreciation for the employees and the empathy for the current situation. One of the most significant motivations for management, the board, and me as we're working around the clock is to optimize the value of the Nortel assets. The better the job we do, it is going to result in a higher recovery value for employees, pensioners, and all the other creditors.
I thank you for the opportunity to be here. I look forward to your comments and your questions.
Thank you, Mr. Chairman.
Thank you, Mr. Zafirovski, for appearing.
I'm sort of caught in a dilemma, because there are a lot of issues that we'd like to cover and that I'd like to cover. I'm trying to look at this from a balanced perspective. I requested that you appear because I don't think it's fair to hear just one side of the story. There are three sides to every story, as we all know. I would have preferred to have you speak after we hear the second panel, because I think it is in your best interests to speak afterwards.
I'm not going to try to play the part of an employee or former employee. We are conducting a study on the stability of our financial market, so that's the other angle I'd like to also address. How do we prevent this from happening again?
My time is limited. I only have seven minutes.
I know that certain members had already formed their opinions. They have taken sides and ignored the facts. You now have the opportunity to give us the facts.
The first question is going to be asked in a more overall global manner: how do we avoid this happening again? How could this come to a point where.... You said yourself that of the three criteria of Nortel, one is to keep their customers, but how are you going to keep your customers if you can't keep your employees or former employees happy?
You also said you want to operate in the real world. We are now operating in the real world. Things have changed. I understand they are changing more rapidly than you would like them to, but you're not government; you're a company. You have to be able to change--and change quite rapidly. You can't expect government to change, yet we saw in Obama's statement yesterday that people have to react in a more transparent fashion. Corporations have to report. They have to act in a transparent fashion.
You have an obligation. There are people out there who are living in the real world, the real world meaning that if you've promised them, after 20 or 30 years of service, and they are relying on a paycheque at the end of the month.... Whether that paycheque is $100 or $1,000 is not the question. The question is, if they are relying on it, if they have been promised that, and if they are at the end of their working career, we have to do something about that. There needs to be protection there.
Your third point was that time is of the essence. Well, when you're making a couple of million bucks, yes, sure, you have commitments as well, but when you're only making a couple of hundred bucks and you're trying to find money to pay your mortgage payment and make your credit card payments, what do I say to those people? Because that's what we're going to hear in the next hour. We can go around and pretend this is not happening, but that's really the question we are going to have.
Now, I'm not sure how you're going to answer that. You've answered some of the questions in your opening statement. The problem is that we are going to get the second panel, and they're going to come up with their version, and we are going to have difficulty reconciling both.
I'm trying to take a neutral and very transparent view of this. You're going to get pressure from other MPs who have already taken sides. The Liberal Party position has always been one of the centre, so we will try to address both. I will give you a couple of minutes, but again, we have seven minutes. Could you address some of those points?
Welcome, Mr. Zafirovski and Mr. Tay.
Obviously, Nortel has a significant impact on this region and many regions across the country. I'm from the Belleville, Quinte region. Nortel has had a long and storied history there, so I can assure you that I've heard from many of the retirees, pensioners, and of course former executives of Nortel.
There's isn't a person around this table who doesn't realize that the best pension guarantee that exists, of course, is a successful and profitable company. But we also understand that when difficulties do occur, pension guarantees do fall under the responsibility of the provinces. People ask if the federal government is off the hook, and I say, quite frankly, no, we have responsibilities as well. I think we, as federal legislators, have a responsibility to provide a regulatory environment that serves the best interests of both corporate and employee groups. Our purpose here today is to listen to the various perspectives, to see if we can come forward and deal with potential legislation and/or enforcement and/or guidance that we could provide that would be of benefit to both groups going forward.
As we travel through this difficult period, I personally--and a number of my colleagues and certainly my constituents from Belleville and many in the Ottawa capital region I've had direct contact with, and my colleagues as well--believe that more clarity is needed. The rumour mill reigns supreme on a little bit of everything, but when people are directly affected personally we really have to get to the very bottom of it to make an intelligent decision.
While Nortel was seriously reducing or in many cases eliminating pension benefits, I'd like to know.... I have three or four quick questions, and maybe you can give me a true or false to them, if you wish, and then we can move on rather quickly.
In the current job market--it's a tight job market out there--do you really believe it was necessary to offer large bonuses, given this market, simply to retain the people you have?
