Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 2 - Evidence
OTTAWA, Tuesday, October 28, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-3, to amend the Pension Benefits Standards Act, 1985 and the Office of the Superintendent of Financial Institutions Act, met this day at 9:35 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, our witness today is Mr. Nick Le Pan. However, he has changed jobs since his last appearance before us. Many of you will remember that he was previously the Deputy Superintendent of the policy branch of the Office of the Superintendent of Financial Institutions, OSFI. Approximately two weeks ago, Mr. Le Pan became the Deputy Superintendent of Operations.
Mr. Le Pan was first involved with Bill S-3 when he was in the Department of Finance, and then when he was in the OSFI policy section, and now while he is in the OSFI operations section.
This is the first set of hearings on the Pension Benefits Standards Act. I believe two other sets of witnesses have asked to appear. They are representatives from the Multi-employers Benefit Plan Council of Canada and the International Association of Machinists.
Mr. Le Pan. Please proceed.
Mr. Nick Le Pan, Deputy Superintendent (Operations), Office of the Superintendent of Financial Institutions Canada: Mr. Chairman and honourable senators, I am pleased to be here this morning. Appearing with me are Patty Evanoff, Director of the Policy Initiatives Division at OSFI, and Carol Taraschuck from our legal services group.
This morning I will talk about certain key elements of Bill S-3 and give a bit of background as to the rationale for the bill. I will also talk about some related provisions which are not contained in the legislation but which are important in terms of the evolution of the overall policy of regulating pension plans, something which was announced in the government's white paper on the Pension Benefits Standards Act prudential regulation. This background was contained in the white paper and was made available to members of the committee.
The federal government and OSFI in particular supervise approximately 1,100 pension plans out of about 14,000 in the country. Compared with other financial institution regulation banks, insurance companies, and so forth where the federal government has a significant role, we are measured by members at only about 10 per cent of the activity nationally. The other major jurisdictions are Ontario, Quebec, British Columbia and Alberta. Approximately 80 per cent of the 1,120 plans are in the banks, transportation sector, Crown corporations, and other areas of federal employment. Some 360 plans are native band plans set up, in large measure, under the Band Employee Benefits Program.
Measured by members, about 90 per cent of our plans are defined benefit plans, while 10 per cent are defined contribution plans. Measured by plans, 40 per cent are defined benefit and 60 are defined contribution.
With that background, I will talk about the rationale behind Bill S-3, some key provisions, some surrounding guidelines that are under development which will be the subject of further consultations, and several other items that are covered in the bill. In particular, I will speak about one item related to federal-provincial harmonization initiatives.
I emphasize that this is primarily a safety and soundness package. The Pension Benefits Standards Act has a variety of goals and includes, in addition to safety and soundness and regulatory issues, a number of provisions related to more social policy matters. Those are not the substance of this bill. This bill is directed primarily at the safety and soundness prudential side of the Pension Benefits Standards Act and the regulatory framework for supervising federally regulated pension plans.
As I mentioned, a white paper was released in July of 1996. Following further consultations, it led to this piece of legislation.
Why were amendments proposed to the Pension Benefits Standards Act in the safety and soundness area? Effectively, the Pension Benefits Standards Act has not been revised materially in this area since it was brought into force at the beginning of 1987. In the meantime, as honourable senators well know, the supervisory and prudential systems in the rest of federal financial institution legislation were strengthened in 1992, 1995, and again in 1997. The government believed, as did we, that similar strengthening was required in the Pension Benefits Standards Act. The current framework in the Pension Benefits Standards Act does not include the range of powers and regulatory tools needed to deal with plans which have solvency or compliance concerns.
As well, a large part of OSFI's mandate under the current Pension Benefits Standards Act is related to review of plan documents. To give a sense of what that means, we reviewed some 4,000 plan documents last year with a staff of 21 people. We believe that our mandate ought to be more focused on things that matter, including safety and soundness issues, and less focused on a requirement for a review of all plan documents and amendments to plan texts.
I wish to talk about some other basic principles that lay behind the development of Bill S-3, in addition to adequate provisions for the regulator to deal with safety and soundness issues.
One principle was that pension plan members should receive adequate information concerning the financial condition of their plan. Following on from that principle, this bill includes a number of provisions which I will highlight in a moment. As well, there will be further provisions and guidelines on enhanced disclosure to members about the financial condition of their plan.
It is also important to realize, as we have discussed regarding other federal financial institution regulations, that regulation and supervision cannot and will not guarantee that the promises made in pension plan contracts will always be met. Bill S-3 contains a proposed alteration to OSFI's mandate to make that clear, as it is already clear in our current mandate with respect to other federal financial institutions which we supervise.
From a safety and soundness perspective, it is important to understand that pension plans, and defined benefit pension plans in particular, are different in a fundamental sense from other financial institutions which are regulated and supervised by OSFI. In defined contribution plans, the promise is to pay pensions related to the value of the assets in the plan. In defined benefit plans, there is a promised level of benefits. However, fundamentally, the promised level of benefits is the result of contractual arrangements between employers and employees.
As with all other pension legislation in Canada, it is possible under the Pension Benefits Standards Act to promise benefits which are beyond the current accumulated assets in the plan with the proviso that the gap is funded over time. The case of a financial institution is different. We expect the institution to have capital in excess of its liabilities, that is, its promises to the depositors or policyholders. In a pension plan, it is not necessary to have that current margin on a current basis.
As a result, plan administrators and their related actuaries must regularly produce reports on the solvency position of the plan on a termination basis or on the position of the plan on a going-concern basis. Inherently, then, the financial condition of a pension plan is dependent upon the willingness of the contracting parties to make the contributions necessary to fund those promises. That depends upon the financial condition of the employer, as well as the willingness of the employees in plans where there are employee contributions, to make the necessary contributions. Otherwise, they can adjust the benefits to be more in line with the contributions which they are prepared to make.
Let me go into some of the key elements of the legislative package. I will not do these in order as they appear in the bill, but rather in the order of the structure of the supervisor-regulatory relationship. I will provide some helpful cross-references to key parts of the bill.
At page 5 of my brief is a clarification that OSFI's supervisory focus is primarily on matters affecting financial condition. There is an amendment to OSFI's mandate in clause 29 of the bill which makes it clear that OSFI has a responsibility to protect pension plan members. However, clause 29 also has related language to indicate that OSFI is not guaranteeing that all promises will be met, and this is for the reasons I have indicated earlier.
Also removed from the Pension Benefits Standards Act is OSFI's current obligation to review all plan documents and all plan amendments. That positive obligation now exists under the Pension Benefits Standards Act, but we do not believe it is appropriate. We believe it is better to focus our resources on things that matter.
As a consequence, there will be an enhanced self-assessment system whereby plan administrators, when they make any amendment, will indicate to OSFI that that amendment is in compliance with the provisions of the Pension Benefits Standards Act.
The Chairman: What does "self-assessment" mean?
Mr. Le Pan: Effectively, that term means "certification" on behalf of the plan. If an amendment is made, there will be an attestation that, in the opinion of the plan administrators, the amendment meets the requirements of the Pension Benefits Standards Act and the regulations.
We will then do spot-checks in some areas and, in other areas, we will do a thorough check. This requirement for attestation will give to the plan administrators a key sense that they hold some responsibility for ensuring that plan amendments and provisions are in accordance with the Pension Benefits Standards Act. It is our experience from other self-regulatory models that such a positive requirement for those kinds of attestations tend to improve compliance, although it will not be 100 per cent effective.
The Chairman: Is it like the certificate of compliance which officers of corporations make with respect to meeting environmental regulations and a variety of other things?
Mr. Le Pan: That is right. We are not prescribing in great detail the form in which this happens because many plans are simple and straight forward.
The Chairman: Will there be written statements sent to you?
Mr. Le Pan: That is correct.
Senator Tkachuk: Will you perform an audit function?
Mr. Le Pan: Yes, in some areas, if there is a very significant change, we will check everything; however, it will be more of an audit post-check type of function.
We cover approximately 1,100 pension plans. There is no current requirement in the Pension Benefits Standards Act that OSFI examine each plan yearly, a measure which exists in some other financial institution legislation. We do 20 to 30 examinations per year.
