Proceedings of the Standing Senate Committee on
Issue 14 - Evidence - October 21, 2009
OTTAWA, Wednesday, October 21, 2009
The Standing Senate Committee on National Finance met this day at 6:38 p.m.
to examine the Estimates laid before Parliament for the fiscal year ending March
31, 2010, and the subject matter of pensions.
Senator Joseph A. Day (Chair) in the chair.
The Chair: For our first session this evening, we are pleased to
welcome back Maria Barrados, President of the Public Service Commission of
Canada. Ms. Barrados will be speaking to us about her most recent annual report.
We have Ms. Barrados before us at least once a year and sometimes more
frequently than that, since our committee's mandate is close to the work that
the Public Service Commission does for the public service on a regular basis.
She is here this evening with Donald Lemaire, Senior Vice-President, Policy
Branch, and Jean Ste-Marie, Acting Vice-President, Audit and Data Services
As we only have one hour for this session, honourable senators, I would ask
you, after Ms. Barrados gives us her introductory remarks, in the exchange of
comments and questions, to keep your questions sharp and succinct. That will
help give everyone an opportunity to participate.
Maria Barrados, President, Public Service Commission of Canada: Mr.
Chair, honourable senators, thank you for the opportunity to meet with you to
discuss the work of the Public Service Commission of Canada — in particular, the
Public Service Commission 2008-09 Annual Report and five audit reports, all of
which were tabled in Parliament on October 9. I am here today with Donald
Lemaire and Jean Ste-Marie.
The Annual Report covers the third year of operation under the Public Service
Employment Act or PSEA. In 2008- 09, the legislation covered 82 organizations
representing more than 208,000 employees, casual workers and students. We have
seen continued growth in these organizations.
We have also seen a high level of hiring and staffing activity. This level of
activity is generated by the growth of the public service, retirements and a
high level of internal movement. For example, we saw an increase of 20 per cent
over last year in the number of people entering into permanent positions in the
Based on our various oversight activities in 2008-09, we have concluded that
the core values of merit and non- partisanship are generally being respected
across the public service. Nonetheless, the Public Service Commission is
concerned about early and important signs that added vigilance is required to
ensure that Canadians will continue to benefit from a merit-based, non-partisan
public service in the years ahead.
While one of the primary expectations of the PSEA was that staffing would be
faster and more efficient, it is still taking too long to staff positions. We
have not gained anticipated efficiencies as measured by speed of staffing for
indeterminate advertised processes. The average time it takes to staff has not
improved since the introduction of the 2005 PSEA.
Our analysis shows that it is possible to make significant improvement in the
time to staff with the current legislation. Based on organizations assessed as
``best performers'', reductions of up to 30 per cent are possible. The PSC also
piloted a new approach to external recruitment that demonstrated that
efficiencies can be achieved with focused efforts of managers and a strong
project management approach. Using such an approach for an external process,
staffing was completed in 45 days, from advertisement to offers of appointment.
Slowness in staffing directly affects the ability of the public service to
provide quality programs and services to Canadians. When faced with excessive
time to staff, work can be delayed, or managers may turn to alternative or
temporary staffing options, such as casual employees or acting appointments,
with attendant impacts on the core and guiding values of the PSEA, the Public
Service Employment Act.
For these reasons, improving time to staff is an integral part of addressing
other concerns we have identified, including an increase in the hiring of
permanent employees from the casual workforce. The PSC is concerned that prior
casual experience can provide an advantage to some individuals. The PSC is also
concerned about the inappropriate use of temporary workers to fill established
public service jobs on a long-term basis.
We also found that the Federal Student Work Experience Program is working
reasonably well. However, some student bridging decisions do not demonstrate
respect for the legislation, guiding values or the PSC's appointment framework.
The PSC found problems with data quality and reporting. Accurate information
is required, for example, to monitor the use of non-advertised processes and
measure the representation of employment equity members in appointments.
This year, the PSC observed new challenges with respect to protecting the
value of non-partisanship. We are beginning to see more complex cases that,
while individually appropriate, may undermine the overall perception of the
political impartiality of the public service. Thousands of new recruits are
entering the public service for the first time and the use of social media
technology blurs the line between public and private lives. We believe that
increased efforts are required to foster a better understanding of
non-partisanship as a core public service value.
Now I will turn to the findings of our recent audits. This year, based on our
assessment of risk, we examined five organizations. We undertake our audits as
part of our responsibility in our delegated staffing system to identify actions
that are required to improve the management of staffing. Based on our findings,
as well as the responsiveness of each organization to our recommendations, we
have taken the following measures:
The Office of the Correctional Investigator has put corrective measures in
place, and we have removed all restrictions on their appointment authorities.
Canada Border Services Agency has already taken a number of initiatives and
they are moving forward. We have asked for detailed plans and will conduct a
follow-up audit in two years.
At both Health Canada and Infrastructure Canada, senior management moved
quickly to undertake corrective actions in response to our audits and have
committed to strengthening their human resource management. They are also
required to provide additional reporting to make sure that progress is
At the Immigration and Refugee Board, IRB, we found preferential treatment in
staffing processes for some executive appointments and former
Governor-in-Council, GIC, appointees. GICs are appointed by ministers, while
public servants are appointed by the PSC, which is independent from ministerial
direction. Senior management of the IRB disagreed with some of our findings. We
will continue to do audit and investigation work over the course of the next
year. The PSC will investigate any internal appointment process resulting from
the audit, and upon receipt of the investigation report, the IRB has agreed to
implement corrective measures. As we deem necessary, the PSC will continue to
audit appointments made by the IRB, and the IRB will report to the commission on
the implementation of the recommendations in the audit report within six months.
We are also moving forward with our preparations for the five-year review of
the PSEA. As part of that work, the PSC is taking stock of the implementation of
the act, whether it has been implemented as intended, and whether it equips the
PSC and others to protect merit and non-partisanship in the years ahead.
The Public Service Commission has been given a special responsibility by
Parliament to independently safeguard the values of merit and non-partisanship
as the foundation of a professional and impartial public service. We are
committed to achieving this important mandate on behalf of Parliament and all
I am happy to take your questions.
The Chair: Thank you for your comments, Ms. Barrados.
Before I go to my list, can you explain to honourable senators, because there
are some new senators to this committee, the comment that you made that the
minister appoints the GICs while the Public Service Commission appoints public
servants? Can you explain the delegation that has taken place and your role in
terms of ensuring that the appointment process is followed?
Ms. Barrados: The Public Service Commission, with the exception of
about 3,000 Governor-in-Council appointments, makes most of the appointments.
The big difference between these types of appointments is who is responsible for
making them and under what direction.
About 100 years ago, there was a great political debate and there was a
decision that appointments would be free from ministerial direction and, hence,
this unusual organization was created, the Public Service Commission — in that
day it was the Civil Service Commission — that is independent from the direction
of ministers with respect to appointments, assessment and non-partisanship.
Governor-in-Council appointments, on the other hand, are made by ministers
and are subject to the direction of ministers and the final decisions are made
by ministers. There are over 3,000 Governor-in-Council appointments. They
include deputy ministers, the heads of boards and board members.
Senator Gerstein: Ms. Barrados, I would like to ask you about
investigations and, in particular, about the whistle- blowing process in the
Public Service Commission. In the corporate world, with whistle-blowing one can
have access to a non-executive chair to the chair of the audit committee.
What is the process? How much is it used? How effective is it? What
protection is there for the whistle-blower and how do you sort out what might be
Ms. Barrados: I will give two answers because I have two
responsibilities. I am the head of the Public Service Commission, which has
responsibility for all appointments within the government. As well, I am the
head of an organization, so I have responsibility for managing my own
organization and staff.
The Integrity Commissioner, who is appointed by Parliament, is responsible
for whistle-blowing and the whistle- blowing legislation. That does not fall
under the responsibility of the Public Service Commission. However, as the head
of an organization, I have to manage the whistle-blowing processes in my
organization, and we do receive complaints from individuals and brown envelopes.
