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View Sherry Romanado Profile
Lib. (QC)
Good morning, everyone. I now call this meeting to order.
Welcome to meeting number 45 of the House of Commons Standing Committee on Industry, Science and Technology. Today's meeting is taking place in a hybrid format, pursuant to the House order of January 25, 2021. The proceedings will be made available via the House of Commons website. So you are aware, the webcast will always show the person speaking, rather than the entirety of the committee.
The first hour will be spent on clause-by-clause consideration of Bill C-253, and then we will move in camera for the second hour to review our report.
To ensure an orderly meeting, I would like to outline a few rules to follow. Members and witnesses may speak in the official language of their choice. Interpretation services are available for this meeting; you have the choice at the bottom of your screen of floor, English or French audio. I'll remind you that all comments by members and witnesses should be addressed through the chair. Before speaking, please wait until I recognize you by name. When you are not speaking, your microphone should be on mute.
Pursuant to the order of reference of Wednesday, May 12, 2021, the committee is meeting to begin clause-by-clause of Bill C-253, an act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act.
I'd like to now welcome our witnesses. Here to assist us today from the Department of Industry, we have Mr. Mark Schaan, associate assistant deputy minister, strategy and innovation policy sector; and Mr. Paul Morrison, manager, corporate, insolvency and competition directorate.
As this is the first time that INDU is doing clause-by-clause of a bill, I'd like to explain how today will go. I will introduce each clause and ask if any members have any questions or comments. If you do, please raise your hand, and we will keep track of the speaking order. I know that MP Lemire is in the room, so we'll try to make sure we can see him when he has his hand up.
Mr. Lemire, if I don't see your hand raised, please send me a message.
Thank you.
We will take care of the speaking order, and once we've finished any debate on a specific clause, I'll then turn it over to the clerk for the vote.
With that, I wanted to also introduce the legislative clerk who is with us in the room today, Monsieur Jacques Maziade.
Welcome to INDU.
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Jacques Maziade
View Jacques Maziade Profile
Jacques Maziade
2021-06-10 11:06
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It's nice to be here. Thank you.
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View Sherry Romanado Profile
Lib. (QC)
With that, we're going to start.
(On clause 1)
The Chair: You'll have in front of you your bill. Does anyone have any questions or comments with respect to clause 1?
MP—
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View Pierre Poilievre Profile
CPC (ON)
View Pierre Poilievre Profile
2021-06-10 11:07
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On a point of order, Madam Chair, I just wanted to make sure you got my amendment. We submitted it about an hour ago, I think. Some of the other members didn't get it circulated to them, which might be a function of the lateness with which I sent it, but I want to make sure it's there and that you have it, so that when the appropriate clause arises it can be discussed.
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View Sherry Romanado Profile
Lib. (QC)
I have not received it, but the clerk has, and it will be distributed shortly. It's on its way. I'll give you a confirmation when we get it, so that you know it's been received, okay?
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View Pierre Poilievre Profile
CPC (ON)
View Pierre Poilievre Profile
2021-06-10 11:08
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Excellent, thanks so much.
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View Sherry Romanado Profile
Lib. (QC)
With that, we'll go to MP Jowhari.
You have the floor.
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:08
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Thank you, Madam Chair.
Thank you to the witnesses, although I was hoping to hear testimony from them or an intervention from them giving a sense of, in their opinion, how big the issue is or whether they have any concerns.
Let me start by asking some questions, at least for me, for those who may have joined us for the very first time in our committee, and for those who are monitoring the committee.
The question is for either of our two witnesses. My understanding is that as of December 2019, we had about 1.23 million corporations in Canada. Of those, about 1.2 million were small businesses, which is about 97.9%. Another 1.9%, or 22,905 of them, were medium-sized businesses. Only about 2,978, which is 0.2%, were large businesses. The issue we are dealing with relates to the unfunded pension. How large is it? Who are the key stakeholders? What is the amount? How many people does it impact?
Either of you, Mr. Schaan or Mr. Morrison, can comment on that first, before I get to questions regarding the pension liability.
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:09
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You bet. I'm happy to start, and then I may have some supplemental information from my colleague, Mr. Morrison.
Essentially, the issue we're talking about with respect to unfunded pension liabilities relates to corporations that have defined benefit pension plans. Just by way of quick reference, there are a number of ways in which companies provide additional retirement benefits to their employees, or future promises of income in retirement. Sometimes they're as simple as supporting individual employees in making their own contributions through things like RRSPs or other savings plans—a defined contribution mechanism.
