Federal bill aims to protect pensions in bankruptcy

A New Federal Private Participant Account is designed to protect your retirement in the bankruptcy process if your employer becomes the next Nortel or Sears Canada.

It is the latest in a series of efforts to change Canadian laws to make underfunded retirement plans with insufficient assets to cover their liabilities a “super priority” over large creditors and the payment of executive bonuses in bankruptcy or insolvency proceedings.

Proponents say these changes could help retirees from financially troubled companies avoid years of legal battles and catastrophic shortfalls in their retirement income.

The Sears and Nortel cases are dramatic examples that affected tens of thousands of Canadians and revealed a difference in how employees and retirees often fare in bankruptcy and insolvency proceedings compared to secured financial lenders such as banks and bondholders and other stakeholders.

Former Nortel employees fought for a decade to recover as much as possible for their pensions after the company filed for bankruptcy in 2009, while legal and accounting costs steadily guzzled the assets for distribution.

In the case of Sears Canada, the company paid billions of dollars in dividends to its shareholders over a period of several years before seeking protection from creditors in 2017. reduced pension benefits.

The new bill was introduced by Conservative MP for Sarnia-Lambton, Ontario, Marilyn Gladu, and has the support of other opposition members, including two MPs from the NDP and Bloc Québécois who had proposed similar bills.

Gladu’s bill passed on second reading in the House of Commons last week and received near-unanimous support to go to the standing finance committee for study, with both Liberal backseats and cabinet members voting in favour.

Previous private member bills on the same subject (one reached third reading but died last year when federal elections were held) have not received the same support from the ruling party, said Michael Powell, president of the Canadian Federation of Retirees, who introduced the bill. the “odds are much better” add.

“I’m cautiously optimistic,” Powell said. “This is the best opportunity ever to make this change that will be a huge benefit for Canadian seniors.”

The Canadian Labor Congress (CLC), which represents dozens of unions and other unions, said it welcomed the parties’ cooperation in this area.

“For decades, we’ve seen companies pay out creditors, even pay bonuses to executives after bankruptcy, while employees wait in the back row,” CLC president Bea Bruske said in a press release.

The proposed changes would apply to defined benefit (DB) plans operated by private sector companies. Those plans, which have declined in number in recent decades because they are expensive and difficult to manage, promise members a fixed payout upon retirement.

By contrast, defined contribution plans, which would not be affected by the changes, specify contributions paid by employers, but not retirement payments, which are variable and linked to the investment return these contributions generate, similar to a self-directed retirement plan. RRSP.

Many defined benefit plans are underfunded, meaning they don’t have enough assets to pay their total obligations to current and future retirees. That can become a problem in an insolvency or bankruptcy situation, where secured creditors, such as banks and other lenders, are at the front of the line when it comes to distributing the remaining assets.

Powell estimates that since 1982, 250,000 Canadian seniors have had their pension cuts due to the bankruptcy or insolvency of their employers.

According to Statistics Canada, there were still about 1.2 million active members in private sector DB plans in 2019, and Powell said his organization estimates that if you take into account already retired members, there are a total of four million Canadians in the private sector. DB plans.

Critics of prioritizing pension obligations have long argued that it could hinder a struggling company from drawing up credit or financing when they need it most, and spur more companies to discontinue DB plans.

“For companies facing serious business challenges, creditor preference status would likely reduce the availability of new capital to effect a turnaround, likely further putting the company at risk, leading to further job losses,” Natasha Trainor , former president of the Pension Investment Association of Canada (PIAC), said in a letter to a parliamentary committee last year considering a previous private member’s bill on the subject.

PIAC said this week that its comments in that letter still stand and that it plans to address Gladu’s bill during committee hearings.

Gladu said during a debate last week that her bill includes a five-year transition period intended to “give companies with insolvent resources time to get their finances in order”.

“I would like to point out that if a company cannot restore its fund’s solvency after a five-year period, it will indeed have to pay a higher interest rate to get credit because it really carries a higher risk,” she added. to.

Gladu said the bill would make pensions the next priority after paying short-term liabilities such as unpaid salaries of up to $2,000 and suppliers who have delivered goods within one month of bankruptcy.

After the committee phase, which could happen in the fall, the bill would still have to pass third reading and go to the Senate before it becomes law.

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