I manage these two things differently, obviously. Within my own organization,
I appoint the head of my internal audit group. Anyone can go to the head of
internal audit, and have access to the independent commissioner, the Integrity
We send brown envelopes or individuals who come into our office with
complaints to our investigation section or our audit section. Complaints are
pursued via those routes. To give a specific example, we have just completed an
audit of a language school that was improperly using our language tests. They
got extraordinary results because they had copies of our tests. We learned of
that because a public servant came forward and said, ``I have just written this
test and it is exactly like my practice tests.''
Senator Gerstein: Are you satisfied that the whistle-blower is
Ms. Barrados: The whistle-blower cannot be completely protected
because of our privacy legislation. If someone is making a complaint against
someone else, the person complained about can ask for the information and the
identity of the person making the complaint.
Senator Gerstein: That is quite a difference from the corporate world.
Ms. Barrados: Yes, and that is the result of the privacy legislation.
It would be an interesting question to pursue with the Integrity Commissioner.
Senator Ringuette: Ms. Barrados, I am always happy when you appear
before our committee. I prepare, because I am always interested in the issues
you bring to us. I did a lot of reading, because you have an extensive report. I
would like to ask questions on a few issues that I have highlighted.
You indicate that indeterminate hires from outside the public service
increased to 20.1 per cent and represent 22.4 per cent of all new hires. That is
quite an increase from previous years. Have you looked into why? For the last
five years I have been complaining about that, but I guess complaining is not
Ms. Barrados: In many respects, that is actually a bit of a good news
story. The indeterminate hires are the permanent hires. There are two different
things happening. One is the public service has grown, and that is not my
decision; that is a decision of the government. The government has decided that
more public servants are required, so there has been overall growth.
The good news for me is that more hiring is coming directly from outside into
the permanent work force. So we have seen growth, and with that growth we have
seen more direct permanent hiring, which I think is a better way to go. I have
always been worried about relying on what I have called a ``contingency work
force,'' that is, using terms and casuals as a recruitment pool. This is an
Senator Ringuette: Yes, but in your report you say, concerning the
non-advertised appointment processes:
Deputy heads need to monitor and document the use of non-advertised
appointment processes more closely to ensure respect for the core and
Nevertheless, the PSC estimates that, in 2008-09, the percentage of
non-advertised processes appears to have decreased from the year before,
from 40 per cent to 37 per cent. It also estimates that 84 per cent of
acting appointments of four months or more were made through non-advertised
Combining your first comment with the 84 per cent of acting appointments
rings an alarm bell.
Ms. Barrados: Yes, that is a concern. The legislation provided for
advertised and non-advertised processes. I have many debates in the system about
the appropriateness of using the non-advertised process. The commission's
position is that the advertised process is preferable, but there are
circumstance under which it makes good sense to have a non- advertised process.
We have seen that number for external appointments move down, still at 37 per
cent. However, having the acting appointments so high is a real preoccupation,
because it gives an advantage to those people who get the acting appointments.
If you do not have an acting appointment, you have a 6 per cent chance of
getting a promotion. If you have an acting appointment, you have a 40 per cent
chance of getting a promotion, so it is a significant advantage.
Senator Ringuette: With regard to the Immigration and Refugee Board of
Canada, you indicate that you examined 54 appointments. For 21 appointments both
merit and the guiding values were met. There were 33 appointments where either
merit or the guiding values, or a combination of both merit and the guiding
values, were neither met nor demonstrated. That is 61 per cent. That is an issue
of major concern because I suspect that not all of these were advertised
Ms. Barrados: A number of them were not advertised. Our big concern
with that audit was that although in some it was done properly, but there were a
number where we could not tell from looking at staffing files. We could not tell
what had occurred because there had not been a proper assessment or proper
I keep reminding people that when you hire someone into the public service
you are making a multi-million-dollar investment, so this is not a casual
undertaking. There was an absence of documentation.
When we looked at the processes, we concluded there was preferential
treatment for some of those executive appointments and bringing former GICs into
the public service. That is why the position we have taken with the IRB is that
we are continuing to do work there. It is quite unusual.
Senator Ringuette: Upon what particular issue in your audit do you say
that you have seen some preferential treatment for GIC appointments?
Ms. Barrados: We would look at the actual process. In a process that
had 174 applications, there would be only three deemed qualified, and those were
targeted as having all the experience. They were former GIC appointees whose
terms had expired and they were being moved into the permanent public service.
When we looked at these processes, we felt that they did not pass the
Senator Ringuette: I remember an accountability bill trying to remove
that kind of initiative from GIC appointments to becoming permanent public
employees within a certain time frame and a certain factor.
You examined 51 appointments drawn from across Canada in Health Canada. You
say that you are concerned that most of the appointments and appointment
processes reviewed did not comply. Most of them did not comply with PSEA; the
guiding values of fairness, access, transparency, and representativeness — PSC
policies; or with the appointment delegation and accountability instrument
signed with the PSC. You found 28 appointments in which merit was not
demonstrated. That is 64.7 per cent of your audit. It is not all of the new
appointees. I do not know what the scale is to do your audit, but the audit is
only a portion.
Of the portion that you have identified, 64.7 per cent did not meet
transparency, accountability, representativeness, appointment delegation,
policy, transparency. That is very alarming.
Ms. Barrados: The Health Canada case includes an interesting set of
circumstances, because they had put management processes in place. They had the
framework in place. They had their policies in place. The problem was that it
was not being implemented and there was not sufficient monitoring on the part of
senior management to ensure that it was properly implemented.
In the case of Health Canada, when we drew this to the attention of senior
management, they took it very seriously and they put immediate corrective
measures in place. For them, we are asking for more reporting because we have
had this commitment to improve, and they recognize that it needs to be improved.
It does show, for me, how important it is that we keep after people.
Senator Ringuette: Yes, and it is important to have an action plan in
HR. However, it seems that HR is only window dressing, with 64.7 per cent that
does not comply with the basic policy of fairness, transparency, et cetera.
Because of my concern, at the beginning of August, I had some of my staff
look at the employment agencies in the Ottawa region; there are seven very
active agencies. Eighty-seven clerical jobs were advertised for the federal
government, and we doubled-checked with the jobs.gc.ca website to find only nine
of those jobs advertised on that website, only 10 per cent. Ninety per cent of
these clerical jobs were advertised through agencies.
Then we looked into contracts in the same group of agencies. Fifty-two jobs
were advertised. Absolutely none of them were posted on the public posting site
jobs.gc.ca. That is a major issue.
I find that more and more departments are using agencies instead of going
through the proper channels, through your system, of publicly advertising
through jobs.gc.ca. Therefore, the issue of eliminating the geographic
restriction is no longer valid because they are bypassing the policy that you
have put in place and only people from the Ottawa region know about these
placement agencies that the government and the different departments deal with.
The Chair: We will let Ms. Barrados reply.
Ms. Barrados: That is also a preoccupation of mine. A number of
members of Parliament have raised this issue with me. We have undertaken a large
piece of work to try to understand exactly the amount and where it occurs most
frequently. A number of things are of particular interest about this phenomenon.
First, it is an Ottawa phenomenon. Forty per cent of the public service is in
Ottawa. It does not occur in 60 per cent of the public service outside of
Ottawa. We are talking about $300 million. It is an amount that has been going
up. It is not only clerical but is also professional work.
These people come in not as public servants, which is another part of the
issue. They actually do not fall under the Public Service Employment Act, but
many of them are there for a long time and actually have roles and
responsibilities as if they are public servants, but they do not have to meet
many of the requirements of public servants, like bilingualism, for example.
There are also potential issues concerning security. These people have the
advantage to move into the permanent public service. While we had talked earlier
about good news, I have some bad news on the casual side because the people who
are there for 90 days move into the permanent public service after they have
learned the advantages in the system.
I share your concern, senator. I am not sure what the easy fixes are because
they are not public service employees in the same way but they function like
Senator Ringuette: I may have to rethink my bill and present it again.
Ms. Barrados: We should have more discussions about this phenomenon.
Senator Mitchell: Ms. Barrados, you will be well aware of the changes
to pay equity processes and appeals brought in by Bill C-10. Could you tell us
what your relationship or responsibility is for that process or issue in the
public service? Second, do you have some idea of the magnitude, the breadth of
pay equity issues in the public service, particularly as they would affect
women? Third, could you give us an opinion on how you feel this new process will
work or not work to advance that cause productively?