What a defined contribution mechanism means is that in a pension plan that essentially says that the employee, perhaps, but often the employer, will make a contribution into a pension plan, the contribution is what is defined; that is, the employer will make a set contribution on every pay, which will then go into a fund. That fund will be invested with some sort of investment scheme, and whatever that investment scheme is able to ultimately provide is what will be made available to the individual at the time of their retirement.
A defined benefit pension plan, however, is one where the benefit is that which is defined, which is to say that a promise is made that upon retirement an employee will receive a percentage, usually, of their pre-retirement income, often with some sort of formula based on best years, which indicates that it will be paid in perpetuity until such time as their death.
What we're talking about is companies that offer this type of pension plan. That number has largely been going down. I don't have the exact figures in front of me, but when I'm done explaining I'll see if Mr. Morrison has information. Essentially, that number is relatively small, because it is a higher-risk mechanism of providing retirement income. Ultimately, the employer is hoping that investment returns will allow them to be able to continue to offer that benefit based on the full lifespan of their employee base.
Where we have an unfunded pension liability is essentially the differential between that which was promised and that which is required. That, we calculate in two ways. One is on a going-concern basis. In a defined benefit that means, are you actually earning enough from your investment returns and your ongoing cash requirements to be able to provide for the requirements of your pensioners at the time of their retirement? Right now, if I have 10 employees and I have five retirees, am I actually earning enough on the basis of what I have in my pension fund to be able to provide that?
Then there's also a wind-up basis, essentially. Is there enough, should the company actually go insolvent, to be able to meet the promises it made to all of its employees? That wind-up basis is a much bigger number, obviously, because you need to have enough in your account that if you were to go insolvent you would be able to pay out those promises.
The vast majority of defined benefit pension plans that are currently available in Canada are actually provincially regulated, because they are provincially regulated industries. The requirements for plan sponsors as to the amount they need to have in place vary enormously, everything from the Quebec government, which actually does not require a solvency basis accounting—so they do not require pension plans to account for what would be required if they went to insolvency—all the way through to the federal government, where we actually require plans to be 100% funded on a wind-up basis or on a solvency basis—
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:13
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Thank you, Mr. Schaan, but can you give me an understanding of how much this package is, how much of it is unfunded and how much is at risk? Are we in a position to be able to get a sense of that?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:13
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My information is that as of 2019 there were 4.3 million workers in total that were members of defined benefit pension plans. For federally regulated plans, those are, as I said, held at 100% solvency requirements. They then have to make up the difference between that which they have and that which would be required on a solvency or wind-up basis over five years—
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:14
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I apologize for interrupting.
I'm hoping that the translators also won't mind.
Okay. Now we know from a numbers point of view that there are 4.3 million people—
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:14
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Yes, of whom 1.2 million, Mr. Jowhari, are in the private sector. The vast majority of those are actually in the public sector. In the private sector, 1.2 million have access to a defined benefit pension plan.
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:14
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There are 1.2 million in the private sector, which I assume is part of that 2,978, roughly, which is 0.2%.
Also, of the 1.2 million Canadian individuals who are impacted, how big is this from a dollar point of view?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:15
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That I would not have at the ready, because, obviously, those plans vary enormously in size.
To your earlier point, it is mostly larger employers that have defined benefit pension plans, although there are some organizations that offer only defined benefit pension plans, for instance, for their senior executives, so that—
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:15
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Senior executives always have a bonus package. I'm trying to figure out, for the average Canadian who works for these large corporations.... Of that 1.2 million, let's say that one million of them are not executives and don't have bonus packages. We don't have any idea of how big this basket is for the one million.
What I am trying to do is get an understanding of what the impact really is, and now I want to get into the clause. What is the specific effect of the insolvency proceeding, as it relates to clause 1?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:16
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This would provide a superpriority for the unfunded pension liability, and essentially that unfunded pension liability varies enormously, depending on the plan, depending on the company and depending on the particular facts. In some cases it can be very large.
In certain provinces where, for instance, a plan is held to having, in assets, only 85% of the value of the plan on a wind-up basis, you could then have as much as or more than 15% of the total value of the plan. For very large employers, we can look at some of those that have been through a CCAA process. For instance, in Stelco there were 20,000 pensioners, and that can end up being an awful lot of money and an awful lot of people.