Again, partially in anticipation of this kind of mandate, we are trying to make our examination methodology more risk-focused in the areas which we think deserve it. We take a similar approach to checking on the attestations, as I have referred to them.
There are also a variety of provisions in Bill S-3 which relate to planned governance and to the superintendent's powers. One example is in the governance area. Authority is given to the superintendent to call meetings with the administrator or to require that the administrator call meetings with members in order to enhance a particular issue. For example, if the superintendent felt that disclosure had not been adequate, he could request that plan administrators meet with members to better explain what is going on.
There are a set of provisions to enhance the powers of the Office of the Superintendent, many of which are directly analogous to powers in other financial institution legislation which were added during the late 1980s and early 1990s. For example, Bill S-3 provides power to the superintendent, under the PBSA, to issue directions of compliance to a pension plan. Power is given to the superintendent to institute any court action which could be instituted by any member who is entitled to a benefit. There is a power to remove the administrator when a plan is wound up.
To put this change in perspective, currently, the superintendent's main remedial power is to terminate the plan. There are few options between a general moral suasion to meet OSFI to discuss something that OSFI does not like and a simple termination of the plan. In other financial institution legislation, there are staged degrees of intervention measures which can be taken.
As we have done in other financial institution regulations, we are preparing what we call a "guide to intervention" which sets out the various stages. About two years ago, we published such a guide for deposit-taking institutions and insurance companies. We are in the final process of developing a similar guide for pension plans. We will distribute it for information and comment before finalizing it. The guide will give those who are responsible for pension plans an indication of how we plan to exercise these powers.
It is a staged kind of approach, as you can imagine, depending upon the seriousness of the situation and on whether any required remedial action was taken at earlier stages. One of the ultimate sanctions is termination of the plan by the superintendent.
There are several other items that track the powers we have in other areas. For example, one of the key measures in clause 9 of the bill is to give the superintendent the power to specify modifications to actuarial practices and accounting principles that would apply to a valuation of pension plans.
There are provisions set out at page 9 of the material which relate to funding and investment requirements. We have not altered the basic funding presumption. As I indicated earlier, it is possible to have a pension plan that is not fully funded on a current basis with a promise to fund it over five years, for example.
On the other hand, we believe that if a plan has a solvency ratio of less than one, that is, if the plan were terminated today, then there would not be enough money in the plan to keep the pension promises. That plan should not be allowed to enhance benefits. Therefore, if a plan has a solvency ratio of less than one, we believe the priority ought to be dealing with that gap and not enhancing benefits.
Clause 10.1 of the bill indicates that plan amendments will be limited to those situations in which a solvency ratio is allowed to fall below one. We also have a positive requirement for investment in a prudent portfolio, an initiative that is found in a number of other places.
I can return to this subject later to answer questions, Mr. Chairman. However, I believe that broadly addresses the safety and soundness parts of the bill.
There is another clause in the bill which deals with requirements to disclose the solvency ratio to plan members. It is not now required that plans disclose the solvency ratio to their members. We anticipate that the regulations will require that the solvency ratio be disclosed. As well, if the solvency ratio is less than one, we anticipate that the regulations will require the administrators of the pension plan to disclose to members a plan by which they intend to move from a solvency deficiency to a fully funded state.
I also wish to highlight clause 6 of the bill which gives authority to the Minister of Finance to enter into a multilateral supervisory agreement with other provincial regulators. A range of bilateral agreements are now in place. Those agreements involve plans which have members under both federal and provincial jurisdiction. Federal and provincial government pension supervisors have developed a proposed multilateral supervisory agreement that would allow plans in those circumstances to be supervised by one supervisor using only one set of rules as opposed to one supervisor using multiple sets of rules.
At the moment, the federal government does not have authority to enter into such an agreement. It is fair to say that interest is coalescing around this type of agreement. Although no provinces have signed up at this point, the prospects are reasonably good that they will. However, without a change to the Pension Benefits Standards Act, the federal government does not have the authority to sign on to that type of agreement. Therefore, it cannot play a leadership role in trying to push the final stages of making such an agreement come to fruition.
This proposed agreement would affect a certain number of federal plans that have members from both provincial and federal employment sectors. I know that, historically, removal of federal-provincial duplication and overlap has been a concern of this committee.
There are a range of technical amendments in the legislation as well. Some of them are listed on page 11 of the hand-out. They include authority for the superintendent to interview third parties and to bring the fines and penalties more in line with those found in other regulatory statutes governing financial institutions.
One further element of Bill S-3 concerns arbitration procedures for surplus entitlement. This is not a matter that is primarily a safety and soundness matter, although it has some implications for the operations of OSFI.
Currently, entitlement to surplus is determined by plan texts.
The Chairman: You jumped immediately to the word "surplus". It is important that people understand at the outset that there are basically two kinds of plans. There are defined benefit plans in which the employee gets something like 2 per cent per year multiplied by the number of years they have worked multiplied by their average salary over the best five years, or whatever. There are also defined contribution plans into which the employee puts in money. The money an employee gets out of such a plan amounts to whatever the money has grown to over the life of the plan.
Clearly, in the case of defined contribution plans, there is no surplus, because it is all the employees' money anyway. Will you be talking about defined benefit plans in which the employer is on the hook to provide a formula amount of money to the employee when the employee retires, independent of how much is in the pot?
Mr. Le Pan: That would be a fairly standard kind of arrangement for a defined benefit plan, yes.
The Chairman: To back up one step, perhaps you could explain what you mean by "surplus". What does "surplus" mean in that context?
Mr. Le Pan: Mr. Chairman, I spoke earlier about plans which have a deficit and the prudential rules surrounding that issue. However, in the case of a defined benefit plan, because the pension promise is not directly related to the assets in the plan, it is a promise that is part of the contractual arrangement that set up the plan. It is possible that the amount of contributions that have been made to the plan at any one time are greater than what would be necessary to fund the promise made to pensioners.
We talked about what happens when they are less, that is, if the solvency ratio is less than one. There could also be plans in which the value of the assets in the plan is more than the actuarially determined value on a present value basis of all the promises made in the plan documents to the pensioners. That difference is a surplus.
Senator Stewart: Would you tell us how the assets are held?
Mr. Le Pan: These would normally be trustee pension plans. Effectively, they are a trust, or an insurance contract in some cases.
Senator Stewart: Are the trustees buying bonds or stocks or putting money into banks?
Mr. Le Pan: Broadly speaking, yes. One would have a portfolio that could include bonds and stocks or other investments such as real estate or commercial lending. I would be happy to provide to the committee a list of the overall mix of the assets of the plans which we supervise.
There is a requirement in Bill S-3 for there to be a prudent portfolio. We are in the process of developing guidelines as to what that would mean in practice. However, we do not have a detailed set of prescribed kinds of assets. In large measure, it is left to the trustees running the plan.
The Chairman: Mr. Le Pan, if a company goes bankrupt, are the assets of the pension fund in a safe place from which they cannot also disappear? In essence, are the contributions from the employer and employee put out of reach of the company in the event the company gets into trouble? To that extent are they in trust?
Mr. Le Pan: The classic arrangement would be a trustee plan. The assets are in trust for the beneficiaries of the plan or to meet whatever the requirements are under the plan contract. In that sense, the assets are legally separate. I think the act provides protection for that from the assets of either the employer or a union representing employees. In the case of a plan with unionized members and employee contributions, they are supposed to be separate from the assets of those entities.
Senator Oliver: Is that like the case of Eaton's where the assets were in a separate account?
Mr. Le Pan: Effectively, the assets of these plans are legally separate.
If there is a surplus, that still leaves the question of whose assets are they or whose surplus is it. Currently, there is not one determination of that question. There is no simple, single answer either in the Pension Benefits Standards Act or in common law.
Remember that we are talking about something that is fundamentally a contract among employers, employees, pensioners, and so forth. The current PBSA provisions around surplus essentially say that if the plan documents and the contract are clear as to employer entitlement to surplus, and provided the superintendent is of the view that there is not a solvency problem, then surplus could be paid to an employer. If the plan documents were clear that entitlement to surplus is to the employer and there is no solvency problem, then you could pay the surplus to the employer. Similarly, if the plan documents were absolutely clear that surplus does not belong to the employer, then it does not matter what the situation is, the plan documents prevail. Other than going back and changing the documents through a renegotiation process, there is no possibility for the employer to change the entitlement to surplus.