And thank you, Mr. Zafirovski, for being here today.
I'd just like to associate myself with my colleague from the NDP, and I hope you will be able to find the time to stay an extra hour to listen to all these people.
It's quite obvious this is an extremely sad case, I know you say for yourself, and more so, I would say, for the others in this room. But it is also for Canada. Before I came into politics I worked for the Royal Bank, and at one point Nortel was worth more in terms of market capitalization than the Royal Bank of Canada. And look where Nortel is today.
I've heard from some Nortel people about the possibility of government help. I'd just like to pursue a little bit of Mr. Mulcair's line of questioning.
In terms of your discussions, whether with Mr. Flaherty, Mr. Clement, Mr. Harper, or any other government officials, did you propose to them some sort of plan for the government to provide help, not so that Nortel would survive totally intact, but to maximize the number of R and D, high-skilled jobs in Canada?
We've had bailouts around the world and in this country. It seems to me that when you have thousands of high-tech, highly skilled R and D people, when innovation and ideas are the way of the future in this country, it's not only a loss to Nortel but it's also a loss to the country if all of those people go south of the border or elsewhere in the world and are lost to the country.
So did you put that case to the government, and if so, how did you put that case, and what did the government say?
Mr. Zafirovski, it is a pleasure to see you today; but after listening to the answers you gave to my colleagues, I believe that this is a sad day for our democracy and our parliamentary system. You have certainly met with representatives and ministers from the government to talk about your financial standing. Your employees are here today, and are the primary asset of your company. They were not at all considered in discussions about a possible bail-out plan the government would have been involved in. I find this very regrettable.
Currently, the employment insurance program has many shortcomings. In light of recent discussions, everyone knows that those who are not receiving employment insurance benefits will have to wait until an agreement is reached. The government does not care about people, about the public, about its citizens. This is what I find regrettable.
You state that you did nonetheless consider your employees. In my opinion, the employees you must count on are your greatest wealth. How can you look forward to the future if you no longer have the confidence or the appreciation of these employees whom you are not even considering?
You agree to cutting back the pension that they have worked for all their lives. I put myself in their shoes. When working for a business for many decades, there are certainly many things that one does not like, and even uninteresting work must be done. However, one expects that one will be recognized for all of these efforts at the end of a productive period. Yet now employees are being deprived of everything because of current difficulties, and at the same time, the executives are still going to receive millions of dollars in bonuses. This is considered normal, because the executives need the bonuses to continue their work.
I deplore this situation, and I truly hope, as all my colleagues have expressed, that you will stay and listen to what these employees have to say later on. It would have been good to hear them before hearing you. That would have helped us understand their distress and their situation.
Can you summarize your position on all of this?
I thank all members of the committee for this opportunity to speak on behalf of retirees and former employees of Nortel.
The committee I represent includes Nortel retirees and former employees and was formed after Nortel filed for bankruptcy protection on January 14. We represent some 17,500 pensioners across Canada, the bulk of them in Ontario, but 3,000 in Quebec and 2,000 in other provinces. Of that, there are another 11,000 people who are represented in the health plan. There are 750 pensioners who receive additional benefits, and over 1,000 severed employees who are affected by what's happening at Nortel. Today, in other discussions, I've discovered another 450 employees on long-term disability who are being affected by what's happening with Nortel.
Why are we here today? We wish we weren't here. We wish there were a viable solution for Nortel to emerge from CCAA, but there's no indication that such a plan is forthcoming. In fact, the press is full of indications that the pieces will be sold off and what will be left will be a rump of the corporation.
There is a campaign to save Nortel that's under way from former executives, and I wish them well, and I hope they get enough oxygen to breathe. But the reason I am here is I must plan for the worst outcome. That worst outcome will be the windup of Nortel.
Who is affected? It's the registered pension plan. It's underfunded. Yes, the pension assets are segregated from the corporation, but there's a significant piece of underfunding in the plan itself, to the tune of about $1 billion. That represents two plans, both the negotiated plan and the non-negotiated plan. There are union retirees who are also affected. That plan, as Mr. Zafirovski has said, has dropped 31% since the last evaluation. Under CCAA and BIA, our pension deficit will sink to unsecured creditor status.
