Bill C-228 proposes an impact on lender priorities that may have other negative effects

Canadian insolvency statutes accord super priority to certain liabilities in insolvency proceedings, bumping them above the interests of secured creditors. Pension entitlements and benefits do not enjoy this super priority. Bill C-228 (the "Bill") attempts to change this. On Nov. 23, 2022, the House of Commons unanimously passed Bill C-228. The Bill will now be sent to the Senate for consideration. Although it is a private member's bill, Bill C-228 has the support of the three opposition parties in Parliament.

At present, employer pension liabilities only have super priority under the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act to the extent that they are:

  1. unpaid amounts deducted from employee remuneration for contribution to the pension fund, or
  2. unpaid "normal costs" or other unpaid amounts that the employer was required to contribute to the pension fund or administrator under a defined contribution provision or registered pension plan respectively.

These are liabilities whose values are known or easily knowable.

Bill C-228 proposes to expand the list of pension liabilities that have super priority to include:

  1. special payments determined in accordance with Section 9 of the Pension Benefits Standards Regulations, 1985 that the employer is required to pay to the fund to liquidate an unfunded liability or solvency deficiency; and
  2. any amount required to liquidate any other unfunded liability or solvency deficiency of the fund.

A pension fund's "unfunded liabilities" refers to the additional amount that needs to be added to the fund's assets to enable the fund to continually pay benefits as they come due if the fund were to operate indefinitely. The "solvency deficiency" is the additional amount that the fund needs to enable it meet its obligations if the fund were to be wound up. The unfunded liabilities and solvency deficiency do not have a fixed value as they fluctuate from time to time and can only be assessed by actuaries at a point in time.

The Bill currently proposes a four-year delay between when the Bill comes into force if passed and when the above amendments become effective (the "four-year period").

For borrowers with defined contribution pension plans, Bill C-228's effect will be muted because the employees' entitlement and the employer's liability are limited to the value of predefined contributions. Borrowers with defined benefit pension plans on the other hand will be significantly affected by the proposed super priority status of unfunded liabilities and solvency deficiency. Defined benefit pension plans account for two-thirds of all registered pension plan memberships in Canada.

Given the uncertain value of unfunded liabilities and solvency deficiency in defined benefit pension plans, lenders will be unable to determine the quantum of any potential pension liability in the event of a future bankruptcy. This inability to reliably measure the risk will likely constrain lenders in granting credit and increase the cost of borrowing for borrowers with defined benefit pension plans. Ironically, this could potentially heighten the risk of bankruptcy.

Ultimately, it is likely that Bill C-228, if it becomes law, will cause or accelerate a shift by employers from defined benefit pension plans to defined contribution plans. Effectively, although the Bill is intended to protect pension plans, a potential result may be that employers use the four-year period to move away from defined benefit plans.

Takeaway

If Bill C-228 becomes law, lenders will need to assess their loan portfolios and determine if particular covenants or renewal limits should be in place for the end of the four-year period.