Uphill Battle – Protecting Retirees in Bankrupt and Under-Funded Pension Plans

December 20, 2012 – Attempts to protect pensions in cases of bankruptcy and under-funded pension plans have yet to provide real and lasting results for retirees of insolvent companies and underfunded pension plans. In spurts, there have been reasons to be optimistic, but pensioners are still last in line to recoup funds when companies go bust.

Small Steps Forward

In 2008, CARP called on Canada’s finance ministers  to protect retirees by changing the rules that govern pension plan contributions and shortfalls. Provincial pension rules tend to permit contribution holidays when times are good and pension plans are adequately funded. But, as the 2008 financial crash proved, the good times always come to an end and retirees are among the first to suffer the consequences of short-term thinking and planning.

In 2009, Ontario took a first, if timid step, towards correcting the problem of chronic underfunding of pension plans when it began a process of reviewing and amending the legislation regarding pension plans. In 2010, the first of the changes took place through Bill 120, increasing from 0% to 5% of pension liabilities the minimum level of pension plan surplus above which the plan sponsor may take a contribution holiday. Under Bill 120, contribution holidays are still permitted, but with conditions, namely that the plan has a small surplus above projected actuarial need.

The changes in Ontario were a step in the right direction, but at the time CARP argued that it was too small a step to reduce the high solvency risk which is a constant challenge for defined benefit pension plans. Rather than tinkering, the risk can be better reduced or eliminated altogether by prohibiting  contribution holidays, and amortizing accruing pension surpluses and deficits over a period of at least five years. Such measures would stabilize the contribution rate, prevent the building up of unduly large surpluses or debts and essentially eliminate the need for separate contingency funds that unnecessarily increase pension costs. In other words, pensions would be better protected against the vagaries of best guesses and market fluctuations.

What About Nortel?

Despite these small progressive steps, pensioners still do not have the bulk of the law on their side, and few pensioner groups understand this as well as Nortel Pensioners.  From the start of their fight to save their pensions, they’ve encountered one dead end after another.

The hopes of 400 Disabled Nortel workers were dashed in December 2010 when Bill S-216  An Act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act was voted down 47-44 in the Senate.

In 2010, Private Member’s Bill C-501, An Act to amend the Bankruptcy and Insolvency Act was introduced into the House by NDP MP John Rafferty.  The Bill offered the hope that pensions would be protected in cases where employers have filed for either bankruptcy protection, or bankruptcy itself. The Bill died after Second Reading when the 2011 Federal election was called.

A second attempt at a similar NDP Private Member’s Bill, sponsored by MP Wayne Marston, died on the order papers absent support in the House. Bill C-331 , An Act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act sought to ensure unfunded pension plan liabilities are accorded priority of claims in the event of bankruptcy proceedings.

Most recently, Nortel pensioners are fighting in court to forestall continued liquidation of Nortel of what remains of their pension fund. The current plan, supported by the Ontario Government, is that any funds recovered from the Nortel liquidation intended for retirees be placed into annuities that will likely pay significantly less than the once expected defined benefit pension plan.
Nortel pensioners have come up with the novel idea of transferring the company’s $2.5-billion pension  plan to a private-sector financial company for management. For now, the Ontario government has eliminated that option on the grounds that such move would put at further risk the remainder of the fund.

Of course, before any big moves can be made to salvage the funds recovered, pensioners may have to wait until the full wind down of Nortel is complete. The Nortel retiree group has recently reported that Chief Justice Warren K. Winkler, the mediator, has scheduled an all-party mediation session  to be held in Toronto for the week of January 14 to 18, 2013. Representatives from the major stakeholder groups, as well as their respective counsel and advisors have been asked to attend.

What’s Next?

Former Nortel employees may be watching closely the proceedings of yet another company insolvency case for a new legal precedent to protect company pension plans and more specifically, their pensioners.
In the case of Indalex, a former aluminum manufacturer, the Ontario Court of Appeal in 2010 ruled that there is a deemed trust under the Pension Benefits Act  (Ontario) that compelled Indalex to fund a defined benefit (DB) pension plan’s wind-up deficiency on the wind-up of the pension plan.

The Court of Appeal concluded that the deemed trust of the pension has a priority over the ‘super-priority’ given to certain last-resort lenders involved in Indalex’s insolvency proceedings, setting a new precedent prioritizing pensioners’ rights over the rights of certain types of lenders.  The Court of Appeal’s decision in the Indalex case reengaged the issue of who gets paid first when companies become insolvent, but the Ontario court decision was appealed to the Supreme Court of Canada (SCC) this past summer, with a decision still pending.

The SCC decision in the Indalex case may have limited application since there were extenuating circumstances but it may help tip the balance in insolvency cases in favour of pensioners. CARP will continue to monitor and report on pensioner rights and the Indalex case.

Read a summary of the Indalex case