In many circumstances, the documents are not clear, which is the case in the vast majority of circumstances.
The role of our office is such that we end up opining on whether or not there is clarity. As I have said, in most cases there is not.
The area of entitlement to surplus from a legal perspective -- because often it is not a matter of clarity in the original contract -- has been subject to a considerable amount of litigation both federally and provincially. Litigation sometimes has gone one way and sometimes others, and that litigation is costly.
In this area, a number of people indicated to us that it might be desirable for the federal government to have a view. There were three possible views the government could assume. They could have done nothing, obviously. The problem with doing nothing is that we end up with a situation that is not very clear for anyone. If there is a desire for there to be some resolution of the surplus situation for a particular plan, there is a potential exposure to considerable costs on everyone's side to get that resolution ultimately done.
Instead of doing nothing, we could have made a policy decision. For example, in many cases employers are on the hook if there is a deficit. If it turns out that there is a surplus, they ought to have the right to that surplus to provide funding when there is a downturn. They at least ought to get the benefits when there is an upside if economic conditions and employment circumstances change. If the plan moves into surplus, they ought to get the upside because they are, de facto, on the hook for the downside.
The third possibility is we could have made a decision that in no case is surplus available to employers, or we could have done something in between.
This bill does not take a formal legislative position on who is entitled to surplus. However, in some cases, it proposes a simplified procedure involving arbitration for a determination of surplus entitlement. It does not take away the right of any party ultimately to go to court, if they so wish, to determine surplus entitlement in a particular plan. It provides a further avenue for sorting out to whom the surplus belongs. We think this has some benefit. I will stop there before I go into the benefits.
The Chairman: Given the technical nature of this issue and because it is the most sensitive issue in the bill, I want to ensure that everyone understands what you have said.
Please feel free, colleagues, to interrupt Mr. Le Pan, because it is important we understand what has happened.
Senator Meighen: Is the lack of clarity in most plans because they did not deal with the question at all, or is it because of the language employed or the poor quality of the lawyers?
Mr. Le Pan: I will ask my colleague Carol Taraschuk from our legal group to comment on that question since she has reviewed many of these situations.
Ms Carol Taraschuk, Legal Counsel, Office of the Superintendent of Financial Institutions Canada: Senator, it is a combination of all the factors you mention. Many pension plans date back to the 1950s, the 1940s, the 1930s and even earlier. Surplus was not an issue at the time, and it was not addressed. Over time, these plans have been amended, and the issue arises as to whether these are legally enforceable amendments to pension plans.
Other plans are poorly drafted. You will see conflicting terms used in a pension plan document. You may also see a plan document that says one thing and a trust agreement that says something quite different. There is always some uncertainty and a lack of clarity in many of the established plans. The newly established plans are adding clarity to the pension plan documents.
Senator Meighen: You went through the alternatives that were available to the government, and we know what alternative was selected. I ask this in all sincerity. Given the two-thirds requirement of present and past members, is that designed to enhance greatly the difficulty for the employer to obtain the surplus? Is it not biased very clearly against the employer? I bring no judgment to bear on that at the moment.
Mr. Le Pan: That is a very fair question.
Before I answer that question, Mr. Chairman, perhaps I should outline the essence of the issue.
The Chairman: Perhaps we can hold that question for a moment and move to Senator Oliver's question and then Senator Stewart's question because I think they want to deal with issues you have covered up to now.
Senator Oliver: You said earlier that this bill does not take a legislative position on who is entitled to surplus. You went on to say that what it does is set up some kind of arbitration regime. Does this not mean that the bill is defective or wanting, and is this not the place to cure it? Why not come up with some legislative drafting now that solves the problem rather than just put a Band-Aid on it? It sounds to me that the arbitration is just a Band-Aid and does not really address the essential problem. Why not do it here in this legislation now?
Mr. Le Pan: That was an option for the government, and it remains an option. I would not advise that option for several reasons.
Fundamentally, the lack of clarity in many plans is a reflection of the fact that the people who were responsible for setting up and running these plans did not have a view. Personally, I feel more comfortable in that world with a procedure which allows them to sort it out. For example, while we do not take a formal position that surplus does or does not belong to the employer, we certainly contemplate a regime in which employers could obtain surplus. However, if the documents do not allow them that entitlement, the regime effectively means that they will have to get agreement of some part of the members of the plan, and to do that they may have to promise things. They may have to enhance benefits. It is basically a framework for remaking contracts and coming to new arrangements.
I am more comfortable with that because I think that to make a determination of this or that in all cases would be imposing a particular view on arrangements, and I am not sure that that view is, in all cases, reasonable. It may well have been that in certain circumstances it would not be reasonable for employers, for example, to have the benefits of all the surplus that is in the plan. On the other hand, I am sympathetic to the view that if employers have a downside obligation they ought to be able to get some of the upside.
As well, if we were to take an absolute view one way or the other, we would be entering into an area which would have some fairly significant implications if we were to say, for example, that surplus belongs to the employer in all circumstances. For employee plans where there are employee contributions, we can get into lots of discussion about from where this surplus arose. It is sort of like demutualizing the insurance companies, something which we have talked about in this committee. To whom does any surplus go? Is it to former policyholders, current policyholders, former pensioners, current pensioners, people who contributed five years ago, people who contributed seven years ago?
Personally, I am not convinced that that would be productive at this point. I think it is more productive, and likely to be more evolutionary, to have a procedure such as we have talked about in this bill which lets the participants sort it out, but which clearly contemplates, and indeed in some measure goes beyond, what exists today in quite a significant way because it does contemplate that there could be entitlement to surplus on a current basis, not just determination, by employers out of a plan.
I think evolutionary movement here is better public policy than an overall once-and-for-all determination that it belongs to A or B. However, some days I am a pragmatist.
Senator Stewart: Senator Oliver has asked my question but the answer prompts a subordinate question. You say that there might be circumstances in which the employer could properly claim the surplus, and that there might be circumstances in which that would not be the case. Can you give us examples of such circumstances?
Mr. Le Pan: I used a simple example in reply, senator. On a moral basis, for example, one could argue that a situation in which it is a non-contributory plan from the point of view of employees is different from a situation in which it was contributory by both employers and employees. Even if plan documents are not clear, it might well be the case that there had been some understanding in 1950 that this is what would happen, but the plan documents would not stand the test of time against court cases that have come up in the last 15 years in this area. It may be that if we could roll back the clock to when a particular plan was negotiated, let us say 1955, we would see that at that time people walked away from the table understanding that in all likelihood surplus would go one way. However, since then we have had court cases on the subject, and it may well be that an impartial person would look at this and say that although the employer and employees may understand that, and the people who shook hands in 1955 may say that that is what they intended, you could not get it done today. None of the people who were around in 1955 are currently running this plan.
It is everything from what was intended and what is actually possible today given what has happened in the state of common law, to the financial situation of the plan. Those are two kinds of examples.
Equally, it may be the case that people thought it was absolutely understood that employers would never get it. The people involved in 1955 may swear that that was the case, but the documents still are not clear one way or the other.
I think this has everything from a "what was agreed morally" dimension to "what is right from a public policy point of view" dimension to "what is right from an analytic point of view" dimension. It is partly a "fairness is in the eyes of the beholder" kind of problem.
Senator Tkachuk: Who has these kinds of plans? Is it mostly Crown corporations or is it mostly private companies?
Ms Taraschuk: They are mostly private companies whose pension plans we regulate. It is essentially the larger plans that are involved.
Senator Tkachuk: Can you give examples?
The Chairman: Examples of that would be banks, Bell Canada; all companies that come under federal jurisdiction.
Senator Tkachuk: On the question of surplus funds, are we talking about a particular kind of pension plan?
Ms Taraschuk: Defined benefit plans.
Senator Tkachuk: That is what I am getting at. Do most of them have defined benefit pension plans like the banks?
