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COVID-19Employment RegulationPension BankruptcyStudent Post

The Economic Effects of COVID-19 Could be Devastating for Pensioners Under Canada’s Bankruptcy Laws

by Cole Eisen April 21, 2020
written by Cole Eisen April 21, 2020

Written by Cole Eisen, University of Toronto Faculty of Law, 3L

Once the immediate public health crisis associated with COVID-19 subsides, Canadians will have to contend with the prospect of reviving an economy that has been put on ice. Many firms are already struggling to survive. Even with workers laid off and a patchwork of relief measures in place, Canadian businesses, many of whom were carrying alarming levels of corporate debt before the current crisis began, will likely have to borrow even more to cover their overhead for the duration of the current economic freeze. With revenues dramatically reduced or halted altogether, many of these firms will soon face insolvency and find it necessary to restructure their debts or simply liquidate their assets altogether. A significant uptick in bankruptcies or restructuring is a frightening prospect for Canadian workers and their families.  

Canada’s bankruptcy and restructuring regimes provide a legal shield for distressed Canadian companies to consolidate and preserve value by either reorganizing their debts or through an orderly liquidation. These processes, known as restructuring and bankruptcy respectively, are facilitated by two pieces of federal legislation: the Bankruptcy and Insolvency Act (BIA) and the Companies Creditor Protection Act (CCAA). The BIA offers both a path to liquidation in the form of bankruptcy protection and to restructuring through a commercial proposal process. The CCAA offers a more flexible path to restructuring for larger firms with outstanding claims of more $5 million dollars and can also facilitate liquidations under section 36 of the Act. Once a firm enters either regime, they are generally protected from the claims of creditors through a legal stay either mandated by section 69.3 of the BIA or fashioned under a CCAA court order. During the stay, a debtor firm can seek a compromise with its creditors who vote on a restructuring proposal to reduce outstanding debts, or it can liquidate its assets entirely to satisfy a percentage of creditor claims.

Under our current laws, up to $2000 of employee wages must be paid out before firm assets can be used to satisfy the claims of most other creditors. Additional eligible unpaid wage claims up to an amount just over $7000 may be covered under the federal government’s Wage Earner Protection Program. However, pensioners do not generally enjoy such special protection and instead must wait in line behind business creditors for a share of the firms’ assets upon liquidation or face a significant reduction in benefits after a restructuring process is completed. These outcomes would be particularly devastating for the more than 1 million Canadians enrolled in a defined benefit pension plan. These workers, who contribute to a pension throughout their working lives with the expectation of a steady stream of income upon retirement, could face a substantial reduction in retirement in favour of banks, landlords and other commercial creditors under the status quo.

The BIA and CCAA assign priority to different tiers of creditors who must be paid in full before firm assets can be used to fulfill obligations owed to lower ranking parties. To borrow an analogy from my Professor, creditors are stacked like flutes in a champagne fountain and the debts owed to higher priority creditors must be satisfied before the lower levels receive any value. The basic structure of these regimes sees secured creditors rank above unsecured parties such as pensioners.

However, certain non-secured creditors are afforded special priority by the statutes, elevating their claims to a higher priority than they would otherwise enjoy as a matter of contract. Certain pension obligations do attract this super priority status under sections 81.5 (1) and s. 60 (1.5) of the BIA and section 6 (6) of the CCAA which require that “normal cost” pension contributions associated with payroll funding be made before commercial creditors receive any value. However, an insolvent firm is not required to make special solvency funding payments until after secured creditors are paid out. These payments ensure that a plan has enough assets to cover liabilities if it were to be wound up immediately.

This means that workers enrolled in plans with large unfunded liabilities may face a reduction in their retirement incomes if the firm sponsoring their pension fails.

Under legislation like the federal Pension Benefits Standards Act, pension plans are funded in accordance with two methods of valuation: a going concern method that considers whether the plan has sufficient assets to meet existing liabilities if the plan operated indefinitely, and a solvency funding method that asks whether the plan could meet outstanding liabilities with existing assets if the plan were wound up immediately. Because solvency funding fluctuates significantly with interest rates, sponsors firms are permitted to gradually eliminate these shortfalls through a series of special payments over a number of years. Delaying solvency funding does not pose any special risk for retirees if the sponsor firm continues operating. However, it does pose a significant risk to beneficiaries if the sponsor firm were to go bankrupt or restructure before the unfunded liability were eliminated. Unfortunately, many Canadian defined benefit pension plans currently suffer from large unfunded liabilities.

