Recent changes to the Bankruptcy and Insolvency Act have given certain unpaid pension plan contributions priority over a lender’s security if the employer is bankrupt or in receivership. How can a lender monitor the debtor’s pension arrears to assess the extent of the lender’s loss of priority?

The Bankruptcy and Insolvency Act now provides that certain unpaid pension plan claims rank ahead of a lender’s security in bankruptcy or receivership proceedings. Effective July 7, 2008, sections 81.5 and 81.6 give super-priority status to:

  1. amounts that were deducted from the employee’s remuneration for payment to the pension fund,
  2. amounts that were required to be paid by the employer to the pension fund under a defined contribution provision, and
  3. "normal cost" amounts that were required to be paid by the employer to a defined benefit pension fund.

These unpaid amounts owing by an employer to a pension fund are now secured by all of the assets of the employer. The new priority status does not apply to "special payments" required to be made by an employer to a defined benefit pension fund to reduce unfunded liabilities and solvency deficiencies.

What does this mean to lenders?  

If a debtor is bankrupt or in receivership, the unpaid pension plan contributions referred to above will be paid before secured lenders can collect amounts owed to them. This will reduce the amount available for lenders.

How can lenders protect themselves?  

Lenders should monitor their debtors’ pension plan contributions to confirm that the amounts listed above are paid when due and, where applicable, include any arrears of these amounts in their margining calculations. One way to monitor these contributions in Ontario is for the lender to obtain from its debtor a completed Form 7: Summary of Contributions / Revised Summary of Contributions each time the debtor is required to file the Form 7 under Ontario Pension Benefits Act. Form 7 is only available for Ontario-registered pension plans. However, other provinces may have similar forms that could be obtained by lenders to accomplish the same goal.[1] References to Form 7 in this article should be interpreted to include such other applicable forms.

Administrators of Ontario-registered pension plans are required to submit Form 7 to the applicable pension fund holder, usually a trustee or an insurance company, each fiscal year and whenever there is a material change to the required contribution levels. The form shows reasonable estimates of employee and employer contributions required to be remitted to the pension fund holder during each fiscal plan year. Estimated employer contributions include normal cost contributions to a defined benefit plan and special payments to reduce going concern unfunded liabilities and/or solvency deficiencies. However, as mentioned above, only "normal cost" contributions, employee contributions and defined contribution plan employer contributions are subject to the super-priority.

Recognizing the specific funding information that Form 7 requires pension plan administrators to disclose can be of significant assistance to lenders. In their loan agreements, lenders can stipulate that the debtor provide a copy of its completed Form 7 to the lender whenever it is required to be submitted to the plan fund holder. In appropriate circumstances lenders could go further by requiring the debtor to remit periodic confirmation from the pension fund holder that the fund holder has in fact received the amounts shown on the most recent Form 7. In jurisdictions where the type of disclosure provided by Form 7 is not required, lenders could require their debtors to disclose such information and provide periodic payment confirmations from the pension fund holder.