Ms Taraschuk: Yes. There is a mixture out there. Some large companies might actually have two or three plans with a variety of schemes attached. One might be a defined contribution plan and another a defined benefit plan. Many of the older established pension plans are defined benefit in nature.
Senator Tkachuk: Do most of the Crown corporations have defined benefit pension plans?
Ms Taraschuk: I do not know.
The Chairman: Personally, I know of no public sector plan, federally or provincially, which is not a defined benefit plan.
To pick up on the last comment, I know of companies that are federally regulated that have a defined contribution plan for hourly paid workers but a defined benefit plan for salaried workers. So they have two plans, both of which are under federal jurisdiction.
Senator Tkachuk: In the case of Crown corporations or public institutions there is another question raised when there is a surplus. This is public money. In the case of banks, for example, they may have made some arrangement that is not quite organized. They have to fight over the surpluses that exist. That is why I asked that question.
On a percentage basis or on a dollar basis, how many of these pension plans are government plans or creatures of government like Crown corporations federally and how many are private? Do we have that information?
Mr. Le Pan: Yes, broadly, but I think we will have to follow up with a precise table. It is a little difficult to give a precise answer because of the 41 per cent of our plans that are defined benefit plans of the 1,100, taking out the native people's plans, et cetera, less than 50 in any given year have a deficiency or are underfunded, if you will. Most of the plans have a positive funding ratio where contributions are higher than benefits promised.
On the other hand, technically, there may be some surplus there. In many cases there is not much because, for example, plans can take contribution holidays. That has been a way to ensure that a surplus did not build up. It is not really so much the total number of plans that have a dollar or surplus type of thing. The plans that would actually have a significant amount would want to enter into this.
We have not had a groundswell of demand for this. We probably now look at a maximum of a half a dozen a year, or four or five situations where plans come to us for a view on whether their documents are clear. That is four to five out of approximately 500. Many of those are not that serious in the first place and just want to get a sense of it. They are not actively looking for surplus entitlement.
We can give you some indication of how many of the defined benefits plans involve Crown corporations and how many involve private sector plans. However, at this point, if you ask my judgment as to whether we are looking at a vast number of plans that will want to get at surplus, I do not think that will be the case. We are talking about a small handful in any given time period. I would be happy to follow up with a table split in the way you are looking at it, senator.
Senator Kelleher: Referring to your page 12, Mr. Le Pan, and the last paragraph there, if the 50 per cent threshold is met, then arbitration is mandatory for plans that are being wound up but optional for ongoing plans. What do you mean by "optional"? Whose option is this? Who decides that? Do we have a problem there?
Let us say that this is an ongoing plan and, through very judicious investments, unlike what happened yesterday on the stock market, we have built up quite a surplus. The employer decides he would like to take some of that money out for other purposes. The wording here says "optional for ongoing plans".
Mr. Le Pan: It is at the option of the employer, and that is the way this is now set up.
Senator Kelleher: Generally speaking, human nature being what it is, I would suspect that it is to the benefit of employees not to have this happen, obviously. They will not be eager to rush in and have this happen. What happens if the employer only gets 48 per cent? Is he up the flue?
Mr. Le Pan: Yes.
Senator Kelleher: Is there nothing he can do?
Mr. Le Pan: In answering that I think it would be helpful for me to make several comments about page 12 which in part go to your question, Senator Kelleher, as well as Senator Meighen's.
We have set up a framework for negotiation. That goes directly to Senator Meighen's earlier question about whether the framework is -- and I do not want to use the word "biased" because that implies something negative -- more directed one way or the other.
What is the framework? It is a framework for negotiation. We anticipate that if you are an employer and you want this, because Senator Kelleher, as you said, it is not necessarily to the advantage of employees or pensioners, you will have to sweeten the pot in order to get people to agree. This is a framework for negotiation, and the questions to ask are: What are the triggers? Is it reasonably enough balanced so that if the goal were to allow surplus entitlements without having to go to court, would it be possible to do that? On the other hand, is the framework fair so that it is not just a cakewalk and employers get to have it all their own way no matter what, given that there is some kind of uncertainty as to whose money this is?
This sets out three kinds of states of the world. One is a state of the world in which more than two-thirds consent, and we are talking about consent of all the members.
Senator Meighen: Alive and dead?
Mr. Le Pan: Not dead.
Senator Meighen: What about the case of estates?
Mr. Le Pan: It concerns only surviving spouses, not the estates.
However, it is not just two-thirds of the people who respond to the mailing. Again, to be frank, the exact terms and conditions of this are key to reaching a judgment on both questions about whether this is slanted one way or another.
The Chairman: Why not take us through this point by point and we will hold the questions until you have finished your detailed proposal? Page 13 is straightforward. Take us clearly through that, and then senators can ask their questions.
Mr. Le Pan: For reference, this is in clause 9.2 of the bill.
Three states of the world are suggested in clause 9.2. The first is that the employer prepare a proposal for a combination of surplus withdrawal and enhancement of benefits either to current employees, retirees, or whomever. Either proposal could achieve two-thirds or more consent, and that is consent of all the members. There is provision in here for classes. We anticipate there would normally be some class voting between retirees and current active members, as you would normally split the retirees from the active members. If it gets two-thirds consent, then the proposal is deemed to be an amendment to the plan. It is as if you had obtained 100-per-cent consent; and the withdrawal of surplus can occur.
The second situation is where the consent is less than two-thirds but more than one-half of members. We are then into binding arbitration. The employer can elect to take the proposal to binding arbitration. The mechanics are in here as to how the arbitrator is chosen, et cetera.
The 50-per-cent threshold was mentioned earlier. If this threshold is met, arbitration is mandatory for plans that are being wound up because we need to know. The plan needs to be wound up. We do not want it going on for years and years. There must be certainty brought to the situation as to who will obtain this surplus. For ongoing plans, it is optional for the employer as to whether he goes to arbitration or not.
You asked what happens if you have 48 per cent. Under the statute, that is it; sorry, it does not work and the proposal is dead. It is open to the employer to decide to come back with an alternative proposal and start again. We do not contemplate that if you are below 50 per cent there would be any possibility for the employer getting entitlement to surplus.
There are further details in clause 9.2 about the mechanics of this, but I have hit the main points. There is also an override, and the superintendent must be certain that the withdrawal of surplus is not bringing the plan down into a financially difficult position. I will leave that aside.
Senator Meighen: I would like some clarification on my admittedly somewhat facetious comment about living and dead. I am still not clear. Clause 9.2(2)(b) states:
...former members of the plan and any other persons within a prescribed class.
Who are the persons in a prescribed class? Where do I find that?
Ms Taraschuk: We are drafting the regulations. The proposal will include surviving spouses who are entitled to the benefit of a deceased member and any other beneficiary that may have been designated by that member to receive the pension benefit.
Senator Meighen: That could include a child, presumably, could it not?
Ms Taraschuk: Yes.
Senator Meighen: Would that include a minor child?
Ms Taraschuk: Only if they have been designated a recipient of the benefit according to the terms of the pension plan, if the plan allows for such a designation, and many do not.
Senator Meighen: So you would have to get the opinion of the minor child in the normal way. You have to get opinions from people who are unable to express their will legally.
This may be an oversimplification, but, as I read it, the superintendent has a discretion in the cases where everything is done to get the two-thirds consent of all these people, in both classes. The superintendent can still say, "Sorry, I do not like it and the answer is `no'."
Ms Taraschuk: That is correct.
Senator Meighen: However, the reverse is not true. If you have a particularly difficult case and you only get, say, 48 per cent, then the superintendent cannot say, "In this particular case that number is close enough and the proposal may go-ahead."
Mr. Le Pan: That is right. The intention is that our involvement is from a safety and soundness perspective and not from the perspective of whether the proposal or the negotiation was adequate. It is nor whether, from a moral or legal view, some party has a right to the money. We want to be in the position to say that a case is okay based on safety and soundness considerations. We do not want to go down to a solvency ratio of one; we would like to see some margin left.
Bill S-3 leaves the negotiation in the hands of the parties; it does not provide for a governmental view or an OSFI view as to who was right and who was wrong.