In 2017, a study published by the Canadian Centre for Policy Alternatives found that only nine of the thirty-nine companies listed on the S&P/TSX 60 that sponsored defined benefit pension plans had fully funded those plans on a solvency basis. These companies held $174 billion in pension assets which amounted to one third of all private sector pension plan assets in Canada at the time. In 2016, the aggregate funding deficiency of these plans was $10.8 billion, up from $6.6 billion in the year prior. At the same time, sponsor firms spent more than $40 billion per year on share repurchases and dividends, increasing their likelihood of future bankruptcy eligibility by funnelling cash out of the firm. In other words, Canada’s largest companies paid out four times more to shareholders annually than it would have cost to fully fund their pension plans in a single year. Were any of these firms to go bankrupt, most of these payments would be unrecoverable and pensioners, along with other creditors, would be forced to accept a reduction in their claims. 

Currently, Ontario’s Pension Benefits Guarantee Fund insures defined benefit pension payments up to $1500. While we could imagine such a model being adopted in all Canadian jurisdictions, this amount falls short what many retirees currently receive. In addition, the PBGF is funded by premiums imposed on sponsor firms. This makes it harder for workers and their unions to push back against the argument that defined benefit pension plans are too expensive in bargaining.

Perhaps now is the time to look at more ambitious legislative solutions such as those contained in Bill S-253, proposed by former mayor of Toronto and outgoing Liberal Senator Art Eggleton in 2018, which would have amended the BIA and CCCA in order to give special solvency funding payments the same super-priority status enjoyed by wages and normal cost pension contributions.  Further, the proposal would have empowered the federal Superintendent of Financial Institutions to prevent sponsors firms from issuing dividends or initiating share repurchases while their pension plans remained unfunded. 

A policy along these lines would affirm important factors that distinguish pensioners from other creditors. Unlike commercial creditors who usually enjoy a diversified risk profile through their dealings with multiple firms, pensioners are wholly reliant on a single enterprise and are thus heavily impacted when a sponsor firm fails. While business creditors can also mitigate their losses by demanding cash on demand in dealings with imperiled firms or negotiating security interests, pensioners have already forgone wage compensation and, in many cases, contributed directly to their pension plans in exchange for a future stream of payments in retirement. COVID-19 has exposed significant gaps in the body of law regulating work in Canada. Much attention has been placed on employment law reforms and on expanding existing benefits into some model of guaranteed basic income. As our policymakers pursue these laudable objectives, they should not lose sight of those workers who have already exited labour markets, but rely on the fixed income of a defined benefit pension plan to fund their retirement. Now is the time for bold action and Canadians should demand that our governments ensure the economic consequences of the ongoing public health crisis are borne equitably. This includes ensuring that pensioners are adequately protected when businesses fail. 

Cole Eisen, “The Economic Effects of COVID-19 Could be Devastating for Pensioners Under Canada’s Bankruptcy Laws” Canadian Law of Work Forum (April 21 2020): https://lawofwork.ca/?p=12365

Pension Bankruptcy
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Darlene Adams May 8, 2020 - 12:22 pm

Cole, may I commend you on this article. It’s excellent and tells a story that many pensioners in Canada have been advocating for for many years.

As a Director of the BBPA (BigBlue Pension Association, ie IBM) I can assure you that we, along with many other Pension groups, have been challenging Governments to attack the inadequacies of current Pension situations/legislation in Canada on the very points you make…. but so far without a lot of success. Ontario, as you mention is the province where most DB (Defined Benefit) pensioner plans are registered and in some respects has stepped up. However, the rest of Canada with the exception of Quebec has done little.

I would be very interested in knowing what prompted you to write this article…. and who your target audience would be? It serves as an excellent summary from a credible source.
Thank you.

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