October 4, 2018
On September 25, 2018, just days before his retirement, Senator Art Eggleton moved second reading of Bill S-253, An Act to amend the Bankruptcy and Insolvency Act and other Acts and Regulations (pension plans).
Bill S-253 seeks to accomplish two things:
- To amend the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”) to provide for priority status for claims in respect of underfunded pension plans; and
- To amend the federal Pension Benefits Standards Act, 1985 (“PBSA”) and the Pension Benefits Standards Regulations, 1985 to empower the Superintendent of Financial Institutions to prescribe measures to be taken by the employer in respect of an underfunded pension plan, including restrictions on the issuance of dividends or share buy-backs.
The proposal to amend the BIA and the CCAA is not new. Last October, we published a post on two private Members’ Bills in the House of Commons aimed at making changes to the insolvency regime to give priority to claims arising out of an underfunded pension plan and the cessation of employer activity in a group insurance plan. Since then, a third private Member’s Bill was introduced in June 2018 to amend the PBSA to authorize the administrator of an underfunded pension plan, where the employer is insolvent, to amend the plan or to transfer any part of the assets or liabilities of the plan to another pension plan. This Bill also proposed amendments to the CCAA to require the relevant parties to agree on the payment of missed normal cost pension contributions before key employee retention plans can be approved in a CCAA proceeding. All of these Bills remain at first reading.
However, Bill S-253 is distinguishable from the private Members’ Bills because it not only addresses pension priorities in an insolvency situation, but also pension underfunding before a company becomes insolvent.
During second reading, Senator Eggleton cited the Sears Canada case as a direct example of what his Bill is trying to prevent. The hundreds of millions of dollars of dividends doled out to Sears Canada shareholders while the pension plan was underfunded have come under recent scrutiny. As a company financially deteriorates, vulnerable creditors like retirees and employees are left to pay the price of the company’s actions with their earned wages – deferred or otherwise. This past August, many Sears retirees have had their monthly pension benefits cut by 30%. Their pension promise has not been kept.
While Sears Canada serves as a cautionary tale to pension regulators across Canada, it is not alone in its corporate practice of directing large cash flow to shareholders and directors. In a report published by the Canadian Centre for Policy Alternatives (CCPA) last year on pension deficits and shareholder payments among Canada’s largest companies, it was found that 25 of the companies listed on the S&P/TSX 60 could make up their pension shortfalls with less than a year’s worth of shareholder payments. In 2016 alone, payments to shareholders via dividends or share buy backs “were four times the value of the pension deficit for those companies with pension plans.”
The CCPA Report’s recommendations include:
- Limiting shareholder payouts when pension plans are underfunded;
- For pensions plans that are covered by Ontario’s Pension Benefits Guarantee Fund (PBGF), increasing PBGF premiums for companies not making up pension shortfalls;
- Mandatory disclosure and consultation with regulators and plan members before extraordinary dividends can be declared and before share buyback programs can be initiated
These recommendations are in line with what other countries are already doing to ensure the security of retirees’ benefits. For example, in the United Kingdom, pension regulators have ‘moral hazard powers’ to act where it believes an employer is deliberately attempting to avoid their obligations to a defined benefit pension plan. In the United States, plan sponsors are required to give the American Pension Benefit Guaranty Corporation advanced notice of corporate and pension plan activity that could potentially put pensions at risk, including the declaration of an “extraordinary dividend”. It is time that Canadian regulators follow suit.
Like the many Bills that have been put forth to protect pensioners, Bill S-253 must go through a long legislative process and will undoubtedly be debated at length by the Senate, as well as the House of Commons, before it can be proclaimed into law. While the Bill is unlikely to pass in its current form, pressure continues to mount on politicians and regulators to act to strengthen workplace pension security.
Pension and Benefits