DB plans further threatened by Bill C-228

A private member’s bill making its way through government is promising to better protect pension plan members.

But in doing so, it could threaten the existence of defined benefit (DB) plans – a preferred option compared to defined contribution (DC) plans – says one legal expert.

“The impact will be much broader in the sense that current members of defined benefit pension plans in the private sector may lose out as a result of their employers deciding to wind up these plans,” says Michael Wolpert, a partner at Fasken in Calgary.

Greater protections

Having passed Second Reading in the Senate on Dec. 14, following a Third Reading in the House of Commons on Nov. 23, the Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985 is nearing completion.

In the event of a bankruptcy, pensions would be paid out in priority over secured creditors such as large banks, preferred creditors, and unsecured creditors, according to Marilyn Gladu, MP for Sarnia-Lambton in Ontario, who is sponsoring the bill.

“That will put pensioners in a much better position. Pension funds will be solvent, in general, and when there is a bankruptcy, large creditors are way more likely to be able to survive one company's going bankrupt than an individual who has paid into their pension and is counting on it for their retirement.”

It’s not the first time this concept has been floated by a private member’s bill, says Wolpert.

“It seems to come up every few years, every time there's a major, high-profile bankruptcy or insolvency and plan members' pension benefits, if they're in a defined benefit plan, are reduced.”

Back in 2017, retail chain Sears faced criticism after seeking creditor protection but not providing severances after layoffs, while giving retention bonuses to executives.

Similarly, in 2009, employees and former employees of Nortel voiced their frustration and anger with the provincial and federal governments when it came to the loss of pensions, severance pay and benefits after bankruptcy.

Priority in insolvency

In particular, Bill C-228 seeks to expand the scope of unfunded pension amounts protected by the priority in insolvency, according to Wolpert and his colleagues in a recent bulletin.

The priority will extend to cover the plan contributions (special payments) an employer was required to make over and above current service costs to amortize an existing unfunded liability or solvency deficit, as well as the remaining balance of the deficits themselves.

“In other words, the super-priority would operate towards fully funding the plan on both a going concern basis and a solvency basis, even if the employer had until then been funding the plan in accordance with legislative requirements,” say the Fasken lawyers.

This change will have the greatest impact on private sector DB pension plans and their corporate sponsors, as these plans provide members with promised pension benefits at a future point in time.

“Funding for DB plans is dependent on a combination of legislative requirements, complex actuarial input and numerous demographic and economic factors and assumptions. As a result, the degree to which a given DB plan is fully funded, and the employer's associated financial exposure can fluctuate significantly at any given point in time.”

This is in contrast to a DC pension plan, where the employer's contributions are set at a fixed percentage of employees' earnings, “and therefore readily quantifiable at any point in time,” says the bulletin.

As a result, “it's going to compromise the ability of these employers or these companies… to borrow money. Any lender, as you can imagine, is going to be reluctant to lend to a company money if a pension plan… [with] an unfunded liability can rank ahead of it in the case of insolvency,” says Wolpert.

It's also going to make it difficult for these companies to restructure if they do run into financial difficulty and become insolvent, he says, “and that could end up with a worse result for members.”

Alternate approach

Companies with DB pension plans could face an increased cost of capital to carry on business, or an inability to borrow, says the Fasken bulletin.

“As a result, these companies may decide to wind up their DB pension plans in favour of some alternative form of retirement savings for their employees,” such as a DC plan or group RRSP, which have less favourable financial outcomes.

“Thus, the very individuals who the Legislature seeks to protect by enacting the bill would be the ones negatively affected by it.”

If an employer does face the anticipated hardships with the new legislation, the first option would be to convert to a DC plan, says Wolpert, “so it doesn't necessarily mean that people are going to be left without a pension. But… there's certainly a lot of research and studies to suggest that a defined benefit plan is going to produce a better retirement outcome than a DC plan, in most cases.”

A majority (84 per cent) of employers offering DB plans say the pensions play an important role in their recruitment efforts, and 71 per cent of Canadians say they are willing to forgo a higher salary in favour of a better pension plan, according to data released by Healthcare of Ontario Pension Plan (HOOPP).

4 years to go

At this rate, the bill could become law in the very near future, possibly in early 2023, he says. And while it won’t take effect for another four years, “there's going to have to be a lot of creativity, a lot of thought, a lot of discussions going on during those four years as to how this is going to be managed,” he says.

“We're kind of stuck with what we've got. I mean, I'd be surprised if, at this stage, there any changes to the legislation, but we'll see.”

And it’s difficult for politicians to argue against the idea of protecting retirees who are “seen as a vulnerable group,” says Wolpert.