The retiree health plan and other benefit plans are underfunded. That whole area is extremely opaque. Pension plans are at least public, and there's information available. So unlike the registered plans, it's not funded, it's paid out of Nortel revenues, there is zero visibility in terms of the long-term viability of these plans, and there's no federal or provincial government oversight. These claims will actually sink to unsecured creditor status. And in the case of putting pensions and the health plan together and the loss of that for some of our members, it would be welfare for some of those people.
In preparing for this, I started looking at the long-term disability group. Again, there are no federal or provincial standards for long-term disability. The plan is administered through Nortel's health and welfare trust, and is funded, again, through Nortel general revenues on a quarterly basis. It is a self-insured plan. There is no backing of any insurance companies. If Nortel goes insolvent, the monthly payments to those long-term disability people will sink to unsecured creditor status. If they ever make it to the pension plan, they'll lose any accruement of those dollars in terms of making it into a pension plan. For them, they'll lose crucial health care. Again, it means welfare for some, for people who are ill-equipped to look after themselves.
Finally, there are the severance people. Employment standards acts, from what I understand, are a lot in the provincial domain, but those standards are being overridden by CCAA and BIA. Those severance claims will sink to unsecured creditor status. As we all know, the severed employees now have to move on to EI and get handouts from the taxpayer.
Who are the unsecured creditors? Let's look at number one: the bondholders, a sophisticated bunch of money managers—sophisticated not only on the bondholder side but in the corporation. They negotiate between equals. They do it for a living. The bondholders take an active view of risk management, of what happens if the corporation goes bankrupt. They look at the probability of default. They shorten the maturity dates on bonds, they ask for higher yield, and they're clever enough to make sure they get cross-guarantees between the two jurisdictions of Nortel, between the U.S. and Canada. In this environment, the original bondholders are actually selling or probably have sold off a lot of their assets, and they've been picked up by vulture bondholders. The information I have is that those bonds are probably going at 12¢ on the dollar.
I don't know what the outcome is going to be if Nortel goes insolvent, but as an unsecured creditor, I'm going to get something north of 12¢ on the dollar. Let's call it 20¢ on the dollar. But I and all of the people I've talked about are going to take a significant haircut.
I'm worried about other jurisdictions. This is a very complex case. Nortel is a large organization. From what I understand in Nortel Canada, there are very few assets. There is little cash, and a global R and D centre with huge costs associated with it. So there are many liabilities.
One of the most significant of the liabilities is what's represented by the group I represent—$1 billion at least from a pension underfunding, plus another maybe $300 million if you add up all the other issues. Outside Canada there's cash, but it's cash that probably can't be reached, because it's tied up in China, which has policies that don't allow you to bring cash back to Canada.
My concern as a creditor is to make sure that the rightful assets belonging to the parent corporation come back to Canada. I am also concerned about other jurisdictions trying to reach out and grab assets in Canada, where there are limited Canadian assets.
Let me move on to the retirees. We are not a sophisticated bunch of money managers. There is an inequality between what the company understands of the pension plan and what the retirees understand. We've put in a lifetime of work and invested in our pensions and our benefits. For us, risk management was all about whether we were going to live too long or too short, whether our spouses would be looked after, whether we'd have a good health plan if our health declined. We never contemplated company bankruptcy.
For the disabled employees, their wage replacement and health care claims are going to sink to unsecured status. Any pension accrument will sink to unsecured status. These people are not eligible for EI or WEPP—all they're going to get is their CPP disability. For the severed employees, there will be no severance pay. Most employees did not even contemplate that they weren't going to get severance. It's highly unusual for people not to be paid severance as they leave the corporation. These people have been forced onto EI, forced to go on at the taxpayers' expense.
What we have here is an egregious imbalance. This problem has been known for a while, and it's not been fixed. People such as pensioners and the disabled and former employees sink to the bottom of the ladder. In today's economic climate, things are going to be brought forward. It's not just about the assets, or even the tax implications. The bondholder is going to get tax write-offs, tax gains. I don't know what we're going to get. We're going to lose money, but I doubt if we're going to be given any treatment from a taxation point of view.
I'm here today to ask you, the members of Parliament, to remedy this situation. The CCAA and BIA sinks us down to unsecured creditor status. I urge you, with the utmost urgency, to grant higher-priority ranking to pensioners, disabled employees, and severed employees. I ask you to handle their claims.
