Last month, I appeared before the federal government’s Standing Committee on Industry, Science and Technology to convey our concerns regarding Bill C-501,An Act to amend the Bankruptcy and Insolvency Act and other Acts (pension protection), which if passed will alter the status of unfunded pension plan liabilities in the context of restructurings and bankruptcies. These changes could negatively impact employers with defined benefit (DB) pension plans and their ability to fund their plans.
The health of a private-sector DB plan is dependent on the financial ability of the employer to support it. Low long-term interest rates and market volatility continue to negatively impact DB plan funding. Bill C-501, the stated purpose of which is “to ensure that unfunded pension plan liabilities be accorded the status of secure debts in the event of bankruptcy proceedings”, may add to DB plan sponsors’ funding difficulties.
The Bill (including amendments recently proposed by the NDP) would amend the Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA) to extend “super priority” status to the entire solvency deficit, and not just those solvency deficit amortization payments that are due but not yet paid.
Extending super-priority status to the entire solvency deficit could place significant additional burdens on the financial capacity of DB plan sponsors, impede their ability to cost-effectively raise capital, adversely affect their ability to invest in Canada’s economy and remain competitive, and, ultimately, impair their ability to fund their pension obligations.
For example, the proposed amendments to the BIA and CCAA could have the following implications:
- the elevation of billions of dollars of potential pension claims ahead of lenders in the priority ladder;
- the revaluation by credit markets of assets available for security and the deduction of higher-priority claims, thus resulting in a significant reduction of available credit; and
- the creation of immediate default situations, based on covenants in existing trust indentures restricting the existence of claims that would have priority over the existing lender.
While the protection of members’ accrued benefits in a restructuring or bankruptcy situation may well be a public policy goal worth pursuing, the unintended consequences of Bill C-501 could include not only the weakening of the financial viability of DB plan sponsors, but possibly the wholesale abandonment of DB plans by corporate Canada.