In some of these cases—in the case of Air Canada, for instance—we've seen that the unfunded pension liability at the entry into their restructuring was very significant. If that had been in place, if there had been a superpriority at the time, it would potentially have dwarfed all the other available creditors and prevented a restructuring.
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:17
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Okay. This is great, because this is where I am trying to get.
I know there are a number of stakeholders, when I take a step back. I have the federal government, I have the provincial governments that have to work together as it relates to the regulator. There are the employees and the employer. Really, those two—the corporation and the employee—are the ones I want to focus on.
As it relates to the employer, what advantages and what disadvantages is this clause going to have on their ability to get credit? What is the impact, from a percentage and from a dollar perspective on the employee, and what risk are they being exposed to?
The government works with the regulations. I really want to understand, from the two key stakeholders, the business as well as the individual, the employee, what their risks are and who is at more risk because of this.
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:18
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On the degree of risk, I'll come at this in two ways. The degree of risk varies, as I said, depending on the regulation that the pension plan itself is subject to. Obviously, if the pension plan isn't required to be fully funded on a solvency basis, that creates greater risk for workers, because there's not enough that's actually being held in assets to be able to make those payouts in the case of an insolvency.
Where those pension regulations are stronger and require greater degrees of funding, that obviously places less risk on the employee in that case.
Your question, though, is in terms of where the risks would go with a superpriority and what the potential impacts would be.
If there was a superpriority, the theory is obviously there's less risk for workers, because they will be paid first, so that unfunded pension liability would be there. In some cases, though, that unfunded pension liability actually would still not be fully serviced by the assets on hand of the organization. In one of the insolvencies that covered over 24,000 pensioners that went through in 2004, the unfunded pension liability in that case was $1.8 billion. That would have significantly dwarfed the assets that were on hand of the individuals, so they still wouldn't have been fully paid, even with a superpriority.
However, because there wasn't a superpriority, that restructuring ultimately brought all of the other creditors to bear, and that entity was able to restructure and allow for those 24,000 pensioners to emerge into a viable entity that could still continue to make pension contributions and ultimately pay out pensions.
If you're a lending institution and there's a superpriority in place, it means that superpriority gets paid out before you do as a secured creditor. There's a couple of potential behaviours that you would keep in mind to ensure that you'd mitigated your potential risk.
One is, obviously, that you potentially charge a higher premium to the cost of credit, because now there's a possibility that you will not actually be paid on a secured basis because there's someone who ranks above you in—
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:20
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I apologize, if I may interrupt you.
I'll draw a parallel with...let's say I have a mortgage and I renew it every five years, or if it's a variable I renew it annually or every two years. During each renewal, they still ask for the same documents, the same financials, to make sure I still can service the debt.
Is there a procedure you'd suggest that these large corporations put in place, so that on a regular basis, whether it's annually, quarterly—the same way I think all the executives get some of their bonuses, on a quarterly basis or an annual basis—they would be able to monitor that portion of the pension and be able to highlight risk, which would reassure the financial institution you're talking about that they're still tracking, their investment is solid, and they still would be able to fulfill the commitment that they had made?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:22
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That's called an actuarial evaluation. An actuarial evaluation is required under federal pension regulations on an annual basis where you are less than 100% solvent on a wind-up basis.
That actually does continue to calculate the unfunded pension liability and then requires special payment. We actually require the gap between a fully-funded pension on a solvency basis and that which is within the account to be paid through special payments over the course of the subsequent five years.
We then require—
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:22
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I apologize for interrupting.
What is the concern that the financial institution has, because they're getting—
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:22
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The concern is that they may know what that unfunded pension liability is, but if that unfunded pension liability is going to be paid ahead of them in an insolvency, that obviously creates increased risk for their ability to be paid back, which means they're going to calculate that into the risk premium they charge, or they won't lend at all.
One of the other fears we have is if there actually is an unfunded pension liability and there is a superpriority for that, one of the potential strategic behaviours that might actually come from lenders is not to assert pressure on the company to fully fund their pension, which is what some people theoretically imagine would happen, especially since that often would mean that you'd be taking it out of working capital, but instead that those lenders will call their loans, and they'll call their loans early to ensure that they get paid, therefore putting the company into liquidation.
