sears canada defined benefit pension plan shortfall Archives - Ira SmithTrustee & Receiver Inc.

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Employee benefits Canada: Introduction

The Federal government supports the proposition that Canadians are entitled to a risk-free, safe, secure and sensible retired life. Corporate financial troubles have increased problems about the safety of pension plan, wage and benefit payments for employees and senior citizens. Employee benefits Canada is now being looked at by the Federal government.

The most recent case that has brought these issues to the forefront has been the Sears Canada liquidation. Federal politicians have sponsored several private member’s bills which have now caught the serious attention of our Federal government. Two such Bills were brought forward by Hamilton Mountain NDP MP Scott Duvall and Senator Art Eggleton. The Federal government wants to make employee benefits Canada news.

Employee benefits Canada: My previous blogs

I have written on the issue in several blogs:

TORONTO BUSINESS BANKRUPTCY PROTECTION: NDP WANTS FEDERAL INSOLVENCY LAWS CHANGED SO THERE IS PENSION PLAN SECURITY WHEN FINANCIALLY TROUBLED BUSINESSES FAIL – September 27, 2017
SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS – October 18, 2017
SEARS CANADA CLOSING: POLITICIANS WANT NEW LAWS TO PROTECT PENSIONERS DUE TO SEARS CANADA CLOSING – November 1, 2017
SEARS CANADA DEFINED BENEFIT PENSION PLAN SHORTFALL: MP SCOTT DUVALL COMES THROUGH ON HIS PROMISE IN CANADIAN PARLIAMENT – November 8, 2017
CORPORATE BANKRUPTCIES CANADA: SENATOR EGGLETON PROPOSES NEW PENSION FUND CANADA LAW – October 22, 2018

Arising out of certain policy statements in the Fall 2018 Budget, the Federal government is looking for responses from pensioners, employees, firms, professionals and various other stakeholders to take a macro, evidence-based strategy to try to provide better-retired life protection for all Canadians.

Employee benefits Canada: Canada’s retirement income system

Canada’s retirement income system (RIS) is currently based upon 3 columns:

Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) give a fundamental degree of retired life earnings.Canada Pension (CPP) gives standard a certain wage substitute for employees, funded by payments from employees, companies and the self-employed.
Employer-based pension – Defined Benefit (DB) and Defined Contribution (DC)).
Income tax-assisted personal saving vehicles, such as Registered Retired Savings Plan (RRSP) and Tax-Free Savings Accounts (TFSA).

Employee benefits Canada: Insolvency and Bankruptcy Law

In 2008-2009, the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA) and the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) was changed. Under the BIA, in a receivership or bankruptcy, arrears of wages was given a super-priority. Approximately $2,000 per staff member must be paid before secured creditors. Any unfunded normal employer pension plan contributions (as distinct from any unfunded pension liability determined by an actuarial evaluation) also have a super-priority in either a bankruptcy or receivership.

As far as a corporate restructuring proposal under the BIA, the amendment also states that the Court cannot approve any Proposal that does not provide for the same treatment. The CCAA was similarly modified to be consistent with corporate restructuring under the BIA.

Employee benefits Canada: Corporate governance

The Canada Business Corporations Act (CBCA) supplies the fundamental business administration structure for Federally incorporated companies. Although good corporate governance is important for all business stakeholders, it must be followed and implemented to be of any use.

As I indicated above, the Sears Canada defined benefit pension plan shortfall has caused the Federal government to now look at a variety of options to try to better protect employees and retirees for both pensions and benefits.

Employee benefits Canada: The Feds are looking for stakeholder comments

The Federal government wants to listen to the thoughts of stakeholders on what further actions that might be embraced to boost retired life safety for workers and senior citizens impacted by company bankruptcy. Specifically, the Federal government wants stakeholder response on increased security for workers’ claims in insolvencies, including changing the BIA and CCAA to make sure that there is a super-priority to pay unfunded pension plan contributions and benefits claims ahead of the claims of secured creditors.

Many options are being considered that the Federal government wants stakeholder comments on by the end of this year.

Employee benefits Canada: Pension options being looked at

Possible pension options being considered are:

Solvency reserves: A solvency reserve is an account the employer could contribute to so that pension deficits can be eliminated. I doubt this would work. If the company could afford to pay into a solvency reserve, they could also afford to just pay off the pension payment deficit.
Pension plan financing relief: The Minister of Finance has the authority to offer companies with pension plan financing relief to assist in the long-term survival of the company pension. The Minister’s authority could be boosted to assist companies with a pension plan deficit experiencing financial problems. This type of help, being a moratorium on pension payments, could come with specific conditions. Such special conditions could include a moratorium on the payment of dividends, share redemptions and senior executive bonuses.
Self-managed accounts: Upon the bankruptcy of the company, the DB plan ends. In that case, the only option is to transfer each former employees’ respective entitlement to purchase an annuity. So, the expected benefit will never materialize because of the underfunding. Federal pension legislation (and provincial legislation to follow) could provide extra options. It could allow rolling over of each entitlement into a self-managed plan such as an RRSP. This way there is an opportunity to recoup some of the lost benefits over time.