This is a federal jurisdiction. Pensions are provincial issues, but this is a federal jurisdiction. Two days ago there was a unanimous vote in the House, and one of the items in that unanimous vote was to give pensions higher priority in bankruptcies. That unanimous agreement has now been shifted to a study by some other committee. I think what's interesting about the proposal here today is that it requires no new government spending. So there's an opportunity here.
Government, you're investing in infrastructure today to protect the economy. Could you please invest in the legal framework to correct this egregious imbalance? This legislation is shovel-ready, and I implore you to act quickly.
We appreciate the chance to speak to everyone here. In a way we've been hiding in the back because our benefits were still being paid up until now, and we appreciate that. You don't know how much we appreciate it.
As people on LTD, we have no options. We basically ended our working careers when we qualified for LTD. Now that things are getting to this stage, probably only a small percentage of the people on LTD recognize that their benefits might be at risk. We know very well how much they are at risk from doing a lot of research on the subject.
We wonder why Nortel could get tax benefits by storing the money to provide our benefits in a health and welfare trust but did not insure this LTD benefit, as specifically recommended by the Canada Revenue Agency's bulletin on the subject. We also wonder why our government has no way of enforcing that requirement and tells us that we need to come to the finance committee to ask them why it was not protected and what the finance committee can do about it.
Right now, we're still being paid. We appreciate that. We also appreciate that it could end at any time, and we have a lot of years before we can get to our pensions, if there are enough pensions left, thanks to all the efforts of the pensioner group. During the time we're waiting, which could be up to 24 years for some of the people that we know in our group, we will no longer get our wage replacement. It was 70% of our original salary for most people. That salary could be from a long way back; in my case, it is in 1994 dollars, so that was a pretty small salary to start with. From that, if we get 20¢ on the dollar, I'll be making about 20% of the salary that I was getting from the LTD pay.
We will lose our health benefits. Many of us, in addition to making great use of the health benefits provided by Nortel, also have significant out-of-pocket health costs, so this is another factor that really worries us. We can't qualify for EI because we weren't paying into it, nor can we qualify for the wage earner protection program.
We will be left with the CPP disability. That will be about 20% of what we were making on our LTD. CPP disability was designed to provide 25% of the basic minimum that people need to live on.
As Nortel employees we deserve better than that. Instead, some people on LTD will end up possibly on welfare. We will end up dependent on the government--not in a proactive way, in that they protected our benefits, but retroactively, by applying for welfare. Some people in our group will end up in the Royal Ottawa Hospital, and one already has--that's really hard for us to see--because of all the stress this is causing us.
I'm an independent financial analyst.
Nortel was operating at a cost structure above what its revenues could support, and it's burning cash at the rate of $1 billion annually. All the figures I'm giving today are in U.S. dollars.
The financial crisis is causing a large drop in telecommunications equipment sales throughout the world, and Nortel, due to the uncertainty of whether it's liquidating or not, is having its revenues decline at a much greater rate than its peers in the industry.
I'd like to emphasize that Nortel chose to enter bankruptcy protection in January 2009 by missing a $107 million interest payment, despite the company having $2.5 billion of cash on its balance sheet. Nortel's next major principal repayment is not until 2011, when $1 billion of debt will need to be repaid. That, of course, is two years from now. We're dealing with much more stressful situations in other bankruptcies that already have debt repayments that cannot be refinanced.
Nortel management has indicated it has volunteered to enter bankruptcy protection to avoid paying severance. We don't have detailed estimates from the company, but on the assumption of the 5,000 jobs cut around the world, the estimated bill for severance would be approximately $500 million, of which we would anticipate Canada to be approximately $100 million, in U.S. dollars.
Under the current CCAA and BIA laws, it is correct that severance does not have preferred priority over unsecured creditors. I would like to note, however, that it is prevalently the case that numerous companies that have filed for CCA protection enter in the beginning days of the process to seek approval from the judge for the payment of severance. In this case, they have chosen not to do that and they have said the purpose of the filing was not to pay severance in order, as we heard many times today, to optimize the value of Nortel--“we need to pay bonuses to the current employees to preserve the value of Nortel”. Obviously, severance and making special contributions in order to top up the pension fund deficit is, in his mind--Mr. Zafirovski, for respect--depleting value for the estate. From my perspective, those statements of optimizing value have a lot to do with maximizing the value for the bondholders by not paying the severance and the pension fund deficits around the world.
