Pension Progress or Pension Peril? Examining the Debate Surrounding Bill C-228
Written by Virginia Torrie and Connor Jonsson
New legislation aimed at reforming insolvency proceedings to prioritize pensioners has taken another important step toward becoming law. Bill C-228, which started as a private member’s bill sponsored by Conservative MP Marilyn Gladu, was referred for Senate Committee review on December 14, 2022, after unanimously passing the House of Commons in November.[1] The bill has now completed first and second reading in the Senate. If passed, the Pension Protection Act, which has received broad support from members of all political parties, would amend the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) to give a new, much more expansive super-priority to defined benefit pension plan members in the event of employer insolvency. It would also amend the Pension Benefits Standards Act (PBSA) to provide for the tabling of an annual report respecting the solvency of pension plans.
Bill C-228 is designed to protect the pensions of former employees in cases of employer insolvency and to increase transparency regarding potential funding issues faced by pensions. If enacted into law, Bill C-228 would mark a major change to bankruptcy and insolvency legislation by providing significantly more robust protection for pensions in employer insolvencies than any country in the world, as far as we are aware.
The BIA and CCAA currently provide super-priority protection to very specific aspects of prescribed pension plans, namely pension contributions that have been deducted from employees’ wages but not remitted to the pension fund, an employer’s “normal cost” of providing current retirement benefits to employees, and contributions owed by an employer to a defined contribution plan.[2] There is no monetary cap on how much the pension amounts may be for the purposes of the super priority, which means that the amounts can potentially be very large. Even still, the costs described above do not always cover the entire shortfall. Current legislation does not provide priority for “special payments” or pension deficits in general – amounts that can be quite sizeable in some cases.[3] “Special payments” are additional payments that may be required to fund a pension plan in certain circumstances, such as if the plan’s funding level falls below a certain threshold. A “pension deficit” is the difference between the assets of a pension plan and the amount that is needed to meet the plan’s liabilities. In the event of a bankruptcy or insolvency, these types of payments are not given the same priority as the amounts covered by section 81.5 and 81.6 of the BIA and 6(6) of the CCAA.
The proposed reforms respond to perceived problems with this current system. The exclusion of special payments and pension deficits from super-priority protection can lead to situations in which pensioners are forced to settle for a (much) reduced payout of their retirement income upon employer insolvency due to a lack of liquidity.[4] Bill C-228 is designed to address these deficiencies, in sweeping fashion.
The new bill aims to expand the super-priority framework to include protections for special payments that are due and unpaid by the employer and for any amount required to liquidate unfunded liabilities and solvency deficiencies of pension funds.[5] This will balloon the scope of the pension super priority, which is already quite broad, essentially expanding its reach to include everything pensioners are owed with respect to their pensions. In effect the full pension deficit would rank ahead of virtually all other claims when an employer becomes insolvent. Conceivably, this could result in other insolvencies where creditors – including secured creditors such as banks – receive no distribution, or very little, from the insolvent estate. Bill C-228 is thus a muscular effort to elevate the priority status of unpaid pension claims above almost all other claimants in an insolvency.
While many have lauded the private member’s bill for enhancing pension protection for vulnerable Canadian seniors, critics have expressed concern that Bill C-228 will have unintended consequences which may weaken the very pension system it was designed to shore up. The primary concern is that companies with defined benefit pension plans will have more difficulty accessing credit since it adds a new, large and uncertain liability that ranks ahead of lenders.[6] The value of unfunded liabilities and solvency deficiencies are very difficult to predict and risk adverse lenders are not likely to look favourably on such unforeseeable liabilities. This in turn could lead to higher rates of interest and an increase in various credit-enhancing mechanisms. As a result, many predict that the new bill may lead to the elimination of defined benefit pension plans altogether, as the increased risk profile that comes with such plans will force companies to reconsider their commercial viability.[7]
The critics may be correct, but it is also worth mentioning that defined benefit pension plans have been on the wane for many years. Virtually no private sector employer is starting a new defined benefit plan in 2023. It is also not difficult to foresee a point in the not-too-distant-future when defined benefit plans exist only for government and public sector workers. The credit risk and access to credit arguments become less critical, and less applicable, when the “borrower” in question is government. Therefore, Bill C-228 may – even likely would – hasten the demise of the defined benefit plan, but it is a stretch to say that it alone would have caused it.