Senator Meighen: Would you be prepared to add any comments as to the hurdle constituted by the requirement for two-thirds of both classes? It seems to me -- and I stand to be corrected -- that that is, if not impossible, then at lease a very difficult hurdle.
Mr. Le Pan: That is a real judgment call, senator. Indeed, there could be differences in judgment. On the one hand, requiring approval from two-thirds of all the people in the plan and not just from the people who respond looks like a fairly large hurdle. There are other precedents. Some provinces actually require 100 per cent. Certain provinces do not allow withdrawals at all for an ongoing plan, but just for terminating plans. Compared to what is out there in the provincial domain, the two-thirds requirement to get your hands on the money as an employer is more than is permissible under certain pieces of provincial legislation.
If I go to the corporate world, squeeze-out provisions would operate at either two-thirds or 90 per cent, depending on how the deal is structured on a corporate takeover or an amalgamation set of provisions.
If there is a significant amount of surplus and the employer is coming forward with a proposal to use part of that surplus to enhance benefits, and if the alternative is that nothing will happen and the money will just sit in the plan with current members getting no more money and the employer getting no money, then we have a sort of Mexican stand-off. It may not be too difficult in that case to get two-thirds of the current members or retirees to agree to some enhancement of benefits with the employer getting part of the money rather than receiving nothing.
I do not have more judgment to offer on this, senator. We stared at this and tried to answer the question which you posed: Is this a reasonable starting point for negotiations?
We considered "two-thirds of everyone" versus "two-thirds of the people who reply." On the other hand, "two-thirds of the people who reply" has some difficulty as a practical measure, too.
Remember, if you do not get the two-thirds, you get arbitration. You can go directly to an arbitration procedure. If you start with the view that it should be easier for employers to get at the surplus, then they must get 50 to still be in the ball game. If they get 50, they have the possibility of going to arbitration. Arbitration will likely lead to some return.
In trying to reflect on this question, I did not personally look only at the two-thirds as being the critical threshold. As an alternative, if you have an ironclad case based on Singer and all the other precedents, you can go to court. We are not removing that possibility.
Senator Meighen: What was the rationale for having the same requirement for former members as for current members of the pension plan? To my untutored mind, former members would have less of an interest than present members. Why do you need two-thirds of former members and two-thirds of present members?
Mr. Le Pan: Essentially, we are saying that former members step into the shoes of members. That is effectively the way this whole regime works.
Senator Meighen: You will have to run that one by me again.
The Chairman: Please define what you mean by a former member.
Mr. Le Pan: I mean spouses of pension beneficiaries.
Senator Meighen: You are not referring to people who worked for the company but have now left that company?
Ms Taraschuk: No. Former members include retirees and those who left the company but who did not transfer out their benefit.
Senator Meighen: Are you referring to someone who may have worked for the government for two years and contributed "x" dollars and then walked away?
Ms Taraschuk: If you left your benefit in the plan, it includes you.
Senator Meighen: That is a benefit to which I am entitled some day, is it not?
Ms Taraschuk: You could be entitled to it. That depends upon the wording of the pension plan.
Senator Meighen: Could I not be entitled as well and still have a right to participate in that two-thirds vote?
Ms Taraschuk: It could happen. It depends on the wording of the plan documents for rights to surplus.
Senator Meighen: I could have forgone my right to entitlement, but I could still be described as a former member of the plan and, therefore, my vote is required.
The Chairman: I am sorry, I am not supposed to say that that is nuts, but why would anyone who has no right to any of the money in the plan have any right to a vote? That does not make any sense.
Ms Taraschuk: The former members are those who had left their benefits behind. Under the terms of the pension plan, they may or may not have a right to the surplus, but they have left their benefits behind in the plan; therefore, they have a right.
Senator Meighen: They have to be entitled to a pension of some sort.
Ms Taraschuk: Yes.
Mr. Le Pan: That is right. They may have transferred to a different employer but did not transfer their pension plan entitlement. They are still entitled to a pension under the plan.
Senator Meighen: I can remember working somewhere for a very short period of time and the money was gone. I had no right.
Mr. Le Pan: No, we are not referring to such a case. Nor are we talking about someone who did not invest. We are talking about people who are no longer members but who still have a pension entitlement because they left their money in the plan. Spouses are included.
The Chairman: Given the confusion caused among eight or nine of us with this question, can I ask that we have a very clear definition of "former member" either in the act -- in which case we are happy to do an amendment -- or in the regulations?
Ms Taraschuk: We amended the definition of "former member."
The Chairman: You are reading something. What are you reading?
Ms Taraschuk: I am looking at the bill as amended at page 1, clause 1(3)(a)(i).
Mr. Le Pan: We are talking about someone who has ceased membership but who has not transferred their pension benefit credit. They still have a credit in the plan.
The Chairman: They are entitled to a pension of some sort.
Mr. Le Pan: Yes. Therefore, they might potentially, arguably, be entitled to some of the surplus.
Senator Meighen: In my mind that still does not answer why you must get two-thirds in that class.
Mr. Le Pan: That is right. Let me come back to that question now that we have sorted out who these people are. I would find it difficult to say. There are enough opinions already about the numbers. For example, somebody might have been an employee in this plan for a significant period of time, left the plan but still retained pension credit in the plan two years before they retired. Compare this with someone who has contributed to the plan for 20 years. Why does one person's vote count differently from another? I would have difficulty arguing that.
On the other hand, there will be situations in which someone may have been there for a short period of time. Given vesting requirements, it may be less than it was 10 years ago, but then you might argue that they should not have the same kind of vote. However, I have a hard time drawing a line between those scenarios.
There is nothing in this bill that says that the proposal must provide the same enhancement in benefits in order to get the vote for somebody who has been there for 20 years versus somebody who has been there three years. I would rather leave it to that than try to decide who has a better right to decide.
The Chairman: You could do a benefits plan proportional to the number of years you have been in the plan.
Mr. Le Pan: Exactly.
Senator Tkachuk: I want to go over that wording "entitled to the surplus" which is in the proposed sections 9.2 (1)(a) and (2) which are related, is that right?
Ms Taraschuk: That is right.
Senator Tkachuk: Let us say there is a pension with $100,000 in it, that $60,000 fits your ratio of one, that you leave an extra $10,000 in the fund and you have $30,000 worth of surplus. If the employer is entitled to the plan, do you not confuse the law by saying, "Yes, you are entitled"? When you say someone is entitled to something, it seems to me it belongs to them, they are entitled to it. However, at the same time you grant the person receiving the pension the right to title, are you not saying, "You are entitled to the money as the employer but the recipients have the right by a vote to say that you cannot have it, therefore you are not entitled to it"?
Mr. Le Pan: There may be in that question a substantive issue, but there is also a drafting issue.
As a drafting matter, what we have done in the proposed section 9.2 (1)(a) is we have used the word "entitled", but we go on to say that the employer is entitled to the surplus either under the pension plan or this section.
The employer may be entitled first because the plan is clear that the employer is entitled to the surplus, period. That was the deal, that is what was negotiated, and there is no question about it. Then, as a drafting technique, we have said that they could also establish entitlement by the rest of this section.
Senator Tkachuk: If they are entitled, they do not have to have the vote. Is that correct?
Mr. Le Pan: That is correct. If they can establish that they are entitled under the current Pension Benefits Standards Act and it is clear in the plan documents, then you do not have to vote. If we are into this grey area, which involves a fair number of the cases as a practical matter, then they are into the procedure that I have just described.
Conceptually, you could say that if you are into this procedure are they really entitled? I agree that before they went through the procedure they were not entitled. If they had been, they would not have gone through the procedure, the documents were not clear. They have established entitlement in a legal and legislative sense by going through this procedure. That is the way this section is set up.
Frankly, assuming two-thirds was achieved, they have established entitlement by going through this procedure. That is all that has happened.
Senator Tkachuk: I assume that unions would not like this. They would like to keep the money in the pension plan for their members, is that not right?
Mr. Le Pan: It is a question of benefits now versus nothing now. If the money stays in the plan, no one will get it today. The employers do not get it and neither will anyone else. The money will just sit there.
Senator Tkachuk: To take the scenario to its logical conclusion, no one will ever get it, is that right?