Ms. Barrados: I am in the same position as any other senior manager in
the public service in that I have been briefed on the initiative the government
has in place, but the Public Service Commission has no responsibility in this
area. We are the people responsible for staffing, promotions and bringing people
in. The employer, the government, sets the classification and the related issue
I really do not have anything to add in terms of the Public Service
Commission, in terms of how this is working or on the progress on this piece of
In anticipation of seeing some of the discussions you have had at this
committee, we spend time looking at gender- based issues and analysis. We have
responsibilities under the Employment Equity Act and women are one of the
We have done work on career progression — how people enter into the public
service and whether there is an advantage for particular groups. We have found
in the case of female employees, when you look at all employment groups, there
is no advantage for men over women. However, when you look at some specific
categories and levels, in many instances, men have an advantage.
Senator Mitchell: And at senior levels?
Ms. Barrados: The numbers I have seen deal more with junior levels.
Senator Mitchell: You are responsible for those numbers; is that not
right? If so, why would you not be interested in trying to get numbers for
Ms. Barrados: I can break out those details. When the numbers are
small, phenomena emerge from the small numbers. We can look to see if the
numbers are robust enough.
Senator Mitchell: I would take whatever you have. For example, in the
top 75 positions in the RCMP, there are only six women. The numbers are small,
but that is indicative of something. It does not mean as much in some sense. A
huge issue is what occurs at senior levels. If you could get that information
for us, it would be excellent.
In your presentation, you said that permanent public service positions
increased over the last year by 20 per cent. With a government that would say it
is very concerned about a $56 billion deficit, it begs the obvious question.
Why? Maybe there is a reason for it. In what sectors or areas of government is
that increase occurring?
Ms. Barrados: Obviously, the public service is facing an issue of
retirements and the need for renewal. There has been a big push on renewing the
retiring public service. There are questions associated with proper succession,
knowledge sharing and such transition issues.
Even taking that into account, there has been this net growth. We have long
tables with detailed numbers in our report. You will see growth particularly in
Defence, Security, Corrections, Health and HRSD. Overall, there is a net growth
of 4.5 per cent.
Senator Mitchell: This is purely anecdotal, but I have heard that
there has been a reduction in the availability of French-language training for
anglophones needing it to progress up the ranks of the public service. It might
well be that the converse is true for francophones. Have there been changes to
the availability of language training?
Ms. Barrados: The Public Service Modernization Act was passed in 2003
and came into force in 2005 and language training was transferred from the
Public Service Commission. We are no longer responsible for language training,
but we do the language assessments. We are the people who do language testing in
Language training responsibilities have been delegated to the departments. In
my own organization, I have to determine the volume of language training and how
I should give it. There are two types of obligations. First, if you have staffed
an employee who should be bilingual into a non-imperative position, there is an
obligation on the part of the employee to learn French and on the part of the
employer to provide the opportunity to do French training. It is an expensive
enterprise. The person has to be sent away and you have to pay their salary at
the same time.
Second is the obligation to provide second-language training to employees as
part of their own training and development plan. That is a different kind of
training and a different type of obligation than for the non-imperative
position. In that kind of training, it is the responsibility for the employee
and the employer to set their training and development plans for the individual.
The employer's first obligation is to ensure employees have the requirements to
do the job they are in.
Senator Mitchell: By dividing responsibility and putting it into the
department, would it not make these programs vulnerable to departments
experiencing cuts? They are looking for what they can cut and all of a sudden we
do not know what is happening because it is not identified in a central way as
it was before.
Ms. Barrados: It is possible, but even when you had the language
school, there was still training happening in the departments as well. My
experience with the deputy ministers is that they are very committed to official
language training. There is a limit to how much you can do and how many people
you can take out of their jobs and send away to learn the second language.
Senator Callbeck: I want to ask about cost-recovery revenues. I read
somewhere that you are having difficulty in meeting the figures in Budget
2008-09. Is that right?
Ms. Barrados: The comment I made in the annual report reflected the
commission's need to reduce its budget in response to the horizontal review. We
lost five per cent of our budget as part of the strategic review that every
department in government is experiencing. I felt that through the new
cost-recovery authorities that we were given, we could manage the reduction
because we had an ability to offer a number of our services on a cost-recovery
basis. It was not a complaint. It was saying: That is what has happened. There
is a reduction, but I think I can manage with the new cost-recovery authority.
Senator Callbeck: I think there was $12 million last year in the
budget for this 2008-09 report. Roughly how much did you recover?
Ms. Barrados: We had a target of $12 million. We were slightly under
and recovered $11.8 million.
Senator Callbeck: This year, it is $14 million.
Ms. Barrados: Yes.
Senator Callbeck: Is that a realistic figure?
Ms. Barrados: I may be overly optimistic. Going forward, we have set
reserves in place of about $2 million. If I cannot meet my cost-recovery target,
I will have reserves so I do not have to lay off people.
Senator Callbeck: How do you establish the cost-recovery figure? Is
there a figure in the budgets of the client government departments that matches
the $14 million?
Ms. Barrados: Yes. You would not see this in the large departments
that are paying for this. We set that number based on the experience of the
previous year. We have a group in our service part of the organization that has
close contacts. They are getting to be quite good at marketing what they do and
getting agreements and estimates from other government departments on what they
think their needs are. Much of this is from the psychology assessment centre.
That is an ongoing type of business for us. It is a unique tool used by
If we have a significant reduction in staffing, we will still have promotions
and movement in the public service. There may be a reduction. This is something
we will simply have to manage closely.
Senator Callbeck: The recovery figure of $14 million represents about
a 20-plus per cent increase.
Ms. Barrados: Yes. When we went through the modernization and
subsequent to that, the Prime Minister appointed an advisory group to look at
the operation of human resource management. One of the pieces of advice that
came from that group, that I thought was reasonable and so I accepted, was that
the required service offerings of the commission had moved from being
compulsory. In the old days, everything had to be done by the commission. Now we
are in a delegated model. It is discretionary. The advice was, if it is really
discretionary, you should put a market test on it, so if people want it, they
will pay for it. Those things that are discretionary, we are putting a market
test on and looking to recover costs. I think that is a reasonable approach
because it pushes efficiency and it means that the commission is only producing
things that people really want.
Senator Dickson: I found your answers to be specific and thorough. My
questions relate particularly to your presentation of the audits of the five
organizations, on pages 4 and 5 of your opening remarks.
I will name the five organizations quickly: the Office of the Correctional
Investigator, Canada Border Services Agency, Health Canada, Infrastructure
Canada, Immigration and Refugee Board. I note that all of these organizations
are responding in a positive manner satisfactory to you in relation to the
issues that you raised with them. Am I right in that assumption?
Ms. Barrados: The only one where I would qualify it somewhat is the
Immigration and Refugee Board, because they did not agree with some of our audit
conclusions. They do not agree with some of the interpretation we have put on
some of the cases. Hence, the result of that is that we have agreed with them.
We will continue to do work there, and they will better understand what we are
trying to do and I will have greater confidence that they understand and they
are doing it correctly.
Senator Dickson: My second question relates to the Canada Border
Services Agency. With ongoing trade problems with the United States and issues
at the border, what are the strengths and weaknesses of that organization? Could
you give some sense to the committee of the detailed plans that the agency
intends to file with you as to their action plan?
Ms. Barrados: I will have Jean Ste-Marie talk about the detailed
report that they will be providing us. Let me tell you about the Border Services
Agency. It is an organization that was put together about five years ago. They
took different sections from different parts of government, including CRA, the
revenue agency, which had moved out of government.
The result was that you had three sets of different systems. You had
different HR systems, different classification systems and different pay
systems. You had an overall different management system. These had to be brought
together. At the same time, there was a whole new program in how we were going
to do border services. It is a huge job and a huge challenge for that
When we went in there, our observations were that they did not have all the
things that one would expect in place, but given everything they had to do, I
felt that their progress was reasonable. You have to put a reasonable person's
judgment on this. I felt that they were trying to address their problems.