Indeed, Nortel is definitely technically bankrupt. The value of the assets on the pending sales, as in the early stages of ongoing concern, are considerably less than the estimated $11 billion of claims. I've estimated, based on what we can find from the updated actuarial reports, that the employment-related claims in the world are approximately $5 billion. So half the creditor claims that are currently being sought for compromise are in the employment-related field: severance, disability, pension fund deficits, not only in Canada but in the rest of the world.
After listening to the presentation of management earlier today, it's very clear to me that they are no longer vigorously pursuing Nortel as an ongoing concern. All the phrases are “I tried to rectify the company”, “I really believed in the turnaround”. These are all in the past tense.
This group, both the terminated employees and the retirees, would like to have an ongoing concern to better enable the payment of the pension fund deficits. And more importantly, they would like to have an ongoing concern to provide research and development jobs in our country for the children of the retirees, the engineering graduates, the mathematics graduates, the physics graduates, and so on, so they could have gainful employment in their pursuit of innovation within Canada and not have to go to the research and development centres of the foreign buyers of the Nortel businesses.
I'd like to note that it is erroneous for the government to say it is reluctant to intervene in the provincial jurisdictions for severance and pension benefits standards. The federal government administers the Companies' Creditors Arrangement Act and the Bankruptcy and Insolvency Act. I don't have time today to go into all the details of this, but I urge everyone to examine the Court of Appeal of Ontario case by Justice Farley. When the Superintendent of Financial Services of Ontario asked his court to approve the special contributions in order to replace the deficit of the Ivaco pension plan, he turned down the request--even though that would have been in the normal course of provincial legislation--on the premise that Ivaco would be liquidating, and under the BIA the pension deficits and the special contributions were pari passu with the unsecured claims. He was unwilling to execute the protections that were in the Ontario Pension Benefits Act.
For this reason, and as a result of what we have heard today about the premise for not paying the employment-related claims in the Nortel case, we ask for an emergency amendment of the Bankruptcy and Insolvency Act to give super-priority to the severance and pension deficits over the bondholders and the unsecured suppliers in this situation.
A statement was made that there were no secured creditors in this company. I'd like to note that $200 million of debtor-in-possession financing—non-arm's-length financing--has come up from the United States. It has been granted super-priority status with respect to the cash disbursements that will come from the sale of assets by Nortel. It is a Canadian-based company, although there are multiple subsidiaries in multiple areas of the world that have their own legal corporations and their own specific indentures and considerations.
A point was made Don Sproule, the head of the retirees protection committee, that Canada is in a particularly precarious situation. Even though Nortel has a 115-year history and is the Canadian base of operations for half of the research and development of Nortel in the world, it is primarily a cost centre. This is typical of a number of successful international companies.
Due to the inter-corporate transactions between Canada and the U.S. on internal transfer pricing agreements, inter-corporate loans, and so on, it is our firm belief that unless there is government intervention there will be limited cash from the disbursements of the sales of Nortel available for provision of top-ups to the pension plan and severance--so much so that we could have nothing in Canada, or perhaps ten cents on the dollar.
I think it is very optimistic at this point, based on the inter-corporate transactions without intervention by the CEO of the company, to disband with internal contracts to ensure that the appropriate amount of money is dedicated for the payment of the pension deficit.
All of these contracts were conveniently rendered null and void when Nortel filed for creditor protection under the federal CCAA legislation. To our even further surprise, we were now to be ranked equal to unsecured creditors and could only hope to expect pennies on the dollar in the settlement that could easily be more than a year away. We also discovered that severance and pension issues are only protected under provincial jurisdiction. But under federal CCAA protection, all provincial requirements are no longer honoured.
At the time the company filed for creditor protection, it was sitting with over $2.5 billion of cash on its books. It boggled all our minds to understand how creditor protection filing was needed with that much cash available. We were, only weeks before, assured by the CEO that we had liquidity well into Q4 of 2009.
This is what we need to fix. CCAA and BIA legislation needs to be revised to give super-priority to current and former employees' claims in these circumstances. Employees and pensioners have no recourse with a bankrupt company and therefore cannot be treated as a commercial creditor. Employees and pensioners need to be acknowledged as a unique group. Please ensure CCAA cannot be used, as it has in this case, to circumvent provincial employment standard laws and to hide from employee financial obligations for severance and pension top-up requirements. Please reference the Mike Zafirovski e-mail I've provided in my brief from 1/30/09. It clearly states it was key to Nortel's liquidity going forward that severance obligations be waived through the creditor protection process.