Employee benefits Canada: Corporate governance options being looked at

Limitations on the company: Dividends, share redemptions and senior management bonuses could be restricted under the CBCA in situations where a company is in arrears of pension contributions. Once the arrears are caught up, then such special payments could continue. As federally incorporated companies are the minority of all companies in Canada. The Provinces would also have to invoke similar legislation. An annual filing mechanism, perhaps through the Canada Revenue Agency, would also have to be established so that companies could be monitored.

Employee benefits Canada: Bankruptcy and insolvency options being looked at

Increased “look-back” time: The BIA permits a court to reverse dividends paid or share redemptions made by an insolvent company within one year preceding the date of bankruptcy. The BIA and CCAA additionally allow a court to invalidate reviewable transaction (transfers at undervalue) by the Debtor as much as 5 years prior to the insolvency. In order to further connect corporate behaviour with employee interests, the “look-back” period in the BIA and the CCAA can be amended to include the unwinding of executive benefits, dividend payments and share redemptions at a time when there were also unfunded pension liabilities. The legislation could be amended to state that the recovered funds must go to paying down the pension payment arrears. I would also go one step further to make the amount approved by the Directors of the corporation to be paid out while there were pension plan contribution arrears a personal liability of such Directors.
Improved openness in CCAA rules: In CCAA, the borrower business negotiates with its creditors on a debt settlement plan. The process is conducted under court supervision. The legislation could be amended so that when there is an underfunded pension plan, it would be mandatory to have legal representation for the employees who are participants in such pension plan. This could be accomplished by amending the CCAA legislation to need that upon the motion to get the Initial Order the administrator of the pension plan must be an initial stakeholder that is consulted and served with the Initial Order motion material. The plan administrator has the statutory right to retain legal counsel and be represented at all Court hearings.

Employee benefits Canada: The solutions are varied and complex

As you can see, the range of possible solutions are varied and complex. However, one thing is for sure though. The Federal government has now awoken to the issue of shareholders being enriched off of the backs of the workers. The Sears Canada CCAA liquidation has brought the issue to the forefront. It will be very interesting to see how the Federal government proceeds in 2019.

Employee benefits Canada: Is your company bogged down by too much debt?

Is your company under fire as a result of too much debt, including pension plan contribution arrears? Is your business looking for reorganizing to get debt alleviation?

The Ira Smith Team has years as well as generations of experience helping people and companies in financial difficulty. If your company needs a corporate restructuring debt negotiation strategy, we have the experience. We will end your stress, anxiety and discomfort. Whether it is a BIA or CCAA debt restructuring, we can help you. We will return you and your company to a healthy, balanced and efficient pain-free life.

Our method for every case is to establish a remedy where Starting Over, Starting Now takes place. This begins the minute you consult with us and walk through our front door. You’re merely one telephone call away. Therefore, with our help, you will take the required steps to go back to leading a healthy and balanced problem-free life.

Call us today for your free first consultation.

Sears Canada defined benefit pension plan shortfall: Introduction

On November 6, 2017, Hamilton Mountain NDP MP Scott Duvall rose in the House of Commons for leave to introduce Bill C-384. It is titled “An Act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (pension plans and group insurance programs)”. Mr. Duvall’s motivation was the Sears Canada defined benefit pension plan shortfall.

Sears Canada defined benefit pension plan shortfall: Hamilton Mountain MP Scott Duvall introduces Private Member’s Bill C-384

Here is what Mr. Duvall said:

“Mr. Speaker, I would like to take this time to thank my seconder, my colleague who has done great work and works very hard in this House, and who has also helped me a lot on this bill.

I rise today to introduce a private member’s bill titled, an act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act. This bill will amend the Bankruptcy and Insolvency Act and the CCAA so that companies will have to bring any pension plan fund to 100% before paying any other secured creditors. It also makes amendments to require companies to pay any termination or severance pay owing before paying any secured creditors.

Other amendments will prevent a company from stopping the payment of any post-retirement benefits during any proceedings under the BIA or CCAA. These amendments will inject some fairness into a process that often sees the interests of workers, retirees, and their families placed behind all others.

We must fix the imbalances in current legislation and provide Canadian workers, retirees, and their families with the protection they expect and deserve. I am hopeful that all my colleagues in Parliament will put aside their partisan differences and support this bill. Canadian workers, retirees, and their families deserve no less.”

Although he did not mention it specifically by name in the House of Commons, Mr. Duvall has said that he would introduce such a Bill as a result of the Sears Canada defined benefit pension plan shortfall.

