On November 24, 2022, new legislation designed to improve pension priorities in insolvency quietly passed its first reading in the Senate, moving one step closer to becoming law in Canada. While many private member bills have tried to strengthen pension priorities in insolvency over the past decade, none have been successful since the amendments were made to the insolvency regime in 2009, giving certain unfunded pension liabilities the priorities they presently enjoy. In contrast, Bill C-228, An Act to Amend the Bankruptcy and Insolvency Act ("BIA"), the Companies' Creditors Arrangement Act ("CCAA") and the Pensions Benefits Standards Act, 19851, or the "Pension Protection Act" in short, appears to be moving through the Legislature with little attention and relative ease. Bill C-228 has received broad support from members of all political parties. At the rate of its present trajectory, this sets the stage for the Bill to receive Royal Assent and become law in the very near future, possibly in early 2023. While the Bill's intention to protect pensioners is an admirable one, unintended consequences arising from its implementation may in fact have the direct opposite result, potentially spelling the end of private sector defined benefit ("DB") pension plans in Canada as we know them.
In particular, Bill C-228 seeks to expand the scope of unfunded pension amounts protected by the priority in insolvency. At present, the priority is limited to:
- Amounts deducted from an employee's pay for payment to the pension fund;
- Unpaid "normal costs" and defined contributions required to be paid by the employer to the pension fund, where normal costs constitute the cost of benefits, excluding "special payments", that are to accrue during a plan year, as determined on the basis of a going concern valuation, and defined contributions being a fixed contribution by the employer to the pension fund; and
- Amounts payable to the administrator of a pooled registered pension plan.
These types of unfunded pension liabilities are presently given priority in bankruptcy and receivership proceedings by the granting of a charge over the debtors' assets, which has priority over all other claims, rights, charges or security against the debtors' assets, excepting certain listed exclusions. These exclusions are: i) the rights of unpaid suppliers to repossess their goods within 30 days, ii) the priority afforded to farmers, fishermen and aquaculturists, iii) amounts deemed to be held in trust pursuant to section 67(3) of the BIA, and iv) unpaid wages up to $2,000. Similarly, no BIA proposal to creditors or plan of arrangement or compromise with creditors under the CCAA can be approved by the Court if such amounts are not paid in full, or an agreement is not otherwise reached with the beneficiaries of the pension fund, which agreement is approved by the relevant pension regulator. 2
The proposed legislation seeks to improve the protection afforded to pensions in insolvency by expanding the priority to now also include both "special payments . that would have been required to be paid by the employer . to liquidate an unfunded liability or a solvency deficiency," and "any amount required to liquidate any other unfunded liability or solvency deficiency of the fund as determined on the day on which" the respective insolvency proceedings commenced.
Particularly, the priority will extend to cover the plan contributions ("special payments") an employer was required to make over and above current service costs in order to amortize an existing unfunded liability (i.e., a deficit arising on the basis the plan continues indefinitely) or solvency deficit (i.e., a deficit arising if the plan were to be wound up), 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.
This expanded priority will have the greatest impact on private sector DB pension plans and their corporate sponsors. DB pension plans provide memberswith 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. The nature of this financial exposure sits in contrast to that associated with a defined contribution ("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.
As a result of the expanded priority proposed by Bill C-228, lenders to companies which have DB pension plans may find themselves at risk of being primed by significant unfunded pension liabilities that will only be ascertainable as at the date of an insolvency filing. This fundamentally alters the risk profile for lenders to such companies. In order to protect their interests, lenders may respond by, for example,making access to credit for such companies more restrictive, difficult and expensive to obtain, by including covenants in the applicable loan or credit agreement which (i) outright restrict the subsistence of DB pension plans, or (ii) make any solvency deficiency in respect of a DB pension plan an event of default under such loan or credit agreement, subject in some instances to certain threshold amounts.
This in turn would mean that companies with DB pension plans would be faced with an increased cost of capital to carry on business, or even an inability to borrow. 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. Unfortunately, research has demonstrated that the projected financial outcomes for plan members in, for example, a DC pension plan or group RRSP are typically inferior to an employer-sponsored DB pension plan.3 Thus, the very individuals who the Legislature seeks to protect by enacting the Bill would be the ones negatively affected by it.
The Bill also seeks to provide more transparency and oversight of pension plans by expanding the content and distribution of the federal pension regulator's annual report to the federal Minister of Finance to include commentary on pension plan funding, including corrective measures taken in relation to pension plans not meeting funding requirements. However, it appears these measures will only apply to Federally regulated pension plans4, such that any potential increase in benefit security that could arguably be derived as a result of these enhanced reporting obligations will presumably not extend to non-Federally regulated pension plans.
It is also of note that a prior iteration of the Bill sought to include an enhanced priority for unpaid wages in insolvency; however, that element of the Bill was removed by the Speaker of the House as being out of scope.5
Bill C-228 has a transitional provision such that it does not come into force for four years following its enactment. If the Bill is enacted, during this transitional period both employers with DB pension plans and lenders to such companies would be wise to review the increased risk profile potentially created by the expanded priority for unfunded pension liabilities in insolvency. For lenders this may include seeking covenants that impose enhanced reporting requirements on borrowers with pension plans, such as with respect to the solvency status of such pension plans. On the other side of the equation, employers will want to consider what type of pension plan best suits their business model, and may be faced with having to change their compensation structure and, in many cases, negotiate changes to collective agreements.
The views and opinions expressed in this article belong to the authors and should not be relied upon as a substitute for independent legal advice. Fasken's Pensions & Benefits, Insolvency & Restructuring, and Banking & Finance teams are monitoring these legislative developments closely and working collaboratively to advise our clients. Should you wish to discuss the particular circumstances of the implications of the proposed Pensions Protection Act on your business or clients, please contact our team members.
Footnotes
1 The current version of the Pension Protection Act (PDF).
2 Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended, ss 60(1.5), 60(1.6), 81.5 and 81.6, and Companies Creditors' Arrangement Act, RSC 1985, c C-36, as amended, s 6(6)(a).
3 The Value of a Good Pension: How to improve the efficiency of retirement savings in Canada (PDF).
4 This is by virtue of the fact that the expanded reporting obligations arise from proposed amendments to the Federal Pension Benefits Standards Act, 1985.
5 Hansard Debates(PDF), November 18, 2022, at 9723.
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