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:23
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Yes. Thank you.
This is my last question, because I want to be cognizant of my other colleagues who have their hands up. When we look at this clause in summary, in bullet points, how is this clause 1 different from the existing law and how would it change the current law?
That's my last question.
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:23
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Clause 1 creates the superpriority for unfunded pension liabilities in Bankruptcy and Insolvency Act restructuring. Essentially, what happens right now is that unfunded pension liabilities are treated as unsecured creditors alongside other unsecured creditors, like small and medium-sized enterprises and other suppliers that have aided with and provided services that have yet to be paid for by the organization.
In the current scheme, superpriorities are afforded in a couple of categories. First of all, we provide a superpriority for unpaid wages, up to a cap of $2,000. We also provide for a superpriority for unpaid payroll taxes—employment insurance and CPP. That's to ensure that employees can actually get their last bit of pay and that doesn't actually go unpaid. We actually have a program federally that doesn't even require the employee to participate in the insolvency process. We take their spot in the insolvency through the wage earner protection program and provide that piece for them.
We then have preferred claims. Preferred claims are relatively rare. There are a small number of them. They exist in a couple of instances.
Next there are secured creditors, which are those who actually lent on the basis that they were insured against assets and that those assets would be utilized to provide them with the security of their loans, and then there are unsecured creditors. In this particular case, they would take that unfunded pension liability in their restructuring and provide for it at the same level at that very early stage. As we've indicated, in certain situations that can actually wipe out available assets for other sources of creditors, or other scales of creditors, and potentially prevent a restructuring from existing.
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:25
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Thank you.
I'm going to yield the rest of my time to the chair to assign. I'm hoping one of my colleagues will ask the question of what this does to our competitiveness, especially for large corporations—the corporations we talked about, those 3,000 corporations—especially if they are international corporations. What would it do to their competitiveness, especially among the G7, the G20 and the OECD?
I'm going yield the rest of my time to the chair to assign accordingly.
Thank you.
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View Sherry Romanado Profile
Lib. (QC)
Thank you very much.
Before I go to MP Jaczek, MP Erskine-Smith, MP Généreux, MP Poilievre and then MP Ehsassi, I just wanted to confirm to you, MP Poilievre, that we've received the amendment and it has been circulated. Thank you for that.
MP Jaczek, you have the floor.
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View Helena Jaczek Profile
Lib. (ON)
Thank you so much, Madam Chair.
Thank you to the witnesses for being here today.
We've heard testimony over the last couple of sessions from individuals representing groups of pensioners in the defined benefit category, Mr. Schaan. You've certainly, through the questions Mr. Jowhari asked you, given us a sense of the size of that group of people, which is rapidly diminishing in terms of businesses employing a defined benefit plan system for their employees. I know that in my own riding there are so many people working in the gig economy or working on contract, and of course they don't have any type of pension at all.
I want to follow up a bit on the defined contribution type of pension plan, which is certainly increasingly common. In terms of that, what type of protection is given to pensioners in the face of an insolvency or a potential insolvency?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:28
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One thing that's important to note at the outset is that pension funds are held in trust and are sacrosanct. They cannot be used for alternative purposes. That's true both for defined contribution pension plans and for defined benefit pension plans. When a company is taking a pension contribution off every paycheque, it's going into a dedicated account that actually continues to accrue value through the investment scheme that it's put through.
In the case of a defined benefit pension plan, whatever is in the plan is absolutely sacrosanct, as we indicated. It can't be used for other purposes. In the case of a defined contribution plan, that means that essentially the risk is being shared between the employer and the employee, so in an insolvency what is available to the individual employee is whatever was invested to date.
There isn't an unfunded portion, because essentially the way that a defined contribution plan works is that the contribution has been defined; it has been made every single time and, as we indicated, any unfunded pension contributions for the previous period of work need to be remitted as a superpriority, so whatever is in that fund is available and then gets distributed. Normally that happens as a purchase of annuities.
There are some mechanisms that have existed in a couple of insolvencies where potentially they've been allowed to be converted into other investment-accruing vehicles, but essentially, for a defined contribution plan, you have very strong protections in place, because there wasn't any expectation other than the fact that the market would return what the market returned. In the case of a defined benefit plan, that's not the case, obviously, because what was defined was the benefit, and that requires a certain level of market return to be able to get to that level.