Unfortunately, despite the clear focus on liquidity and finding a way through its debt minefield, the company is now paying $45 million in executive bonuses and paying employee incentive bonuses of an estimated $68 million internally. This does not sound to us like a company that is trying to find a way out of financial straits.
This path is an all-too-easy way for employers to unload employee obligations onto the Canadian government and its taxpayers. This path pushed an expected 1,100 employees onto unemployment insurance at an estimated cost to us as taxpayers of $20 million—a loss of $34 million in income taxes we would have paid on the severance.
All told, by skilful execution of this legal plan, Nortel avoids paying an estimated $125 million in severance obligations in Canada, $1.25 billion in pension obligations, $200 million in post-retirement health and other benefits. They also got to take out of the pockets of all Canadians about $54 million without a single shot being fired. Wow, this is a pretty sweet deal for them.
This was all accomplished using the loopholes that exist in this aging CCAA and BIA legislation and with the help of $5.5 million per month of lawyers. This needs to be fixed, and fixed now, as it has been and will be used by many more companies that will go into bankruptcy in the future.
We, as the severed employees of Nortel, want to ensure this indignity is not propagated onto any other hardworking Canadian employee in the future. We want to ensure the laws are amended and ensure that employers such as Nortel are forced to honour their employee obligations and do the moral and ethical thing for the employees. Nortel and its executives need to be made accountable to this case, and before any bonuses are paid out, they need to be made to honour their severance and pension commitments.
Please refer to the additional briefs we have provided on this matter, as I could not cover all the issues in this short presentation. We are more than happy to work with any levels of government to rectify this situation for future generations.
In closing, I would like to thank everyone for their time and attention here. Once again, I ask our government to begin immediate work on fixing the federal CCAA and BIA laws to protect the innocent Canadian workers going forward.
I will close now and make myself available to answer any questions you may have.
Yes, thank you very much, Chair. I'll speak very briefly as an individual and as a pensioner.
I joined Bell Northern Research, which subsequently became part of Nortel, back in 1973, and I went on pension 29 years later. I want to say that one of the problems you're facing is that among the 20,000 or so people who are already affected or who are going to be affected by the underfunding of the pension plan, many older people are completely unaware of the risk they are at.
I've been spoken to by many people who are on survivor pensions and who have continued to assume that their pensions were protected by government. These issues of the underfunding of the pension plan, the impact of the failure of the stock market, and the impending cancellation of many of these supplementary benefits, such as the health plan, life insurance.... The health plan, of course, includes dental benefits, includes the drug plan and so on, which is absolutely crucial for these older retirees. Many of them are going to be in a case of extreme hardship.
In this room today I recognize many former colleagues and contacts from Nortel. I think you've heard repeatedly and through many other contacts that Nortel was very much a teamwork kind of company that made a huge contribution to Canada's technology economy. It functioned like a university. It was perhaps more important than the National Research Council in terms of creating knowledge and intellectual property that allowed the formation of many companies and many world-leading technologies. It was a jewel that is at risk of loss. Therefore, I, like many other former Nortel employees, hope that initiatives may be possible like the Robert Ferchat proposal that part of the company might be resurrected to create a much smaller but still a technology jewel as part of Canada's technology economy.
I will say that you have many people who could not come into this room today. There were people who were turned away and are standing on the front steps outside Parliament this morning. Back in January, when Nortel first filed for CCAA protection, we had over 700 people show up trying to get into the first information meeting organized entirely by volunteers, because many of us, as pensioners, as retirees, have just not had the kind of information from the company or from the monitor to really make it clear what's happening in this process. So we're here before you today, and you've heard some eloquent proposals from the Nortel retiree protection committee. I have volunteered also to help that committee. I just wanted to speak today as a pensioner, like many of the people sitting behind me for whom this is a crucial issue.
Federal government intervention is essential, because although this is a multi-jurisdictional problem, as you've heard, many of the problems have been created because the federal process overrides provincial protections we were relying on.
Thank you, Mr. Chairman.
Thank you to the witnesses for appearing. It's been very interesting. I knew we'd get another version of the facts.
