Hon. Tony Loffreda: Honourable senators, I rise today at third reading to speak in support of Bill C-228, the pension protection act, introduced in the other place by our colleague, Conservative MP Marilyn Gladu, and skillfully sponsored here by Senator Wells. I thank them both for their work and commitment in getting this bill through Parliament to protect the pensions of Canadian workers.

As you know, Bill C-228 seeks to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act to give pensioners super priority status when companies are undergoing bankruptcy or insolvency proceedings. This is a welcome change, and it has been a long time in the making.

During our committee deliberations, we were often reminded that Bill C-228 passed with unanimous support in the other place: 318 votes in favour; 0 votes against. If our inboxes are any indication, hundreds — if not thousands — of Canadians have sent us emails asking that we adopt this bill as soon as possible.

I agree with them. This is a good bill. Its intentions are worthy, and it should be adopted as soon as possible — tonight, if possible.

Most of us can probably get behind the idea of giving pension entitlements and benefits a super priority status in insolvency proceedings. Workers have spent their lives working hard and contributing to their pensions, and we need to protect them. It is only fair to do so. I agree with what Senator Yussuff just said: that a company’s most valuable assets are their workers.

I always used to have the magic triangle where you have the client on top, the shareholders and the workers. Without the workers, the client won’t be happy.

However, I want to share some concerns that must be monitored going forward for the benefit of all future workers. I have always said, “Businesses create jobs. If businesses thrive, clients prosper, communities prosper and workers prosper.” I want to bring those arguments forward, as well as what we heard in committee.

Some stakeholders shared concerns that giving pension liabilities priority over the interest of secured creditors may make it increasingly more difficult to obtain financing and it may make the DB, or defined benefit, pension plans less attractive and less popular.

At present, employer pension liabilities only have superpriority under Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act to the extent that they are, one, unpaid amounts deducted from employee remuneration for contribution to the pension fund or, two, unpaid normal costs or other unpaid amounts that the employer was required to contribute to the pension fund or administrator under a defined contribution provision or registered pension plan, respectively.

Bill C-228 proposes to expand the list of pension liabilities that have superpriority to include, first, special payments that the employer is required to pay to the fund to liquidate an unfunded liability or solvency deficiency and, second, any amount required to liquidate any other unfunded liability or solvency deficiency of the fund.

When we refer to a pension plan’s unfunded liabilities, this usually represents the additional amount that needs to be added to the fund’s assets to enable the fund to continually pay benefits as they come due if the fund were to operate indefinitely. The solvency deficiency is the additional amount that the fund needs to meet its obligations if the fund were to be wound up.

Unfunded liabilities and solvency deficiency do not have a fixed value as they fluctuate from time to time and can only be assessed by actuaries at a certain point in time. This can be problematic in cases that involve defined benefit pension plans.

For greater clarity, a defined benefit pension plan, as defined by Statistics Canada, is a type of pension plan in which an employer or sponsor promises a specified pension payment, lump sum or combination thereof on retirement. The employer is responsible for managing the plan’s investments and risk.

We know that membership in a DB plan accounts for two thirds of the total membership in registered pension plans in Canada, which represents 4.4 million Canadians. We also know that in the private sector we’ve witnessed a sharp decline in DB plans. According to Statistics Canada, 21.3% of private sector plans were DB plans in 2000. That number dropped to 9.6% in 2020. We were reminded in committee that there is also a growing trend among employers, big or small, who have defined benefit plans to switch to defined contribution plans, which, of course, is not the ideal scenario for Canadian workers. For instance, defined contribution plans, along with composite plans and hybrid models, have increased from 6.8% in 2000 to 14.5% in 2020.

I strongly believe that a DB pension plan still has numerous benefits when properly funded. The problem is, the unfunded liabilities are not always intentional. There is so much uncertainty involved in funding those pension plans. So they must be properly funded, and there are many solutions to have them be properly funded. However, given the uncertain value of unfunded liabilities and solvency deficiency in DB plans, lenders will be unable to determine the quantum of any potential pension liability in the event of a future bankruptcy — as I mentioned, uncertainty. This inability to reliably measure the risk will likely constrain lenders in granting credit and increase the cost of borrowing for borrowers with DB plans, especially in an insolvency workout scenario, and, ironically, this could potentially heighten the risk of bankruptcy.

As I said, I do support the plan. I agree with it. But these risks must be monitored going forward. As a former banker, I can attest to the fact that bankers do not like uncertainty or risks they are unable to identify or mitigate. Lenders lend on margin formulas, which are exact, and precisely reduce prior claims in order to determine borrowing margins. These margins may be reduced with the passage of the bill, especially in situations of insolvency, and it may have the counter effect of making company restructurings more difficult.

Ultimately, it is likely that Bill C-228 may cause or even accelerate a shift by employers from defined benefit pension plans to defined contribution plans. Effectively, although the bill is intended to protect pension plans, a potential result may be that employers use the four-year transitional period to move away from DB plans.