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View Helena Jaczek Profile
Lib. (ON)
Essentially, then, this particular bill doesn't really affect pensioners who have a defined contribution plan. In their contribution to the investment vehicle, they must be aware there is some risk in terms of the vagaries of the market or whatever. Presumably they understand that.
Is there anything in this bill that adds any protection for them?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:30
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No. This bill is aimed at a couple of elements. It's aimed at unfunded pension liabilities; it's aimed at terminated group insurance plans and it's aimed at severance pay. Defined contribution plans aren't treated under this bill, because essentially a defined contribution already has a superpriority for any unremitted payments into the plan for that last little period leading up to the insolvency. Then, as I said, it's subject to the vagaries of the market—in terms of investment returns—as to what ultimately those individuals will receive upon retirement.
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View Helena Jaczek Profile
Lib. (ON)
Thank you.
My riding is in Ontario. You alluded to the fact that in Ontario there are already certain legislative provisions that provide considerable protection. In your view, would it perhaps be more reasonable to ensure that every province institute its own regulations more in line with what Ontario has, rather than institute this particular bill?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:31
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I won't presume to speak for the provincial approach to pension regulation. I can say why we've approached it the way we have at the federal level. We believe pension funds ultimately should be 100% funded on an insolvency basis because we see real risks: Insolvencies can't necessarily be fully predicted. By requiring plan sponsors to be at 100% funding, we anticipate and allow for the possibility that the firm might ultimately go insolvent, and that therefore there are sufficient funds in place to allow for the promise they've made.
For provinces that don't require that level of funding, we didn't introduce that at the federal level, in part because we thought it introduced significant undue risk to workers and pensioners. It raised the possibility that you could have an insolvency that would lead to an unfunded pension liability of a significant nature.
We see real value in solving the problems of unfunded pension liabilities while the firm is actually in a position to be able to address them—that is, while they're operating and ongoing. Doing it in the case of an insolvency is extraordinarily difficult. By definition, there are insufficient funds to be able to pay those to whom there are obligations. Therefore, you are then ultimately making strategic decisions and policy mandate decisions about who should be paid and in what regard.
We also wanted to be mindful of the fact that we are very supportive of the desire for incentive to restructure and allow for entities to emerge as a going concern and continue to make the contributions that ultimately will lead to greater security.
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View Helena Jaczek Profile
Lib. (ON)
Thank you very much. Of course, I understand the sensitivity around the federal-provincial situation.
Madam Chair, those are all my questions. Thank you very much.
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View Sherry Romanado Profile
Lib. (QC)
Thank you very much.
Next we have MP Erskine-Smith.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
Thanks very much, Chair.
I have four questions. First, you mentioned that contributions are a deemed trust. We heard testimony, and I think the Supreme Court has upheld this general view, that pensions are deferred wages. Just from a principle rationale, before we get into the details of this bill, forget superpriority: Why wouldn't all pensions be a deemed trust when they're deferred wages?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:34
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You ask an important question. Essentially, we see it as deferred compensation, not necessarily wages. We see compensation as a promise made in a way similar to the promises made by that same organization in a number of different domains. The promise, upon receipt of a service, to pay for that service is also akin to that, which is where you find other unsecured creditors.
In an insolvency process we need to be able to look at all those who, essentially, have IOUs and promises held, and figure out a mechanism by which to provide for an orderly treatment of those. While we've deemed what's in the fund as absolutely sacrosanct, what is not in the fund is held to be akin to that, which is other creditors and their unpaid bills as well.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
With regard to the federal policy, you've mentioned today a few times that we require 100% funding on an insolvency basis for the sake of pensions. That's in relation to not only the contributions, which would be in deemed trust, but also this promise of return as it relates to DB pensions. Is that right?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:35
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I'm not sure I follow the second half of that.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
On an insolvency basis, you just said to me that you treat them on an unsecured basis alongside other creditors. However, you're telling me that the federal policy is that there needs to be 100% funding of pensions on an insolvency basis.
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:35
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Yes. The regulatory obligation is to be at 100% funding on a wind-up basis. However, when that is not the case, we require special payments to be made over the course of the subsequent five years to be able to make up that gap.