It's difficult. Everybody in this room is here for the right reason, and I think we all sympathize with the former employees. It's funny how we got here. We're here actually for another reason. We're conducting a study on the stability of our financial system and credit availability, and then we noticed there were problems with pensions, so we've been conducting a study. As It turns out, there's no better case study than the present case study, because it's actually a live one.
Now we're caught in a dilemma, because as parliamentarians we have committees and we have our own responsibilities within those committees--forget about our jurisdictional responsibilities, whether it be federal politicians, provincial, or municipal politicians. You're lucky I can toss the ball over, because we have the parliamentary secretary for industry, but I'm not sure how we're going to be able to solve this.
There are two points here. There's the same question I asked Mr. Zafirovski initially; that is, how do we prevent this from happening again, and what do we do now? What is happening now I'd hate to say is a commercial dispute, but there is definitely disagreement on the facts. How do we get to an agreement if we can't even agree on what happened in the past? So this is a big problem.
Everybody pretty well has suggested that we need to change the CCAA. I don't know how that's going to happen in the next little while and help the people we're trying to help. So I need some direction. I have to understand a little bit of what's happened in the past.
For example, Mr. Sproule, you talk about the bondholders being sophisticated, but I beg to differ. The bondholders are not sophisticated or else they wouldn't have invested. I think they're the least sophisticated of all, and that's what we've been able to see during all our studies. I'm going to turn around and maybe put the blame on you, because you were actually there. You're the employees; you see what's going on. Why didn't you help us and say maybe this is not a company we should be investing in? It might be a hard question, and you might laugh at it, but you are the front people. What happened there?
Welcome and good morning to all of the witnesses. I would like to address Mr. Ken Lyons, specifically.
Mr. Lyons, I know that you are one of the representatives of the Nortel Retirees' and Former Employees' Protection Committee. You represent approximately 3,000 Nortel retirees in Quebec.
Earlier, I was listening to my colleague, Mr. Carrier, talk about how human capital, human resources are and will continue to be the greatest asset for companies such as Nortel. We have heard from people who feel that they gave everything—their lives, their passion—to Nortel.
Earlier, I asked Mr. Zafirovski how he felt about the situation, as he did not even try to help people. I did not ask this question, but it was understood afterwards. When he approached the federal government, and met with ministers, he did not even try from the outset to protect his former employees and retirees. This was not done.
I heard my colleague Mr. Pacetti tell us that he does not want to blame anyone. I have difficulty accepting the fact that what could have been done to support this human resource, retirees, was not done from the outset. They want to count on their human resources for the future, but at the very least, they must show respect towards those who made Nortel achieve the level of excellence it achieved.
Mr. Lyons, I would like to hear your comments on that issue in particular.
Thank you very much, Mr. Chair.
I wish to thank all the people who are here today for putting a human face to this drama.
It's so unbearable to watch what's happening to the individuals but also to realize, as the CEO of Nortel pointed out, that they approached the Canadian government to try to find a solution that would avoid the breakup and destruction of Nortel, which has generated so much wealth and growth and richness and resources, well beyond its own walls, in the Canadian economy and in the intellectual community. The breakup of Nortel is the Avro Arrow of the 21st century. It's one of those colossal mistakes that get made, and I was really distressed to find out that the door had been slammed on an attempt to come to a solution that would have allowed Nortel to continue as a going concern, as opposed to breaking it up.
Mr. Lyons, thank you for pointing out something that a lot of people don't think about, and that is that the money that goes into pensions is simply forgone income. It's your money, but you're putting it there. It doesn't belong to the employer; it doesn't belong to the employee. It's yours for later use, and you have to be able to call on it.
There's another issue the chairman referred to, and it's worth mentioning now. Because of the size and the scope of the changes Nortel has gone through, the variations, every possible perverse effect has been amplified, magnified—for example, the issue of the phantom income. For people who haven't followed the issue, it's going to be dealt with in September. A lot of Nortel employees bought stock, and there was a deemed disposition at a higher price. It was money they never saw—they're being taxed on it. And as they say at the train stations, be careful, because one train can hide another. Once you think one's gone, in bankruptcy there's a further deemed disposition and people are going to get hit again.