What you are running into here is politics, even though this is a legislative measure. The unions would say, "No, we do not think the employer should have the money." There would then be a campaign between the people representing the unions or the membership and the employer who wants his hands on the cash, is that not right? In a practical sense that is what you have.
What you are doing is inducing the employer to get hold of what he thinks is his or her money. You are inducing them to run a campaign by offering pension inducements as part of the campaign.
Mr. Le Pan: That is right.
Senator Tkachuk: That would be in order to get hold of the balance of the cash.
Mr. Le Pan: That is right, knowing that everyone has some degree of rights and so forth, and it is not a slam-dunk that the employer can make no proposal that will enhance benefits.
On the other hand, it is back to Senator Meighen's point. The union in your example, Senator Tkachuk, does not have the ability to stop this for a variety of reasons. It is precisely back to the question: Does this set up a framework where we are likely to see some use of it? Is it biased one way or the other too much? My gut sense is no, but that is just my gut sense. That is partly why we are here. We are doing exactly what you said. Those are exactly the dynamics we are anticipating.
Senator Tkachuk: Is that what you want to happen?
Mr. Le Pan: Yes. You have to negotiate. It is not so much as a campaign as you have to pre-negotiate. You have to sit down and say, "Suppose we do this as an employer..." This is your support.
The Chairman: To follow up on Senator Tkachuk's point, would the proposed section 9.2(1)(a) not be more clear if you were to say that the employer establishes it is entitled to the surplus, or part of it, under this plan, but the rest of it should say, "or the employer receives the right to this surplus as a result of the rest of this section"?
It seems to me that this part of the section is a right that he obtains as a result of going through a process and is not something to which they are entitled. Could you look at this area?
Mr. Le Pan: I would be happy to, Mr. Chairman.
The Chairman: To follow up on Senator Tkachuk's point, just to put numbers on it, what you are saying is if, for example, there is a $10-million actuarial surplus which the employer would like to get a handle on, he cannot get it without the approval of the people affected by the plan, so he goes to them and says, "I would like this $10 million. I realize you will not give it to me unless you get something in return. Why not split it down the middle?" So either the employer obtains five and the beneficiaries obtain five, or they get an extra 1 per cent a year or whatever. Is that essentially the dynamic you are trying to set up?
Mr. Le Pan: Exactly.
The Chairman: What you are saying is there is then a vote on that, to put it in layman's terms. If less than 50 per cent of the beneficiaries vote "yes", it is dead. If over two-thirds in each class vote "yes", it is a done deal. If it is halfway in between, there is compulsory binding arbitration.
Mr. Le Pan: That is right.
Senator Meighen: However, it is not a done deal until the superintendent says "yes", is that not right?
Mr. Le Pan: Yes.
Senator Meighen: Why is that in there?
Mr. Le Pan: I understand.
In that example, I do not think we would approve a plan that moved the solvency ratio down to one. Actuarial science is not precise. The standards for valuing these plans are in evolution. We have seen a fair amount of restructuring in the economy, and that has meant that plans that formerly were thought to have significant margins turned out, two or three years later, to have margins that were not so good. I do not want to have a plan, three years after they have taken this solvency ratio down to one, be terminated with a deficiency.
The Chairman: Are you saying that the superintendent is essentially going to decide, as he should for financial solvency reasons, how much money can come out of the plan, which is not what this says; or can the superintendent decide that he does not like, for example, the split that has been voted on by people? If it is the former, that is fine, and why do we not say that? I take it you are not suggesting giving him absolute discretion, by which it would appear he could throw out a plan.
Senator Tkachuk: How would the superintendent know anyway?
Mr. Le Pan: We could require an up-to-date valuation of the plan.
Senator Tkachuk: Then is it 1.1 or 1.2 or 1.3 or what?
The Chairman: That is a judgment call.
Mr. Le Pan: That is what we are paid to judge. I do not have a target at the moment.
Ms Taraschuk: The legislation also requires by regulation that a cushion be maintained in an ongoing pension plan. I believe it is two years worth of contributions or 25 per cent of the liabilities. We have to ensure that that is there as well, and that the regulations are being complied with, before the surplus leaves.
The Chairman: Do you understand the question we are asking? We absolutely understand, I think, why you would have a right to veto something on the grounds of insolvency. The question is: Why would you have the right to veto the plan if you had already agreed on the maximum amount of money that could come out of the plan?
By the way, why would anybody vote on a proposal unless it had already been agreed? Take my $10 million example. Why would I even put this issue to the employees unless your office had already said, "You can take $10 million out"? We would be wasting our time.
Mr. Le Pan: That is what will happen. People will come to talk to us first, just as they do with other transactions.
The Chairman: Can we not make that clear?
Senator Stewart: He thinks it is not necessary, because it will happen anyway.
Mr. Le Pan: No. They will happen anyway because of what is in this bill.
Senator Meighen: It is sort of an advance ruling. You would say, "This looks okay."
Mr. Le Pan: We would ask, "Do you have an updated actuarial report and so on?" What sets that up is the requirement to get our approval. I totally agree with you, Mr. Chairman, you are not going to have a situation in which somebody will go out with a proposal that they know we will turn down.
The Chairman: I am putting it slightly differently. I think they will want to know you are going to say "yes".
Mr. Le Pan: That is right.
The Chairman: That is different. People will want an advance ruling, and surely the advance ruling from OSFI would only say, "The plan will still be financially sound if this money is taken out." Beyond that, how the money is divided among the various players is not your business.
Mr. Le Pan: What about disclosure? Is there anything related to disclosure? I will be frank. We are pushing and we are evolving here, particularly with the new white paper proposal and what is in this bill, but we, over the past 12 to 18 months, have, in a couple of situations, done an immense amount to push for adequate disclosure to members about what was really going on in plans. We have done that in part using our approval authority for various other things under the statute, including our requirement to approve plan amendments. If you take us out totally or limit us only to safety and soundness, we will not have any role around the quality of the process. I want to think about that before I agree to it. It may be that we could circumscribe the proposed section 9.2(1)(c) in some way, but I would want to think about some of the other kinds of roles that we might have in the process.
The Chairman: Do you understand our concern?
Mr. Le Pan: I understand.
The Chairman: If a fair process, as described here, has been gone through, and if it has passed the test and the plan is still safe, you should not then have the right to change it.
Mr. Le Pan: Right, and our interest is the same as the committee's. We do not want to get into the Solomon-type position of trying to decide whether the split should have been 10.1 or 10.2 or 5.1 or 6.2. We do not want to be in that business. In fact, this provision in the bill is aimed at trying to get us out of that position, to some extent.
The Chairman: Can you reflect on that issue and let us know?
Mr. Le Pan: It may be that we could deal with that more directly than just totally circumscribing the authority.
Senator Kelleher: I have two questions. Going back again to the first question I asked regarding the situation where it is less than 50 per cent, I think the chairman used the phrase, "You are dead," but then you said, I think, subsequent to that or during my remarks, "However, they still have the right to go to court if they wish." What I am concerned about comes from thinking strictly as lawyer. If I have an act that talks about these things and in effect says if you do not get the 50 per cent, you cannot go to arbitration, I am concerned, if I do bring an action and go to court, that it will be argued against me that I am precluded from going to court because of the system and regime that has been set up here. As a lawyer, I would be a heck of a lot happier if I had a clause in here preserving my right to go to court in the event that I do not have the 50 per cent. That is there and that is a threat to me as an employer, if I have to go to court. Do I have that right? It is not preserved here.
Mr. Le Pan: Yes. It is not preserved; it is not taken away.
Senator Kelleher: I do not know. It could be argued that it is being taken away because I have set up this procedure within the bill.
Ms Taraschuk: I do not think it has been taken away because of the option presented to the employer for establishing entitlement in proposed section 9.2(1)(a). I would be concerned about putting in a broad notwithstanding provision regarding court because that would just raise some uncertainty as to the binding ability of this arbitration process which we want to ensure is there. I believe that they still have the option to go to court even if they do not get the 50 per cent.
Senator Kelleher: It certainly does not say that.
Mr. Le Pan: I hear you.