While there is a 100% requirement, not all pension funds are going to be at 100% on a wind-up basis at all given moments.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
I understand that, but the overall policy.... My point is that in the answer to my first question, you effectively said that contributions are deemed trust, because those are deferred wages, and that this other is deferred compensation, so it's unsecured. However, actually, federal policy is that they should all be funded on a wind-up basis. We want to make sure that pensions, regardless of whether they are contributions into the pension or just the return that is promised to them in an unsecured manner right now.... All of that we want to see funded on a 100% basis.
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 11:36
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We see strong funding levels within pensions as an important parameter to ensure the continued vitality of the promise. We then treat the missing portion, essentially, as a creditor alongside other classes of creditors in the case of an insolvency.
The goal of the policy is strong, well-funded pensions. The reality of an unfunded pension liability in insolvency is that it's an unfunded credit that needs to be paid, and it needs to be paid alongside the other creditors.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
I take your point, but the federal regulatory policies—
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View Sherry Romanado Profile
Lib. (QC)
My apologies. Sorry, MP Erskine-Smith. I hate to cut you off, but the bells are ringing.
In order for us to continue, I would require unanimous consent to continue, so I'd like to know if I have unanimous consent to continue while the bells are ringing. Do I have unanimous consent?
I see Majid Jowhari shaking his head.
MP Jowhari.
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View Majid Jowhari Profile
Lib. (ON)
View Majid Jowhari Profile
2021-06-10 11:37
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No, Madam Chair. I know this is the crisis season.
I am logged in, and I am ready to vote. I don't know what the vote is, but I'd like to get caught up on it before I go to vote. I need that time.
Thank you.
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View Sherry Romanado Profile
Lib. (QC)
Okay, we will suspend for the vote.
If everyone can please make sure they're logged back on as soon as the vote is called, we'll then continue.
MP Erskine-Smith, I'll make a little note that you still have the floor.
With that, I'll suspend.
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View Sherry Romanado Profile
Lib. (QC)
Welcome back, everyone.
I'm not sure if MP Erskine-Smith had finished. He had the floor, so I'm going to turn it over to MP Erskine-Smith.
Had you finished?
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
Not quite. I just wanted to pick up from where I left off. In the federal policy the idea is that through regulation we ensure that there will be funds in an insolvency to fulfill pensions 100%, and provinces have different thresholds—lower thresholds in some cases, and no threshold in the case of Quebec. To get at what we want, which is protecting pensioners, that would be the policy that would do the most.
Is that fair to say?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 12:25
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Yes. I think our view is that the moment at which it is most easy to influence the security of pensions is when the firm is up and running and operational. That's why we require firms, while operational, to be dedicating capital towards the requirements of their pension obligations.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
Understood. Given, though, that this is a concern—this is obviously federal policy, as I say, to protect pensioners, at least as it relates to federally incorporated companies.... When we look at provincial governments that aren't doing the same thing, and we say we still care about pensioners, it's consistent with our policy rationale, because we want to see 100% funding for pensioners. Superpriority isn't something we are opposed to in principle—we want to protect those pensioners—but your argument is instead, we're concerned in practice that it would lead to fewer restructurings and that would actually make pensioners worse off.
Is that your fundamental rationale for not supporting this bill?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 12:26
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Yes, we think there are unintended economic consequences that come to bear as a function of a superpriority. One is a heightened cost of credit. The second is an incapacity for companies to continue to operate. The third is that, if it were to come to pass in the choice between a liquidation or a restructuring, it potentially would tilt the balance towards a liquidation, because there would be a pursuit by creditors of as much security of their owed capital as possible.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
Two questions follow from that, and then I'm done. The heightened cost is less concerning to me because pensioners should be fully paid, and if it means that businesses have higher costs in the marketplace to fulfill their obligations to their employees, so be it.
I do share the concern about unintended consequences. I wonder, with the two remaining questions that I have, first, isn't it the case...? I'm counsel for a union, let's say, and the company is in receivership. I don't want the company to go bankrupt if it's going to make my folks worse off, but the superpriority gives me a position of leverage in negotiation. I can always negotiate away from that position, but why would we be opposed to a stronger position that they can negotiate from?
Surely we would be confident in counsel and a restructuring process that is looking after the best interests of pensioners to say, if it truly is the case, the facts on the ground in that particular matter show that forcing the company's hand and maintaining our superpriority over all of our claims is going to send it into insolvency and it will be unable to restructure. Surely we can make that decision, as pensioners, collectively, through counsel, in our best interests. If it is in our best interest to claim now, we'll claim now; if it's in our best interest to take a discount to ensure the company continues to be a going concern, so be it.