Randy Bauslaugh from McCarthy Tétrault recently wrote for the C.D. Howe Institute that the passage of Bill C-228 would likely transfer financial risks to creditors, shareholders and financial partners. In turn, lenders:

. . . will impose additional conditions on loans or capital. This will include increased security guarantees to rank ahead or equal with the pension liabilities, imposition of higher borrowing costs, insistence on full, rather than provisional funding of accruing liabilities, and many will just require the employer to give up its defined benefit pension plan.

He even suggests that lenders and other financial players are already being advised to review and modify documents to ensure debtors or partners do not have or do not set up defined benefit plans. If this reflection is correct, it may foreshadow what is to come.

Industry leaders from the banking and pension sectors, in a joint letter, echoed Mr. Bauslaugh’s comment and cautioned that “. . . Bill C-228 would fundamentally alter the risk profile that is assessed by creditors . . .” who would likely respond to adjust for the increased risk profile that would stem from the potential of not having a loan repaid.

The Canadian Association of Insolvency and Restructuring Professionals also told our committee that they fear:

. . . the super-priority will likely cause a gradual elimination of remaining DB plans because of the challenges in raising secure debt financing.

The association believes that C-228 is:

. . . likely to affect restructuring proceedings under the insolvency legislation by having a chilling effect on interim financing necessary to explore a restructuring process or exit financing to complete the process.

And it would save jobs for the workers.

Jean-Daniel Breton, the Chair of the Association, noted that:

Anytime that a lender has an ability to decide whether or not to extend credit, they will take into consideration the amount of risk that is perceived with regard to the enterprise.

His colleague Alexander Morrison added that when a company is going through a restructuring process and gets into financial difficulty:

. . . it’s critical to have interim financing to buy time to allow that restructuring to occur. If we have lenders who specialize in doing that interim financing, they are going to be very reluctant to lend into a situation where there is a large potential priority claim on a defined benefit pension plan that will rank ahead of their loan.

To counter what some of the industry players have said, we were told in committee that banks will find ways to adapt and to protect themselves and to work through the system. I agree that banks will adjust. They will re-evaluate their margin formulas, which may make it more difficult for companies to access financing if the calculations lead to a negative number. However, the issue is not so much with the bank or only with the bank, but with the employer who wants to set up a DB pension plan knowing the banks will consider the prior claim. Banks will assess the risks and could ultimately charge more to access capital or simply reduce its lending capacity. We may, in fact, see a further decline in DB plans due to this legislation, and yet, we should be encouraging employers to adopt DB plans. I believe they have many benefits over defined contribution plans.

On the contrary, with today’s tight labour market, maybe employers will feel the added pressure to adopt DB plans as a way of attracting and retaining employees. This argument was made in committee, and I hope it will be the case. Like I said before, when businesses and employers thrive, communities and employees prosper and jobs are created.

Honourable senators, in light of what I just said, I want to reiterate my support for this bill. I do support it. It is pivotal that we protect the pensions of hard-working Canadians who have contributed to and rely on their pensions for a well-earned retirement. However, I felt it was important to address and monitor some of the possible unintended consequences of this bill and some of the shifting dynamics that may affect the relationship between businesses, lenders and workers with the passage of Bill C-228.

I certainly don’t want to come across as an alarmist, but I contend that creditors or banks will adjust their approach to lending, and it may make it increasingly more difficult for struggling companies to restructure. The case of Algoma Steel in Sault Ste. Marie is one such recent example we heard about in committee. I heard many times about when cheques were being paid, bonuses or dividends — I monitored many companies in my early banking career that were insolvent, and I would never approve a bonus, cheque or dividend in an insolvency. Those cheques would never be approved. In that case, the bank works with the company to keep it viable, alive and going forward. Those cheques are never approved in the case of restructuring.

Like the Canadian Chamber of Commerce, I feel that:

Struggling companies would have greater difficulty securing loans, thereby undermining a core objective of insolvency legislation – to encourage successful restructurings that allow companies to continue employing Canadians . . .

As senators, I believe we have the luxury of taking the long view on issues, and I am concerned that Bill C-228 may not necessarily achieve its intended objectives of always benefiting future workers and putting them first. It would be a shame if Bill C-228 does not do that.

Some might even argue that Bill C-228 may be benefiting current workers and pensions, but it may negatively impact future workers and pensioners, those who have yet to join the workforce and who may end up with no pensions at all or less favourable plans.

I hope that defined benefit pension plans will not continue their downward trend with the passage of this bill. Defined benefit plans offer greater security to pensioners, and, as we were told in committee, they also offer protection from marketplace volatility. We want to encourage employers to adopt these plans. It will be important to monitor the situation and gather data in the coming years to accurately reflect the changing landscape in the pension plan environment, particularly during the four-year transitional period.

I urge us to adopt the bill as-is today. Canadian workers and pensioners are relying on us to do so. However, I call upon us to monitor the situation and evaluate if the bill has any unintended consequences for current and future pensioners. Hopefully it won’t. Thank you.