Senator Kelleher: That is my first concern.
My second concern goes back to the wording on page 12 of the bill. If the 50 per cent threshold is met, arbitration is mandatory for plans that are being wound up, but optional for ongoing plans. My concern is that, generally speaking, from my knowledge of what happens, the only reason the plan has been wound up is because the company is being wound up. You have a bankruptcy here.
Ms Taraschuk: Not all of the time.
Senator Kelleher: Not all of the time, but in a number of cases a plan is wound up because the company has gone bankrupt, is that correct?
Mr. Le Pan: Correct.
Senator Kelleher: What that means is it is in the hands of a receiver of some type somewhere, and there is no way, when a company has gone bust, that the employees are going to be receptive to very much. Yet, you will have the receiver, who is representing the creditors, wanting to get at that money to pay the creditors. What you are ensuring here, if I do not get the 50 per cent, which I probably will not in a situation like that, is that it will go to court and there will be some very costly litigation because both sides have a great deal to lose. In a case like that, where a plan is being wound up, particularly where there is an insolvency, I wonder if that 50 per cent threshold is a very good idea because you are ensuring it will go to court and be litigated. Would it not be better for the parties if we dropped that 50 per cent threshold and forced them to go to arbitration so that money is preserved for the parties involved?
Mr. Le Pan: Working through the logic here, I have a couple of things to say. I think you are really focusing almost totally on the liquidation scenario.
Senator Kelleher: Yes, I am.
Mr. Le Pan: Certainly, we are aware of terminations that are not liquidations. In those cases I do not think your argument would apply.
Senator Kelleher: That is right.
Mr. Le Pan: Secondly, in the case of liquidations, of course we have seen liquidations that are not actually formal liquidations but are restructurings.
Senator Kelleher: That was the Eaton's case.
Mr. Le Pan: Yes. That is not the only one.
Senator Kelleher: That is the most recent one.
Mr. Le Pan: Yes, although that is not a federal plan. Where there has been willingness on the part of employers, unions and employees to make a deal --
Senator Kelleher: There is pressure because they want to restructure, but that pressure is gone when the company is being wound up.
Mr. Le Pan: You are focusing totally on the wind-up kind of case.
Senator Kelleher: Yes.
Mr. Le Pan: Not even a restructuring kind of case.
Senator Kelleher: I am just trying to save money for everyone.
Mr. Le Pan: I understand. It is an interesting point.
Senator Kelleher: It is very expensive.
Mr. Le Pan: From our point of view, we are interested in getting some certainty in that kind of case because, to the extent it drags on, you are holding up both the termination of the plan itself and, potentially, as you indicated, the insolvency proceedings. I do not have a strong view one way or the other.
Ms Taraschuk: I would raise two points. First, if we do not have some sort of threshold, what type of proposal will the employer be sending out to the members? This way at least there has to be some effort at obtaining consent even on termination.
Senator Kelleher: In the event of an insolvency situation, what is so terrible about forcing the people into arbitration rather than going to court? The reason the company is insolvent is that there is a shortage of money.
Ms Taraschuk: Yes, I understand that. The arbitrator is considering the proposal. One difference on termination is that rights crystallize when a plan is terminated, as opposed to members perhaps having a right to surplus in the future if the plan is not clear to the benefit of the employer. Rights have crystallized at that moment. So they have a real interest in this process. There is more danger of members challenging the issue in court to have distribution. This way makes the process more workable, ensures that the members will get a decent proposal and ensures that the arbitration process can proceed with regard to this proposal.
Senator Kelleher: Perhaps I am missing the point. In my example, if it is under 50, the parties will go to court.
Ms Taraschuk: Or they could redraft the proposal.
Senator Kelleher: The company is bankrupt. Obviously there is a shortage of cash in a situation like that. That is why they have gone broke. Why risk the little bit of money that is left on extensive litigation? Why not force them to arbitration?
Mr. Le Pan: It is back again to creditors versus pensioners.
Senator Kelleher: That is not hurting the creditors. I think it will help everyone to have arbitration.
Mr. Le Pan: Agreed. There is no question about that. If we could have arbitration on a least cost basis for sorting it out, that would help everyone.
Senator Tkachuk: Clarify this for me and Senator Kelleher. If it is surplus funds, how can it be hurting the pensioners?
Mr. Le Pan: I did not use the word "hurting".
Senator Tkachuk: Yes, you did.
Mr. Le Pan: It is an issue of various interests. There are surplus funds and we are trying to sort out who gets what, where it is not clear. On the one hand, the surplus that comes out to the company that is in liquidation will go to the creditors of that company. We are talking about what the threshold is for the kind of negotiations and arrangements that we have described here.
If we were to lower the threshold in that case significantly below 50 per cent, then it may well affect the kind of proposal that is made to the members and former members and you will presumably end up, because there is a lower threshold of assent needed, with a proposal that has more of the surplus going to the employer -- the liquidating company -- and less going to current members.
We talked in your example about a 50-50 split. If all I have to do is get 10 per cent agreement to be in the ballpark, as opposed to 50 per cent, I will not propose a 50-50 split.
Senator Tkachuk: I got lost there because the intention of this is to clarify some of the outstanding problems. Senator Kelleher raises a very good point. If they are considered surplus funds, the pensioners will never get those funds.
Mr. Le Pan: That is not true.
Senator Tkachuk: Let us say there is a bankruptcy. It will be easier to fix up the actuarial tables and figure out how to meet the obligations to the employees who are left and the ones who have left the company and are receiving pensions. You know how much you need to pay them as per the agreement they signed with the company. There are still surplus funds. Are you saying that in the case of a bankruptcy there is a question of whether there is really surplus funds and that they should belong to the pensioners versus the creditors?
Mr. Le Pan: That is right. It is exactly the same issue, or I think of it as the same issue.I do not think the fact that the company is gone has solved the question of whose money this is.
Senator Tkachuk: No, it will go to court.
Mr. Le Pan: Therefore I think there is still a question of whether that money should have gone to pensioners versus the employer. We are trying to figure that out where it is unclear. I think Senator Kelleher's suggestion is that the threshold ought to be lower because in these situations it is more likely to go to court any way and therefore we ought to make it easier to use this procedure than the court procedure.
We are still talking about a negotiation, as we described earlier, in order to get the assent. We are still talking about the balance of power in the negotiation. The lower you make the threshold the less likely it is that there will be a meaningful proposal to pensioners.
Again, as I said earlier, there is no magic to the numbers in here. These were judgment calls. If it were said that, because we want to increase the likelihood of using this arbitration procedure for a terminating company, the numbers ought to be lower, I can understand that. However, I would be worried about putting it really low because then there will be no incentive to provide a meaningful proposal.
Senator Kelleher: I was not suggesting down to zero, but something less than 50 in that kind of situation.
The Chairman: You will be coming back next Tuesday. Can you reflect on that in the meantime?
Mr. Le Pan: Of course.
Senator Stewart: We have talked again and again about negotiation. What is the factual situation with regard to whether the employees are organized? How well are most of these groups organized?
Mr. Le Pan: It varies. In some plans there is very strong union representation. In other plans the employees are unionized but the union is not particularly active in pension matters. As well, there are some that are not unionized. It is all over the map.
Ms Taraschuk: In some pension plans the retirees are organized around an association of sorts and for others there is nothing in place.
Senator Stewart: I think I see the implication. Thank you very much.
Mr. Le Pan: Part of this process leads to there having to be some interlocutors.
Can we do anything in circumstances where there are not active groups, and so on, other than sort of try to prescribe different classes so that there is some sense that people could get themselves organized where they are not on a class basis? I do not really think that we can mandate representation. I thought about this when we were putting this presentation together. It comes back to the same question we have been debating, namely, if there is a requirement for a real level of consent that is meaningful there must be someone to whom you are actually talking. The flip side of the questions by people who worry that it will be too hard for employers to get funds out of this is that if the thresholds are too low, there will not be a meaningful need to obtain consent from the employees or former members or retirees and, therefore, there will be less need for them to be organized in any way to consider it. That is part of the judgment call concerning whether or not we have these thresholds set at roughly the right level.