On the severance issue, if you had your severance, you wouldn't be going on EI. You'd be able to live off your severance for that amount of time and have EI at the end if need be. Here people will be immediately going on EI—that was the choice of the government when it turned down Mr. Zafirovski's proposition. There'll be a clawback of that when and if you get even 22¢ on the dollar. It's every possible perverse effect of the system amplified.
Mrs. Urquhart, I want to ask you something. Is it your view that if we gave preferred status to severance and pension benefits over bondholders and unsecured suppliers, it would have been an incentive to seek to maintain it as an ongoing concern, as opposed to going into liquidation? Is that your view?
Thank you for that explanation. We tend to agree with you, and that's a reason to come back to it.
Mr. Sproule correctly pointed out that there was an NDP motion that was adopted unanimously just a couple of days ago in the House, which calls, for example, for the people at the CPP Investment Board to give back the millions of dollars of bonuses they paid themselves. I think there's a bit of a theme developing there.
The other thing it would do, of course, is fix this type of problem. There's nothing to stop us from doing it. But it would seem, from the meetings that were described, that the government is anxious to see Nortel go into liquidation, as opposed to doing everything it could to keep it vital and keep it as a going concern. That, for us, is extremely distressing information.
Also, the reference to the Income Tax Act is correct. We've looked at this issue in this committee, and it's part of what has to be fixed. Obviously when times are good you have to be able to top up more, and that limitation shouldn't be where it is right now. Your explanation was completely right.
There's another strange thing. The head of the Canada Revenue Agency was in here just a few short weeks ago, and we asked how it was that the employees of JDS Uniphase had had a very special remission with regard to their phantom income, and asked why that deal was not available to Nortel employees. We asked him if he had ever seen that before, that a remission order in a very specific case was not generalized to others. He said that in the 90-year history of the Canada Revenue Agency, no one had ever seen that, and he had never seen that. That's from the head of the agency.
The only difference between the two is that every single employee of JDS Uniphase—and I'm very glad for them that they got the remission—happens to be in Minister Lunn's riding. That's the only thing they seem to have going for them. So let's hope that the fact that a lot of the retirees live in some of the ridings, especially those who are from the Ottawa area, might make them a little more amenable than the ministers who were mentioned: Minister Flaherty; the Minister of Industry, Mr. Clement; and the Prime Minister.
Again, thank you for putting such a human face on this issue for us and explaining your individual situations, especially with the employees on disability.
I would love it if you could provide us, Mr. Clooney.... You gave us a very specific bit of information with regard to documents that refer to Sun Life and a deduction. Perhaps you could supply that to the clerk of the committee so that we could actually see it. It's incredible. I'm not saying I don't believe you. I'm just talking about the situation itself, that people would be led to believe they have insurance, that they find out it doesn't even exist, and that they're general creditors.
I'll try to keep it even shorter.
Thank you for the opportunity again. This is very much the human face that has made the decision so difficult and agonizing. When we filed in January, the decision was not made until January 13. I do have a family, with three sons. What I keep telling them is that if you want to accomplish something significant, you have to give it everything you have, and we certainly did that. And I always say just because you do, it does not guarantee success.
Phase one can give assurances to all the employees, former employees, pensioners--who are doing exactly the same level, they're giving everything they have. We're asking customers, suppliers, employees to work with us through this process to optimize, within the current constraints, the values for the liabilities that Nortel has. It's a major imperative. It's the only reason I'm going through this process. You have my personal commitment to that. I've expressed it to the employees on an ongoing basis. I cannot express in any more ways the level of empathy and respect that I have for the 100-plus years that Nortel has been here.
We gave everything we had. It's a different game plan. Still, many of the assets of the company are superb. We're trying to optimize them for the benefit of all, very specifically, employees and stakeholders. Mr. Tay can attest to lots of discussions that we've had internally.
There were a couple of very specific questions on the LTD. We have 409 people. We're continuing those payments. We're looking for options to continue those without any guarantees to deliver a specific update on that.
I have a very quick comment on pensions. We did stop the pension plan in Nortel in 2006. For many large companies that go through different stages, to have 25,000 people paying for 100,000-plus pensioners is a very significant risk. We have changed to defined contributions, which are defined benefits. I believe that it's a smart way to be looking at managing pension assets for employees.
Lastly, there was a comment that we did not make an accurate statement on priorities. I would like to ask Mr. Tay to comment on the $200 million.