We did not pull and sample files in that organization because they had done
it themselves. There was no need for us to do it. We are not even asking for a
special report. We said that we will go back and audit in two years to see what
kind of progress they have made.
Jean Ste-Marie, Acting Vice-President, Audit and Data Services Branch,
Public Service Commission of Canada: We started off by mentioning that we
look at the framework and we look at systems. For instance, we looked to see if
they had HR policies in place, they did. They also have elements of good
planning. For systems, they clearly understand the roles that managers are
supposed to play in their HR advisers. They also have training for managers.
They have a number of the elements, if you will, that we expect to see in a good
Obviously, as Madam Barrados has mentioned, we will go back, because there is
more work to be done. As you can appreciate, it is a large organization. We
cannot do it all in one fell swoop, so we will go back and look at some of their
Senator Dickson: Staying with the Canada Border Services Agency, is
there a timeline for the filing of the detailed plan?
Ms. Barrados: We will go back in two years. We have asked the other
departments to report to us in six months. We have a report from all departments
every year. In two years we will go back.
The Chair: As a follow-up to Senator Dickson's questions, what are the
consequences of not agreeing, short of you withdrawing the delegation? You
delegate and you have an agreement with them that you can oversee, but short of
that, we spoke earlier about a number of hires that you have discovered that
were done not according to the rules. Do those people end up losing their
employment or do they continue to be employed or do you just look forward?
Ms. Barrados: There are a number of things that happen as a result of
these pieces at work. We have various tools on that delegation agreement. In the
delegation agreement, we can put a number of conditions. They can be
requirements for special reports; they can be requirements that we intervene in
specific types of transactions; it can be requirements that they cannot do some
and they can do others. There is a range of things. I must say that over time,
we have been trying to work different models to get the best result, because our
objective is not to take things over; our objective is to get better
performance. Everything we do is to try to get that better performance.
In the individual transactions, the individual appointments that we find with
problems in the audits, we then move to an investigation, which is a
quasi-judicial process. The result of that is, if it has been an external
process or if it is fraud or improper political activity or interference, we can
order corrections that can include removing someone from the job or the public
service. If it has been an internal process, however, by the way the act is
structured, it has to be done by the deputy minister. That gives us a bit of an
issue because, in the case of the IRB, where there is some disagreement with us
and the head, the act is set up in such a way that it is the head who has to do
it. That is why we are continuing to work in that organization. It is a feature
of the legislation that is giving us a bit of a problem.
Senator Di Nino: You will not be overly surprised to guess what my
first question will be because we have discussed it many times before. On the
success or otherwise of hiring of visible minorities, how are we doing?
Ms. Barrados: This is another area where I think I have good news. I
am pleased that I have sometimes good things to say. We have had difficulty in
getting the number right. Before I start that story, we look at the numbers and
how they are doing coming in, and of all those processes that were advertised —
this is not including Senator Ringuette's non-advertised, because I do not know
about them —18.8 per cent were visible minorities.
Senator Di Nino: That is up from what?
Ms. Barrados: That is up from 16 per cent and up from 15 per cent. We
have seen a steady increase every year. This is in part because we now have a
much better way of measuring this. We have spent quite a bit of time automating
the whole application process. Thankfully, I got the money to do that, so I have
the system in place and because of this application system, I can identify the
applicants and match them with the appointments.
What I do not know, though, is what the overall public service looks like,
because there it is actually a problem with the numbers. I do not have a lot of
confidence in that number. On the hiring last year, we did much better.
Senator Di Nino: Congratulations on that.
The Federal Student Work Experience Program is something relatively new. Can
you tell us what it is and how it is doing?
Ms. Barrados: That program has been around for a while. It is sort of
the summer employment program for students except it includes co-ops as well. We
did an audit of that program and we found that it was working reasonably well,
again in part because we have managed to invest in automating that process. We
can automate the whole process, which makes its more fair. Approximately 10,000
students come in every year through that program. The Economic Action Plan put
some additional money into that program to bring in more students. They all come
in through the Public Service Commission.
When you come in as a student through that program, as either a summer
student or a co-op student, you can be ``bridged'' into the public service. The
person can come into the public service, either through an internal process or
even through an unadvertised process.
My worry is that it is not properly documented. Again, these are investments
for a lifetime career, so I do expect a better job on assessing the requirements
of the job and what the person brings to the job.
Senator Di Nino: You talked about GIC appointments. I think you said
there are 3,000 out of an approximate 21,000 total workforce. That is a small
number in total, is it not?
Ms. Barrados: There is no doubt that is a small number. The
Governor-in-Council appointments are concentrated. They tend to be the senior
positions. I am a GIC appointment, for example.
Senator Di Nino: I was going to say that, but I am glad you did.
Ms. Barrados: I thought you were going to say that. That is why I said
it. I am a Governor-in-Council appointment. Deputy Ministers are GIC
Senator Di Nino: I guess senators are in a funny way too.
An Hon. Senator: No, we are not.
The Chair: No, we are appointed by the Governor General.
Senator Di Nino: In your presentation, you concluded that the core
values of merit and non-partisanship are generally respected across the public
service and then you suggested additional vigilance is required in some areas,
which will always be the case because nothing is perfect.
We have seen you now for a number of years and it seems to be working, it
seems that the improvement is continuing. As I said a moment ago, it will never
be perfect, but are you basically satisfied that we are moving in the right
direction and things are moving along well?
Ms. Barrados: I am very proud of our public service. I get a number of
visitors from abroad, and when I explain what we are doing in our public
service, I think we have every reason to be proud. Overall, we are a
professional public service and a public service of integrity. When I do these
reports, I look at the areas I think there is risk and we have to do better, so
I focus on those areas where I think we have to do better.
The one part that worries me more than I have spoken about before is the
issue of non-partisanship and how we protect it in our public service. This is a
key part of the Canadian public service. We have taken for granted that people
understand our traditions and way of working as change and turnover was slow. We
have many new people coming in — part of renewal, growth and retirement — and we
are in a technology age that brings different kinds of pressures.
I give an example in the report about one young individual who went to work
for the Privy Council Office who declared that he was politically active. No one
spoke to him, first mistake, and said, ``Now you are in the Privy Council
Office, you have to be very careful.'' Then he did a Facebook page praising
somebody in the opposition. He sent it to a friend. That is fine; that is
private, but the friend sent it to a friend and the friend sent it to a friend
and it was no longer private. It was public. This is the kind of world we live
in now. This is new, so we have to worry about that and address it and ensure
that everyone understands the obligations, and we on our side, the Public
Service Commission, contribute to everyone understanding that. That is a new
area for me. We are making progress. We have things to do. We still have a job
Senator Di Nino: We have a good person doing it.
Senator Chaput: Ms. Barrados, the report says that 70.1 per cent of
those appointed to organizations subject to the Public Service Employment Act
identified English as their mother tongue and 29.9 per cent of those people had
French as their mother tongue.
How many of those organizations are subject to the Public Service Employment
Ms. Barrados: Eighty-two.
Senator Chaput: Bilingual imperative positions are positions that
require knowledge of both official languages of Canada, English and French. You
say that 26.9 per cent of positions in the public service are bilingual
imperative. Can you tell us whether all those positions will be filled by
Ms. Barrados: You are talking about imperative positions?
Senator Chaput: Yes. Bilingual imperative positions will all be filled
by bilingual staff? Staffing activities are in fact done fairly well, if the
imperative is adhered to.
Ms. Barrados: For each appointment, the candidates' level of language
proficiency has to be evaluated. The evaluation is done by the Public Service
Commission of Canada. We are responsible for all of the language testing.
Senator Chaput: Do recruiting programs target postsecondary students
Ms. Barrados: Yes.
Donald Lemaire, Senior Vice-President, Policy Branch, Public Service
Commission of Canada: The postsecondary recruiting program is a national
program. Universities and colleges can request the programs. We do testing all
Senator Chaput: Do universities have to make a request? They are not
invited to participate?
Mr. Lemaire: Postsecondary recruiting programs have been taking place
for about 30 years, so they are very well known on university campuses, and are
held every year in the fall. Students are invited to participate at that time.