Senator Oliver: Ms Taraschuk has talked about regulations. Can you tell us at what stage the regulations are now in terms of their drafting to implement these funding proposals? Do you intend to bring them here and table them before us so that we can see them?
Mr. Le Pan: We would be happy to do so if you wish to see them. That has always been my approach.
Senator Oliver: What kind of timing is involved?
Ms Taraschuk: We have a draft right now which is being altered and changed, but we will be happy to provide you with it.
Mr. Le Pan: We will not go into this unless members would like to do so because we covered it in the presentation, but we also have various other guidelines that are under development, for example, guidelines related to governance and disclosure. The guidelines on disclosure will be available -- and, here we are talking about days -- in draft form for discussion and consultation, as will the others. Obviously, we will be happy to provide those to this committee. Those flow more from other policies than they do from the bill directly; however, they support some of the fundamental thrusts of the bill.
The Chairman: This committee has done work in other governance areas. We have studied corporations and are about to look at institutional investors. When you have the draft policy guidelines available, I would like you not only to make them available to us but also to return here to discuss them with us while they are still in draft form.
Mr. Le Pan: We would be happy to do that.
Senator Callbeck: I wish to return to page 10, where you talk about the Minister of Finance entering into a multilateral supervisory agreement. If the Province of Prince Edward Island signed such an agreement with the Minister of Finance, what is involved and what pension plans are you talking about?
Mr. Le Pan: The pension plan is composed of two types of members. They are members who are federal employees and are governed by the Pension Benefits Standards Act, and members who are provincial employees and are governed by provincial pension legislation. Under the proposed multilateral agreement, let us suppose that the members in the federal employment are the majority of members in the plan. Let us say that 75 per cent are members under the Pension Benefits Standards Act and 25 per cent are under the auspices of the Province of Prince Edward Island. As a result, it would be possible under the agreement for the federal government and OSFI to supervise the whole of the plan with respect to all of the members using the Pension Benefits Standards Act rules. Currently, that is not possible. Essentially, you have two sets of rules that apply to that plan, namely, Prince Edward Island's rules and federal rules under the Pension Benefits Standards Act.
There are other arrangements we can enter into as a supervisor with Prince Edward Island. For example, let us take a plan that is a purely Prince Edward Island plan with provincial members and no federal members whatsoever. It is possible, without any needed legislative authority for Prince Edward Island, for example, to ask OSFI, on a contractual basis, to help them administer their pension plan supervision. We do that with a number of provinces in the insurance companies area and in the trust and loan area and we can do it in the pension area as well.
What is really new in this clause in this bill and in the proposed multilateral agreement is that it would not just be us administering a different set of rules.In my example you would be reducing the number of sets of rules that apply to the pension plan from two to one set, and vice versa. If the plan had a big share of Prince Edward Island members and just a few members employed federally, effectively that plan could be totally administered by Prince Edward Island under Prince Edward Island's pension legislation.
Senator Callbeck: You are talking about a plan in which both federal and provincial employees would be in the same plan.
Mr. Le Pan: Yes.
Ms Taraschuk: It is very rare and happens mostly in multi-employer plans where you might have one company that is provincial mixing in with federal companies.
Senator Callbeck: Has this been asked for?
Mr. Le Pan: Do you mean the amendment?
Senator Callbeck: Yes.
Mr. Le Pan: There has been work on this multilateral agreement for five to seven years. Plans that have both federal and provincial members would like to see a reduced amount of federal-provincial overlap here. For the kind of plans that would be effective, there is support for this. It may mean there should be a further kind of sorting out of responsibilities, but there is nothing on the table federally or provincially at the moment that has the likelihood of a major restructuring concerning who does regulation here.
To return to where I started, the federal government represents only about 10 per cent of the action nationally. In order to have some kind of major rearrangement of responsibilities -- because now we have both the federal government and the provinces in this business in some fashion -- it would require the support of provinces with a significant amount of the activity.
The other aspect of some major rearrangement that would affect the possibility of some major rearrangement is that pension legislation, both federally and provincially, involves two elements, as I indicated at the beginning of my presentation. There is a safety and soundness element, including everything from the powers of the supervisors to investment rules, et cetera. It also involves a number of tricky social policy aspects, that is, everything from the definition of "spouse", the surplus provisions that we have talked about, vesting rules, et cetera.
My own assessment is that the degree of harmony in those second set of rules now is far less than it is in the first. If we were to talk about the federal government taking over pension regulation on behalf of all or a significant number of provinces, for example, or vice versa, one of the first things one comes up against is some of these tricky social policy aspects of pension legislation that have been contentious and have involved a lot of discussion and compromise in different jurisdictions. My own assessment of the ability to get some kind of agreement on one set of rules for those among, say, five or six provinces and the federal government, is not high. We have not been pursuing some major rearrangement of responsibilities here. We have been pursuing incremental kind of steps, that is, the kind of agreement that I talked about in which plans are comprised of both federal and provincial members.
We are developing some degree of expertise in examination. Currently, not many other provinces actually have examination staff that examine pension plans. We do quite a few of them and we are facing a learning curve as to how to focus on what really matters here. If a province wanted to approach us on that kind of administrative basis, we could do that. Those kinds of steps are a better way to get some rationalization here than some kind of major rearrangement because I do not see that as being realistic in the short time-frame. It might well be desirable. Many employers are increasingly worried about the fact that we have duplication. There is quite a difference between being worried about it and actually getting to some resolution, as we have seen in a number of federal-provincial financial regulatory areas where it has not been possible to come to some rearrangement.
Senator Meighen: You mentioned provincial plans which require the 100 per cent. I am still troubled by the two-thirds. In particular, I am still troubled with the two-thirds in section (b), the former members. I was thinking, and, as I thought, I believe I saw the answer to my question: If you do not get it, you go to arbitration.
Mr. Le Pan: That is right.
Senator Meighen: Suppose you had worked out a deal between the employer and the union, to take an example. Presumably they would both appear before the arbitrator and say, "We are in agreement. The fact of the matter is that we just cannot physically find two-thirds of these people." The arbitrator would presumably say, "I will go along with it."
Mr. Le Pan: Exactly. There is more flexibility in here than people realize. Suppose the former members make up only a relatively small part of the plan. Again, that will increase the likelihood that an arbitrator will do that.
I do not want to get into this again, but it is back to the matter of us not wanting to be in the business of doing the line drawing.
Senator Meighen: The 100 per cent seems virtually impossible.
Mr. Le Pan: To be frank, some provincial legislation prohibits surplus going to employers for ongoing plans or only provides for this in terminating plans or requires 100 per cent approval for an ongoing plan.
Senator Meighen: Is that regardless of the plan?
Mr. Le Pan: Yes. We are down to two-thirds. Some provinces do not permit it at all. We looked at the provincial rules. We borrowed a bit from some of them. The arbitration procedure exists in British Columbia, for example. We have elaborated on it, and we have pushed the yardstick.
I will be frank here in the spirit of the kind of discussion we are having. Going back to a question which was asked earlier, we were trying to look for something that had a reasonable chance of being workable but that did not open up such an emotional issue that we could not get anywhere. That was part of the judgment.
Similarly, part of the discussion internally, and one reason I am happy to be here, was that there is no magic to one particular number versus another. Flexibility can be used as to what those numbers ought to be, as you have seen, and we are prepared to discuss things.
The Chairman: Senators, before adjourning, I can indicate that these witnesses will re-attend next Tuesday. When they do so, I would ask that they be prepared to address the outstanding issues which have arisen today as well as matters which might arise later in the week when other witnesses appear.
Mr. Le Pan: Mr. Chairman, I should like to make one or two other comments on points which I did not get a chance to cover earlier.
As I indicated, this bill came out of a white paper. The bill was tabled in the previous Parliament, and approximately 30 submissions were received in total. Many were brief; several were more detailed. We made some changes to the legislation in response to comments received, but we did not adopt a number of comments -- in particular, some from witnesses yet to appear. I would be happy to go into those now or later.
The Chairman: When you attend next Tuesday, you can respond to comments we hear on Thursday, comments you heard from the committee today, as well as deal with technical amendments and get back to some of the broader policy issues that have been discussed with you today.
The committee adjourned.