Sears Canada defined benefit pension plan shortfall: Hamilton Mountain MP Scott Duvall walks the walk

In our September 27, 2017 blog, TORONTO BUSINESS BANKRUPTCY PROTECTION: NDP WANTS FEDERAL INSOLVENCY LAWS CHANGED SO THERE IS PENSION PLAN SECURITY WHEN FINANCIALLY TROUBLED BUSINESSES FAIL, we told you that Hamilton Mountain MP Scott Duvall, the NDP pension plan critic, informed a group at the United Steelworkers’ Hall that he will present a private member’s bill to secure employees’ pension plans and benefits, and pressure business to offer termination or severance pay, prior to paying secured lenders.

With his Bill C-384, Mr. Duvall has lived up to his promise.

sears canada defined benefit pension plan shortfall

Sears Canada defined benefit pension plan shortfall: This is actually the second Bill attempting deal with this problem

In our November 1, 2017 blog, SEARS CANADA CLOSING: POLITICIANS WANT NEW LAWS TO PROTECT PENSIONERS DUE TO SEARS CANADA CLOSING, we reported that Bloc Québécois MP Marilène Gill’s Private Member’s Bill C-372, passed First Reading. That Bill is titled “An Act to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (pension plans and group insurance plans)”. In that blog, we described the provisions included in that Bill.

Like Mr. Duvall, Ms. Gill is trying to pass legislation to avoid another Sears Canada defined benefit pension plan shortfall insolvency situation.

Sears Canada defined benefit pension plan shortfall: What does Bill C-384 actually say

The purpose of this blog, is to describe the terms of Mr. Duvall’s Bill.

Mr. Duvall’s Private Member’s Bill C-384 passed First Reading. It is very similar to Ms. Gill’s BIll C-372. He wishes to amend the Bankruptcy and Insolvency Act (BIA) as follows:

In order to be approved by the Court, a corporate restructuring proposal under the BIA, for a company with a prescribed pension plan, the Proposal must include payment in full of any unfunded pension liability or solvency deficiency. The amount is calculated at the time of the filing of the Notice of Intention To Make A Proposal (NOI) or the Proposal if there is no NOI filed.

New section 69. 7 be added to the BIA that in the restructuring proposal of an employer, upon filing, until the discharge of the Licensed Insolvency Trustee (LIT), or the insolvent employer becomes bankrupt, all amounts that the employer must contribute under any arrangement for the benefit of the employees, must continue throughout the restructuring period. This would cover any pension plan, health, injury or accident plans and group insurance coverage.

The unfunded pension liability or solvency deficiency calculation is called “special payments” in Bill C-384. The calculation is by section 9 of the Pension Benefits Standards Regulations, 1985.

In a receivership, the receiver is personally liable for paying any unfunded pension liability or solvency deficiency. However, the receiver’s liability is only from the proceeds of the sale of current assets.

In either a receivership or corporate bankruptcy, the charge for any unfunded pension liability or solvency deficiency would rank ahead of the charge of any other secured creditor. It is interesting to note that the Bill does not attempt to provide such a security ranking to anything other than the pension liability or solvency deficiency.

The Officers and Directors of the company are not entitled to the benefit of this secured charge. Even if they are participants in the pension plan that has the unfunded pension liability or solvency deficiency.

New subsection 136(1) (d. 001) to the BIA, creating an extra class of preferred creditor. A preferred creditor is an unsecured creditor who ranks ahead of the ordinary unsecured creditors and ranks after the secured creditors. The Bill states that it would say that the amount of any termination or severance pay owed to an employee by a bankrupt employer, less any amount previously paid by the LIT, would rank in priority right after the wages owed to the employee.

There are also proposed amendments to the Companies’ Creditors Arrangement Act (CCAA) in Bill C-384. It is to bring the same changes in that statute as those to the BIA described above. The intent is that the treatment under both statutes is the same.

Sears Canada defined benefit pension plan shortfall: Now it is up to Justin Trudeau and his Liberal Party

We will now have to wait and see what happens to both Ms. Gill’s and Mr. Duvall’s Private Member’s Bills. As we previously reported, it is unusual that a Private Member’s Bill becomes real legislation. As the Liberals hold a majority in Parliament, if they don’t want it, or a revised Bill for the same purpose, to pass, it won’t.

Sears Canada defined benefit pension plan shortfall: Does your company need a restructuring and turnaround plan?

Is your company insolvent and needs to restructure? Is your business viable but can only employ people and carry on business if it can restructure its debt? Contact the Ira Smith Trustee & Receiver Team. If we meet with you early on, we can create a restructuring and turnaround strategy. That way your company won’t have to be like Sears Canada closing.

sears canada defined benefit pension plan shortfall