Supporters of Bill C-228 disagree, and believe the new bill is unlikely to kill pension plans or severely impact lending practices, although the basis for such claims is not clear. At a minimum, there will be a period of financial “reckoning” as plan sponsors and their creditors adjust ex ante to the changes that will apply ex post in case of bankruptcy. Arguments in favour of Bill C-228 range from the contractual (the future of the majority of these plans can only be decided through negotiation so they are unlikely to change without employee consent) to the historical (there was a lack of adverse consequences when super-priority for workers’ salaries was first legislated in 2005 – although, as noted, those were far more modest changes to the order of distribution in bankruptcy and did not initially include companies that liquidated through the CCAA).[8]
Fundamentally, those in favour of Bill C-228 believe that retirees should not be forced to take a reduction in their rightfully earned retirement income when their employer becomes insolvent. That is a simple and compelling policy claim that has gained political traction just as largest demographic cohort of workers – baby boomers – have begun retiring in large numbers. Older adults tend to be more engaged in political processes, including voting, and this observation, coupled with the fact that the baby boomers represent such a large group, is a recipe for broad political support. This perhaps best explains why Canada is on the cusp of upending the order of distribution in employer liquidations to favour pension claims.
More generally, some have argued that a “pension champion”, who would be responsible for advocating for the interests of pension plan beneficiaries and coordinating the efforts of various interest groups, could be helpful in addressing challenges facing the pension system in Canada.[9] In this role, a pension champion could work to bring together stakeholders in the pension system, such as pension plan administrators, regulators, and government officials, and help to identify and address challenges facing the pension system with the aim of developing a cohesive national pension strategy. This is likely a sensible recommendation, and would have the added benefit of aiming to resolve some of the thorny challenges related to pensions directly through pension law, rather than indirectly through bankruptcy and insolvency legislation.
While creditor priorities in bankruptcy are ripe for review and reform, this should be done comprehensively so that the resulting order is coherent overall, and an effort is made to balance competing priorities and concerns. From this perspective, Bill C-228 demonstrates how a piece meal approach is far from optimal. By placing some of the very largest claims first, smaller but equally meritorious claims owed to other stakeholders will likely go unpaid altogether. This includes, for instance, invoices owed to tradespersons (unless they qualify for unpaid supplier of goods repossession rights) and damages owed to tort victims.[10]
The rationale for limiting the scope of super priorities is, at least in part, in order to spread the proceeds of the insolvent estate more broadly than would otherwise be the case. The proposed enhancement to the pension amount super-priority disregards that fact, and instead treats the super-priority as a means of elevating the totality of claims held by a certain stakeholder group to the front of the queue. This in turn incentivises other stakeholders to follow suit, leading to still more piecemeal reforms. The approach taken by C-228 is not surprising given it is a private member’s bill, but it illustrates the need for more comprehensive (ideally, government-led rather than interest group-led) reforms of Canada’s bankruptcy and insolvency system. Such reforms would be able to take a global view of how the proceeds of an insolvent company should be distributed, instead of reducing the exercise of setting creditor priorities to a game of “winner take all.” Establishing an order of distribution for a bankruptcy system is complex and multifaceted, and it accordingly requires a measured and nuanced approach.
If Bill C-228 is passed there will be a four-year time period before the relevant provisions apply, which will enable companies to address their unfunded liabilities and solvency deficiencies. While it is still unclear what the final version of the bill will look like, there is little doubt that the impact to the pension system, and those involved in it, will be enormous and the ramifications of its passage will be felt for years to come.
[1] C-228, An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1st Sess, 44th Parl, 2022, cl 5(1) (Senate committee stage) [Bill C-228].
[2] See BIA ss 60(1.5), 81.5 and 81.6 and CCAA s 6(6)(a).
[3] Anthony Capital Corporation (Re), 2021 NLSC 91 at para 38. See also UTB Marine Group Ltd v Northern Transportation Company Limited, 2017 BCSC 2007 at para 54.
[4] Canadian Press, “Sears case shows the risk of defined benefit pensions for employees” (14 September 2017), online: CBC News < https://www.cbc.ca/news/business/sears-pension-reduced-1.4289380>.
[5] Bill C-228, supra note 1, at cl 2-4.
[6] Alan Freeman, “Prioritizing the workers” (4 November 2022), online: National Magazine <https://nationalmagazine.ca/en-ca/articles/law/business-corporate/2022/prioritizing-the-workers> [Freeman].
[7] Ibid.
[8] Ibid.
[9] Gavin Benjamin, “Expert panel: Does Canada need a pension champion?” (20 Dec 2022), online: Benefits Canada <https://www.benefitscanada.com/expertpanel_/gavin-benjamin/expert-panel-does-canada-need-a-pension-champion/>.
[10] See BIA, ss 81.1 and 81.2.
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