This year we received 77,000 applications.
Senator Chaput: This is not done just in Ottawa or in big cities?
Mr. Lemaire: No.
Senator Chaput: They are held all across Canada?
Mr. Lemaire: Yes, and even internationally. If Canadians abroad want
to apply, we even have mechanisms available at embassies for testing candidates.
Ms. Barrados: Employment applications can be submitted on our Internet
site and are available to everyone.
Senator Chaput: Are operational practices in terms of compliance with
the Official Languages Act adequate then?
Ms. Barrados: That may be a little strong. I think we have a staffing
system that meets the requirements of the positions. However, we might then ask
whether people are using their languages in the workplace.
If your question is whether people are complying with the requirements of the
Act, I am confident in the appointment and staffing process. There are other
Mr. Lemaire: In terms of merit, if the position is bilingual, the
requirement is essential. If the person does not meet the language requirements
of the position, they cannot fill it. If that does occur, however, we can even
revoke the appointment. So it is an essential requirement.
Senator Chaput: Might it happen that a person is hired for an acting
position if a bilingual person is not found? Are some positions staffed while
you are waiting?
Mr. Lemaire: It those cases they do non-imperative staffing.
Senator Chaput: Is it possible for that to happen?
M. Lemaire: Non-imperative staffing does happen, yes.
Senator Chaput: Can you tell us whether there is a lot of
non-imperative staffing for these positions?
M. Lemaire: It seems to me that it is around 7 per cent, maximum.
Senator Chaput: Seven percent in bilingual imperative positions?
M. Lemaire: It's non-imperative.
Ms. Barrados: It is not possible to put someone who is not bilingual
in an imperative position.
Senator Chaput: It is not possible?
Ms. Barrados: No.
Senator Chaput: Thank you.
The Chair: Thank you, Senator Chaput.
The Chair: Unfortunately, we have run out of time, although I know
that senators have many more questions. We enjoyed having you here, Ms.
Barrados, Mr. Lemaire and Mr. Ste-Marie. Thank you very much for being here, and
on behalf of the Standing Senate Committee on National Finance I thank you for
the fine work you are doing.
Ms. Barrados: Thank you.
The Chair: Honourable senators will recall that this committee agreed
that we would do a pre-study on the issue of pensions with a view to help the
steering committee determine whether we wish to proceed with a full-blown study
on pensions and, if so, the parameters of that study.
We are pleased to have with us this evening Mr. Phil Benson representing
Teamsters Canada. Representing Nortel Retirees and former employees Protection
Canada, we welcome Don Sproule who is National Chair and pensioner. We also have
Diane Urquhart, Independent Financial Analyst; François Meunier, Ottawa Chair
and pensioner; and Frank Mills, Board Executive.
I will ask you to keep your opening remarks as succinct as possible. We are
trying to understand the many issues as they relate to you.
Phil Benson, Lobbyist, Teamsters Canada: Thank you. It is nice to be
back before the committee. Teamsters Canada represents about 125,000 members
across the country in all sections of the economy. People think of us as
Canada's transportation union, but we are in beverage, brewery, dairy, casinos
and just about everything going.
We have been working on this file for about five years. To be blunt, we see
three or four main shortcomings with pensions in Canada today. As a
philosophical statement of what pensions are and where they come from, pensions
are deferred workers' wages. They are not company money. They are held in a
trust for the pensioners and for no other purpose. Second, pensions must come
before all other creditors in bankruptcy, excluding claims of workers themselves
under the workers protection act. Third, pensions should be run like insurance
companies; holdings should be held in bonds, not in the stock market. I will
deal with these three points by dealing with the criticisms that we faced with
We heard that the markets were in disarray, that the entire economy was going
to tank and that is why pension plans were in trouble. That is not true. It is
rewriting history. The companies came to the government seeking relief in 2004,
2005 and 2006. Pension plans were basket cases near the end of the longest
sustained economic boom our country and the Western world has ever seen. We
believe that after 40 years of regulations the regulations have completely
failed, hence the reasons for the changes we need.
Today's companies say that because of the tough economic times they need to
do this, that and the other. That is funny. When the economy was booming they
said they needed these changes because they could not meet their obligations.
They cannot meet their obligations because they do not treat the money as if it
is workers' wages.
We want a bond fund and the first criticism is that there are not enough
bonds. The provincial and federal governments are writing $90 billion worth of
bonds this year and $300 or $400 billion over the next few years. If you want
diversification, you can go to the United States, Germany or any other Western
country and fill up with bonds.
The second criticism is that the market always beat bonds. There are two
articles in my brief from the National Post, a great friend of labour,
reporting on two experts from the United States who claim that is bogus, that
bonds will outdo the market. Even if that was not 100 per cent correct, thank
goodness Teamsters Canada's actuary believes that, as our pension plans are
safe. They are in bonds, not in the market, and that is because of risk. The
risk for beneficiaries and pensioners is zero. They cannot afford risk.
Companies, however, choose to take risks with pension plans because they can use
that money to build their business. I know this because before the House of
Commons committee one of the companies stated so. So much for fiduciary duty. If
it is somebody else's money, you cannot use it to your personal benefit.
Another complaint is that it would cost too much money to invest in bonds.
One company, that I will not name in order to avoid embarrassing them, is
looking at $1.5 billion, I believe. They would be looking at $300 million a year
or $150 million over 10 years smoothing to get rid of their liability.
One of our members asked the CEO at a public meeting: How much would it cost
to have a bond fund? He said $40 million a year more. Instead of spending $40
million a year more, they are willing to risk $150 million over 10 years or $300
million over five years. Our members, who are beneficiaries of that plan, cannot
afford that risk. Clearly, the company did.
We have been told that this would cause a problem for companies to have
capitalization. There is something called multi-employer benefit plans. They are
plans where you have a large group of employers who pay into a pension that is
administrated by a union and management. They are paid by hourly wage, say $8 an
hour. That money goes into a separate fund that a company cannot touch, use or
go anywhere near. It only exists for the beneficiaries. There are no payment
vacations; you continually pay into it.
By the way, those plans are doing quite well because under separate rules,
they have to maintain full funding. None of those companies say we would have a
problem borrowing from the bank. Those companies are some of the major
construction and transportation companies in this country, such as the people
who build the tar sands. They have no problem at all getting billions of dollars
in loans. Do they have a capitalization problem? I do not think so.
It all goes back to what a pension fund is. If it is viewed as deferred wages
or if it is protected, we remove from a company the ability to use the fund for
any other purpose except what it is there for, to look after pensioners. We do
not believe that this will happen overnight or be done instantaneously because
companies would require time to unwind, but we are putting it forward as basic
principle as what we would like to see pension plans look like in the future.
Don Sproule, National Chair and Pensioner, Nortel Retirees and former
employees Protection Canada (NRPC): Thank you. I have not been at this
business of pensions as long as Mr. Benson. January 14, when Nortel declared
CCAA, is when I became actively involved.
We do believe that Nortel is the poster child for what is happening to
Canadian companies in general that are about to be exposed to CCAA. What is
happening to us is the fact that under CCAA, our pension deficit sinks to the
bottom rung of creditor status. We are unsecured. All of my colleagues, friends
and family said this cannot be, that indeed you are exposed from a pension point
of view. They were surprised as I was surprised.
In unsecured creditor status, we are now pitted against the vulture
bondholders and foreign governments in the case of the Nortel insolvency. I will
talk about that for a little while.
In the case of the bondholders, these people, the original bondholders that
sold bonds to Nortel, worried about it going bankrupt. They were worried about
it to the extent that they would shorten the periods for which the bonds were
funded, they raised the interest rates, and they could actually have insurance
policies using credit default swaps to make sure that if Nortel went bankrupt,
they were protected.
On January 14, these people sold off all of their bonds to vulture bond
funds, and now these vulture bonds have picked up Nortel bonds at 10 cents to
the dollar and they stand to make a handsome profit.