Why wouldn't we want them to have that negotiating position?
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View Sherry Romanado Profile
Lib. (QC)
I'm not sure if Mr. Schaan is having a technical problem because he looks like he's frozen.
There you go, he's back.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
Mark, did you catch enough of that?
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 12:29
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Just the last little bit of it. I think the premise of your question was—
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
Why wouldn't we want them to have a position they can negotiate from? We are presuming that they're incapable of protecting themselves, by saying they're not entitled to superpriority because of unintended consequences. They can always negotiate away from that. They can always negotiate away from that position in their own best interests.
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Mark Schaan
View Mark Schaan Profile
Mark Schaan
2021-06-10 12:29
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I guess I'd offer a few thoughts on that. One is that one of the goals of having as few rules in place at the time of restructuring.... Well, I'll put it this way. A CCAA restructuring has a number of guardrails and safeguards put in place to ensure the preservation of a fair process that has integrity for all participants.
One of the premises of it, though, is that we walk in with a relatively blank slate to try to encourage an outcome that will ultimately allow for the company to emerge. We don't predetermine in the restructuring process who has an advantage, because at the end of the day, the restructuring is ultimately what's better for everybody. We don't put in place a significant number of impediments to that; we look for parties to come together for creative solutions.
The protection that's afforded to pensioners, to other members and to other unsecured creditors is essentially the mechanism by which you have to achieve to be able to get out of the restructuring, and that is that 50% of the total number of creditors in every class needs to approve the ultimate settlement agreement, and two-thirds of the value of each creditor class need to approve the restructuring agreement as well.
That is the fundamental preservation of the integrity, so we give everybody leverage, including for an unfunded pension liability. It's a very significant leverage, because if that's a very large, unfunded liability, that's a very significant portion of their class, which means that they carry weight in articulating the restructured outcome.
One of the challenges is, if you put that in place at the front and say, “Hey, guys, I hold all of the cards. I'd rather come through a restructuring perspective, but I could also just walk away right now and get paid,” the assumption that it will somehow lead to other, better outcomes, presumes that they will seek that restructured entity, and we have to remember that there are very different interests even within that class. You have active workers, who have an unfunded pension liability for continued capacity for their retirement security in the future, and you have existing retirees with varying degrees of life expectancy that's to be proved. Obviously, their negotiating position and their desire for payment now versus payment of a restructured entity are highly varied.
I would simply suggest that the theory here suggests that they always have the capacity to be 100% paid and that they'll use that appropriately. If it ends up that they just want a liquidation, that's okay, but if they want a full restructuring, we also need to think about those unintended consequences.
As to your point earlier about the fact that you weren't necessarily concerned about access to credit, one of the things that we have to recognize is that access to credit is what allows for the working capital that allows for this organization to continue to be operational and make pension obligation contributions. That access to capital and the cost of that capital factors in to the capacity of the entity to be able to continue to run, make profit, and then ultimately make determinations of payments into their pension plan.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
Thanks for that.
There are two very quick things, and then my last question.
One, there are secure creditors over and above those with unfunded pension liabilities who, in many cases, would have less interest in the company proceeding as a going concern. They're just interested in getting their money back in many cases. The interest of the pensioner would be, in many cases, not only getting their money back, but they certainly don't want to see the company go down if it means that it's going to negatively impact their pension going forward. I think, as you look at classes of creditors, you'll find that pensioners, more than most creditors, are interested in the company continuing as a going concern.
The second thing I would say that relates to unsecured creditors, and I think this gets to the fundamental point, is that, if we think that employees, those who have worked a lifetime for a business, are sui generis, I think they are. They shouldn't be treated the same as other unsecured creditors who have obligations to any number of third party businesses.
My last question is in relation to a cap. We heard some testimony from the Canadian Federation of Pensioners related to better striking the balance, and they pointed to other jurisdictions that do better at striking a balance in relation to having a superpriority or some preferred status, but subject to a cap. In Canada, we seem to have had this conversation as only between superpriority for everything or, in your view today, no superpriority because of unintended consequences.
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View Nathaniel Erskine-Smith Profile
Lib. (ON)
If we are to address your concerns in supporting this bill, potentially, do we not address them by virtue of a cap? What are your thoughts on that?
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