In our case, those bonds are actually cross-guaranteed between Canada and the
U.S. Because Nortel is in bankruptcy in Canada, the U.S. and the U.K., whatever
ends up in the Canadian estate, they can top up their payments from the Canadian
estate and then they can go to the U.S. estate. They have managed risk. They
understood the risk, and they are sophisticated.
When I took a pension, my risk concern was not about Nortel going bankrupt.
My risk concern was about whether I would live too long or not long enough and
my wife would not be looked after. My risk concern was whether I would have
health benefits if I became ill. That was my risk concern. Now, it is an unlevel
playing field, where I am pitted against vulture bondholders in the Canadian
The second point is about foreign government agencies. Outside of Canada,
with respect to Nortel employees in the United States, the Pension Benefit
Guaranty Corporation in the United States, PBGC, has stepped in and said they
would provide a guarantee of up to $54,000 a year on pensions. They have taken
over the pension plan. In the U.K., it is an equivalent number. Now we face the
situation where those government agencies in the United States and the U.K. will
come into Canadian courts to pay their bills, and they will take money away from
us because they have looked after the pensioners in the U.K. and the U.S. I say
that is not a level playing field. That is highly unfair, and we believe that we
are being discriminated against in terms of what is going on.
What do we do? The Nortel pension is actually regulated in Ontario, and we
have issues with the Ontario government in terms of not winding up the plan.
There was an expert commission for pensions that said whatever you do, keep the
plan going. Right now, the Nortel plan is 40 per cent stocks and 60 per cent
bonds. Do not wind up the plan; let it live, and as the market recovers, you
will do well. We have had no commitment from the Ontario government on that.
Second, the Ontario government has determined Nortel is too big to fail; they
cannot afford to provide any protection under the Ontario Pension Benefits
Guarantee Fund. The Senate is federal, I understand that, but put it aside in
terms of how we are at risk from the Ontario government.
While Nortel pensioners in the U.S. can sleep because they know they have a
$54,000 guarantee, Nortel pensioners in Ontario cannot sleep because the Ontario
government will not make a commitment to back up the $12,000 that they had
promised under the Pension Benefits Guarantee Fund.
We looked at the federal level jurisdiction. We hear from the federal
government the statement that pension plans are not a problem of the federal
government; they are a provincial responsibility. That may be true, but the
Bankruptcy and Insolvency Act and CCAA are federal responsibilities. We are
looking to you to make an amendment to level the playing field in order to give
us preferred status in the bankruptcy courts. That, to me, is what would be
Today we had something like 4,000 Nortel people on the Hill demonstrating to
support immediate changes to the Bankruptcy and Insolvency Act in order to give
us preferred status; preferred status over vulture bondholders and preferred
status over foreign governments.
Diane A. Urquhart, Independent Financial Analyst, Nortel Retirees and
former employees Protection Canada (NRPC): I would like to recommend to the
committee that you do indeed proceed to an official study of the pension crisis
in Canada. My remarks tonight are focused on two areas in which I believe
pensions are not secure.
I would first like to speak about the Public Service Pension Plan. We need to
review the compensation program for the money managers in the Canada Pension
Plan and the PSP pension plan, which, as you know, covers pensions for the RCMP,
the military and the civil service.
You are all aware that in the Canada Pension Plan, there was approximately
$24 billion of losses, and yet the top management received $7 million of
bonuses. We have a problem with compensation plans that enable government
employees, notwithstanding the high expertise they have, to get paid
multi-million dollar bonuses while they have lost that degree of money for the
The problem with the plan is — and this is a problem that is pervasive in the
financial industry, not just in the pension fund industry — compensation is
focused on paying substantial short-term bonuses in order to take excessive
short-term risk. Then, when the risk falls apart and losses in the billions are
rendered for major banks and pension funds, those people can leave their
organizations still having received millions of dollars and are set up for life.
They bear no need for the clawback on the losses they have left behind to pay
back on the bonuses. Clearly, we need to change those plans so there is a longer
duration to them in that they cannot be paid for short-term risk without bearing
the consequences of the billions of dollars of losses they have undertaken.
PSP has $4 billion of investments in asset-backed commercial paper, and they
were sellers of credit default swaps, which I will speak about briefly. These
were very high-risk investments that the PSP investment should never have been
invested in. They clearly did not do due diligence, and they received
multi-million dollar bonuses for the incremental profit that was yielded for the
initial years of their investment. Of course, that has all unwound.
The benchmarks of the PSP and the CPP should be examined and audited to
ensure that these profits are not artificially measured against benchmarks that
do not make sense. In particular, we should look at the private equity areas and
the structured credit areas to ensure they are not just gaming the system by
producing an arbitrarily low benchmark that is easily exceeded and for the
purpose of preparing their compensation.
I need not remind you that when risk is taken and losses are rendered and the
money managers receive millions of dollars that the losses are borne by the
beneficiaries. In the case of the public service plans, of course, when there
are deficits in those plans, they will lead to one of two things. It will be a
cut in the inflation protection because the government is not prepared to make
up the shortfalls on behalf of the civil servants or in the case of the Canada
Pension Plan; and most importantly, it will require taxpayers' money if all of
those benefits are to be sustained.
I believe Finance Minister Flaherty has called for a review of the
compensation plans of all Crown corporations, including the PSP and the CPP. I
would like to remain diligent and encourage the Senate to examine them carefully
to ensure we do not have this short-termism in the compensation plans that would
cause the money managers to take excessive risk.
I would like to turn to the issue that pensions are not secure when companies
file for bankruptcy. I want to start by saying that there is a problem in the
bankruptcy process, both in Canada and in the United States because of a
10-year- old innovation called credit default swaps.
Credit default swaps is a new derivative that allows bondholders to insure
themselves against the possibility of credit default. It is like an insurance
policy. A bondholder can pay premiums to a counterparty that agrees to receive
those premiums and, in exchange, to make a commitment that it will pay for the
credit losses in the event of a bankruptcy or other contingencies. We have a
situation where a $50 trillion market has developed within 10 years, and it is
the product at the core of the financial crisis.
How is it relevant to bankruptcies? If you are a bondholder and have insured
your risk in the credit default swap market, you would rather have a court
filing for bankruptcy protection or for a bankruptcy than seek to do a
restructuring outside of the courtroom. The reason you would rather have that
happen is you need to have a credit event in order to go to the counterparty
that made a commitment to pay your insurance in the event of a credit default.
If you get a court filing, then within one month, by contract, there will be a
cash settlement of your insurance.
What we saw in the Nortel case, to give you an example, not only did they get
a full hedge, they put, let us say, $100 onto a bond; and as a result of calling
for the court filing of Nortel's bankruptcy protection, they would get their
$100 back, as well as make a profit. I want to explain that. How can you make a
profit even on insurance?
The situation is that they call a cash settlement auction right after the
bankruptcy filing, and so Nortel bonds dropped to 12 cents on the dollar. They
call a cash settlement auction. Eighty-eight cents of damages are paid to the
bondholder for every dollar that he owns. He gets to keep the bond. Nortel bonds
have recovered to 50 cents on the dollar; not only did Nortel get its money
back, but made a profit of approximately 38 cents on the dollar because this
market has paid an insurance damage, which was substantially in excess of the
actual damage in the liquidation.
It would be like being a grain farmer who suffers a hailstorm. You get your
full crop paid for and then the sun comes back up and the crop continues to
grow. You harvest it. You keep the proceeds of the crop insurance earlier in the
year and you sell your grain. Because of the credit default swap market, there
is now a business of purchasing junk bonds, purchasing credit default swaps at
reasonable prices well in advance of the financial distress and then work on
management to work towards the process of filing for bankruptcy.
This is why it is urgent to change the BIA, the Bankruptcy and Insolvency
Act, because it is no longer an equal compromise. For decades there was a view
that the employment-related claims are creditor claims, just like the bondholder
has claims. Since everyone has claims, they should be treated equally. It can no
longer be the case in the modern financial era because of the credit default
swap markets that we can say that since the bondholder has losses, that everyone
must share the pain.
Since the bondholders have access to these deep and liquid credit default
swap markets, that they can get their money back and even make a profit, surely
we can change our bankruptcy act to put the pensioners, long-term disabled
people, and even the severed worker first in line for the proceeds of the
bankruptcy. They did not have access to the insurance markets. They are truly
taking losses while at the same time the distress debt buyers of the world and
the hedge funds have been able to make profits from the carnage that is
occurring in the pension fund industry.
Right now, we have the majority of our pension funds in deficit. It is well
accepted or factually determined that credit default swaps were a major factor
in the bankruptcy of Quebecor, in the bankruptcy of AbitibiBowater and, in my
opinion, in the bankruptcy of Nortel as well. This is not an isolated case. This
is a new phenomenon, and it is only a 10-year phenomenon and one at the basis of
I strongly recommend that your committee examine the credit default swap
markets in the context of bankruptcy and that this government accept the need,
as a matter of social policy and as a base of basic business fairness, to enable
the pension fund deficits to go ahead of the bondholders in bankruptcies.
The Chair: Thank you very much, Ms. Urquhart. You present a clear and
compelling case. We appreciate your explanation of credit default swaps and
François Meunier, Ottawa Chair and Pensioner, Nortel Retirees and Former
Employees Protection Canada (SRNC): Thank you, Mr. Chair. I will not repeat
what has been said by Mr. Sproule, who speaks for me. I am just going to add one
You mentioned when we started that you are looking for sources or solutions.
One additional point, even though it is undoubtedly too late for Nortel
employees, is that tax laws for companies are not helping things at present.
During growth periods, companies that contribute to their pension funds are
cautioned to contribute an amount in excess of 110 per cent of the required
actuarial value. When that is followed by a slow period, that value, given it is
invested in the market, often loses a lot of its value. This leaves a very large
deficit, as we have seen in the case of Nortel. At that point, the companies are
required to restore the pension funds over a period of five years. When they are
still going through a slow period, it is very difficult to manoeuvre. It would
be a good idea to look into it or see whether those limits could not be changed,
in terms of the contribution during growth periods, for the benefit of companies
experiencing slow periods.
When the slow period is long or very serious, what happens is that the
companies cannot afford the contributions any more, even if they are spread over
a period of three or five or even 10 years. The result is that we see strategic
bankruptcies, to avoid additional expenses and be able to get back afloat, to be
able to pay their bondholders, as in the case of Nortel. That is just one point,
but I think it is important, certainly, for other companies that have not yet
had to deal with this.
Frank Mills, Board Executive, Nortel Retirees and former employees
Protection Canada (NRPC): Honourable senators, in doing a little research
before I came to this meeting, I discovered — not in any way pejoratively — that
I am at least two years older than the oldest member on the committee. I am the
The power of the arguments made by my companions is overwhelming. It is so
logical that it defies description. My appeal is more on the human side. I could
not elaborate any further on the details that my companions have offered, but I
will offer some insights.
I have experienced a significant amount of failure with regard to
corporations. You are looking at an engineer who worked on the Avro Arrow
project. They still exist.
The Chair: Congratulations.
Mr. Mills: I ended up working for Nortel. Double jeopardy is defined
I am also a father of four children. I have nine grandchildren. My major
concern currently — as I stated my age — is with respect to these children and
When I was a young man working as an engineer for Nortel, I was motivated by
idealism. Idealism was our motivation. We put our heads down on our problems and
we focused. We were aware that with regard to retirement and benefits and so on,
this was assured to us. The company told us that our wages were being set aside
so that when we reached the end of our careers, there would be something to look
after us. We took that as a given.
That permitted us to be idealists and to focus on what we were doing. It was
true; the fuel that fed and kept Nortel going was idealism. It was the idealism
of young people who had the urge and driving force to change the world and to
develop things that would make a difference. It was not until later in the
company's evolution that idealism was replaced by greed and self-serving. That
is where I believe Nortel went off the track.
Although I am an advanced senior, my plea is that the overwhelming body of
evidence says that this is an injustice. If that is not addressed, the cynicism
that develops among younger people is overwhelming. When my children see what is
happening to me, they become cynical of the political system. Why would they
vote? For instance, voting by younger people is one of the major problems in our
political system today. If these injustices are not addressed, it feeds that
The Chair: Thank you. That is important food for thought.
Senator Eggleton: I, like you, am hoping this will be a comprehensive
study. I have a motion to that effect in the Senate, but it is stuck at the
moment. I am happy we are doing some preliminary work in this committee.
I find it amazing that Nortel employees are being looked after in the United
States and in the U.K. but not here. I understand that in both of those cases
they are national plans. We do not have one. We have a provincial plan. Ontario
is the only province that has a plan.
I want to understand the provincial plan. Do they tell you do not qualify or
they have run out of money because they helped the auto industry?
Mr. Sproule: What they tell us is what we read in the press. They say
they have run out of money for the PBGF, Pension Benefits Guarantee Fund. We
have been trying to talk to Dwight Duncan's cabinet and we have talked to some
of his officials. What we read in the press is that they have run out of money.
I met a Nortel pensioner who had worked for 10 years in Canada and 17 years
in the U.S. He had to retire in 2003. There is the Pension Benefit Guarantee
Corporation in the United States and a Pension Benefits Guarantee Fund in
Ontario. He said Bush is in power and there was no way he would get the American
Pension Benefit Guarantee Corporation to bail him out. He would take the
commuted value of his pension and run, because it would not happen. He thought
Canada would be safe and he would keep his pension in Canada. He got a double
whammy. He took a commuted value — a hair cut — in the U.S. Obama has stepped
forward to back up an underfunded plan. He went to Ontario and Dalton McGuinty
is saying, sorry, we do not know.
Senator Eggleton: This plan exists; it must have criteria. Surely, you
can get your lawyer to write a letter to them asking for specifics as to whether
Mr. Sproule: Nortel has been paying its obligations all along to the
PBGF plan. The problem is the plan is underfunded as it is in the U.S. However,
the Ontario government is saying it is underfunded and they do not know if they
can honour the commitment. That is the best we have so far.
Senator Eggleton: You should probably continue to pursue that.
Mr. Sproule: We are.
Senator Eggleton: What if things turn around for Nortel? Nortel has
some Scientific Research and Experimental Development Tax Incentive Program tax
credits. They are worth something. Eventually if things turn around, what
position would you be in to go back after them?
Ms. Urquhart: You need to know that Nortel is liquidating. It will not
exist after June 2010. Unlike most bankruptcy protection filings where the goal
is to undergo a restructuring plan to remain as an ongoing concern, that is not
the case. With respect to the tax loss carry-forwards, I estimate that if a
tradable market value was paid, there would be $1.3 billion of value. Those tax
credits expire on the acquisition by another entity of a business, unless they
are in precisely the same business.
We have asked the Canadian Revenue Agency to make concessions to Ericsson,
Avaya and Ciena such that they could purchase the tax loss carry-forwards that
would otherwise expire. We can find no one at the federal government in
leadership engaged in any matter. Whether this is being seriously explored is
not known to us.
It has always been my view that it would be good if we could get even
one-half of the value. This would be a form of subsidy because even if someone
paid for those tax benefits, if they did not pay full value for them, then the
government is subsidizing that business buyer of those credits.
Senator Eggleton: How do you get them? The company owns them or
Ms. Urquhart: They have expired. They have no value unless the Canada
Revenue Agency is prepared to make a concession. If the Canada Revenue Agency
says it is prepared to allow those tax loss carry-forwards, including those
scientific research credits, to be included as part of the purchase, those tax
credits would add to the purchase price. However, since they are a concession of
the Canadian government, they would be a concession offered by the government to
be prescribed for the benefit according to how they prescribe it. In other
words, it does not need to go to the estate to be shared with the debt holders.
Senator Eggleton: It is still a possibility.
Ms. Urquhart: I think that would be a fabulous solution here and in
other instances of companies liquidating where there is a self-insured long-term
disability plan, in particular, and where there is a deficit. This could be a
mechanism whereby, instead of a direct bail-out as occurred with General Motors,
this would be a sale at a discount of tax loss benefits. It would be tied to not
only getting money, but to performing effectively for the benefit of Canada as a
business operating in the country.
If you tied this to Ericsson, Avaya or Sienna, the government could say they
could buy these businesses. We will let you get some tax benefits, but you need
to keep this many jobs here. You need to have this amount of capital spending in
order to get the continuing tax benefits we are offering you at this time. I see
it as better than a cash transaction by the Canadian government and it is a
mechanism to deal with some of these serious problems.
Senator Eggleton: Could you file with us what you just said, in
effect, the kind of conditions you would put on this provision if the government
were to allow it?
Ms. Urquhart: Yes.
The Chair: Mr. Sproule, Nortel is a national, international,
interprovincial company. How is it that its pension plan was subject to
Mr. Sproule: As best I understand, it just happens to be that Nortel
headquartered in Ontario. The pension plan was registered in Ontario. If I
understand correctly, there are certain pension plans that come under federal
jurisdiction, for example, Air Canada and Bell Canada.
Mr. Benson: From the union side, the Teamsters represent the most
workers in the national sphere. Hence, the group of seven companies asking for
relief, most of them have Teamsters who work for them.
Mr. Sproule: I think only 10 per cent are federally regulated and the
rest are provincially regulated.
Mr. Benson: As it happens, mostly Teamsters. I hear from Nortel that
Flextronics, which is a group of Teamsters well represented on the Hill, in
fact, are also part of the reason we are here, part of this Nortel shemozzle.
The Chair: Does the federal government play any role in dictating how
much a corporation should keep in its trust to satisfy its obligations under
Mr. Benson: Yes, they do. Unfortunately, as we have seen, the
regulations over the past 40 years have really let both companies and workers
down. There are funding requirements, but, as we know, they have not been met,
and the government — not just this government but the previous government —
moved forward with giving various types of relief. You are giving a period of
time to restore 100 per cent funding. That, however, has now become a 10-year
floating target with smoothing, which probably now is not overly objectionable,
at least in the short run. The answer is yes.
The Chair: Does that come under insolvency legislation?
Mr. Benson: No.
Mr. Sproule: The pension plan and employment standards in terms of
severance are provincially regulated. When matters enter the bankruptcy court,
we go to a higher level, to federal statutes, and that trumps the province. That
is the problem.
The Chair: We have heard some reports in relation to the bailout for
General Motors and Chrysler, and there was some suggestion that some of that
bailout was used to top up the pensions for some of their employees. Have you
heard of that?
Mr. Benson: I have heard rumours. As I understand, that was not the
intent of the bailout money. I have heard rumours, but I have absolutely no
Ms. Urquhart: I have seen correspondence from General Motors
management to the salaried workers thanking the government for the money. As a
consequence of the money having come from the federal government and the Ontario
government, they were delighted to tell the salaried workers that they were able
to sustain the pension.
While it may not have been the government's intent that it be known that the
money would be used for that purpose, the workers inside of General Motors have
certainly been advised that it is as a result of the work of the governments and
the contributions made that they have been able to complete the plans.
I want to add a point with respect to the issue of the bankruptcy law,
because it is being said in the house that the federal government has no
jurisdiction to assist the Nortel pensioners because this is an Ontario
The first point I want to make is that not all the workers of Nortel worked
in Ontario. We have about 5,000 workers in Montreal and 3,000 workers in
Alberta, so this idea that everything needs to fall back to Ontario just does
not make sense. Certainly from a guarantee perspective, it would be only the
Ontario pensioners, in any case, that would get a modest contribution to the
In 2006, Ivaco Inc., a steel company, went into bankruptcy. I want to remind
senators that the Government of Ontario and the Superintendent of Financial
Services, filed a motion in the bankruptcy court asking that they be allowed to
compel an updated actuarial evaluation for the plan. This was for the purpose of
Ontario, under its regulation, requiring special contributions to be made in
order to pay for the deficit of Ivaco Inc.
The idea of their seeking the special contributions was to crystallize those
special contributions and to have them placed in a deemed trust so that when
Ivaco liquidated, those special contributions — and hence the cumulative amount
of those special contributions, which would have eliminated the full deficit —
would have been a crystallized claim with priority over the unsecured creditors.
Justice James Farley denied the motion. The Bankruptcy Act itself does not
specify that pension funds are a prescribed, unsecured creditor claim. It is
silent on that matter.
Justice Farley, in the 2006 case, determined that because the bankruptcy law
is paramount to provincial laws, and because the law is silent with respect to
the pension deficit, and notwithstanding the fact that the only law there was in
the country was the provincial law that required the special contributions to be
paid, he made a decision that this company is going into bankruptcy and that he
would decide whether or not those special contributions will be deemed. He
concluded that these pension deficits, the special contributions, would not be
crystallized and that the pension deficit is an unsecured creditor claim.
It is because of that precedent, not because of the prescription of the
federal law itself that has put us in this predicament with pension fund
deficits and the provincial standards that have been prescribed by Ontario and
This gives us the firm belief that we must now have an amendment of the
Bankruptcy and Insolvency Act to deny the right of any judge in a bankruptcy
court to supersede the obligations within the provincial standards. That is why
we have this conviction that Tony Clement is not correct when he says that this
is not our jurisdiction.
There is nothing Ontario can do that will solve this Nortel situation other
than a government bailout. Tony Clement has no right to say that the federal
government will bail out the federal companies, and Ontario is to bail out the
I am of the view no one should get a bailout. If there is money in these
companies, which there clearly is in the Nortel case, $6 billion of cash, that
cash should be used first, as it was intended by the provinces that these
special contributions would kick in, be crystallized and eliminate a deficit. We
need to make it clear in the federal Bankruptcy Act that they will replicate the
standards that were prescribed by the province so that no judge can determine
that, in a bankruptcy, he can make his own choice in that regard. It should be
I think most of you have seen The Globe and Mail editorial. We
consider The Globe and Mail to be the businessman's newspaper. We were
pleased to see that in their editorial, they too have said that these pension
obligations that are the deferred wages should be ensconced in the bankruptcy
laws and duplicate what we see in the provinces so that there is no question, at
the time of a company's death, that those deferred wages get paid when there are
funds in the company.
The most frequent reason I have heard for the possibility of not amending the
Bankruptcy and Insolvency Act is that there are some businessmen who are saying
it will raise their cost of credit. They say that when they need to borrow
money, they will have a higher interest cost.
Fortunately, a number of more mature businessmen on the Business News Network
yesterday decided they would come out together to argue that we need to make the
amendment. This is what I have said to those who say that there will be an
increase in the cost of credit: Show me your numbers and your studies.
I believe that statements with respect to a deficit in the pension plan
causing an increase in the cost of capital for all corporations in the country
are not well-founded. I make the point that it is a good thing for you to study
too. I believe I have studied it from my 30 years of investment. There is not a
high enough incidence of defaults for one to argue that this is not a good
policy. It is certainly good social policy, but I would also argue that it will
have miniscule impact on the cost of credit. When you bring in this credit
default swap issue in terms of the incentive to go into bankruptcy, I do not
think we have any choice but to move towards a policy that will allow us to
protect our seniors and our disabled at the time of bankruptcy. The cost of
credit will be miniscule, and all of the debt holders concerned about that
should go out and buy their credit default swaps.
The Chair: We are running out of time, and Senator Mitchell from
Alberta has been patient. Senator Mitchell you have the final opportunity to
make your statement and this was intended as a preliminary meeting for us to try
to get a feeling for the issues.
Senator Mitchell: I have a couple of questions, but they are
technical, and I can get them in the future. Perhaps Mr. Sproule wishes to add
Mr. Sproule: Regarding the cost of credit, when you have to do a full
reckoning, it is not just a cost of credit and Canadian competitiveness; there
is also a social cost that goes on the balance. Who is looking at the full cost,
especially from a social cost, in terms of people going on welfare, EI and
people having their sons and daughters look after them in old age? When we do
the balancing of accounts, let us look at the full cost.
The Chair: You helped us very much in raising a number of issues and
helping us appreciate them. If, as a committee, we decide to proceed further
with this, I hope we will be able to call on you to help us further in a more
Mr. Sproule: In a heartbeat.
The Chair: Thank you on behalf of the Standing Senate Committee on
National Finance and we look forward to meeting you again.