Protection for private pension plans: what Canada can learn from the U.S. Employee Retirement Income Security Act.

• Author: Firman, Mark
• Position: Fourth Annual Conference

Abstract

This paper examines the intersection of Canadian pension and bankruptcy law. Provincial and federal pension legislation requires pension plan sponsors to maintain sufficient assets in a plan to meet their obligations to plan members at retirement. Despite these safeguards, when a pension plan is underfunded and an employer becomes bankrupt, workers face inordinate risk. Simply put, many workers are poor bearers of risk and are almost completely dependent on their employers' pension promises. This paper argues that the existing legislative protections, including recent amendments to the federal Bankruptcy and Insolvency Act, which provide a super-priority for certain pension claims in bankruptcy, ultimately fail to mitigate the growing risk that workers may face benefit curtailments when their employers collapse. The paper argues that extending the super-priority to cover all pension claims would be counterproductive insofar as efficient distribution schemes should ensure as best as possible that secured creditors maintain their priority. Accordingly, to avoid a potential clash between pension plan members and secured creditors, the paper proposes an alternative means of worker protection: a national public pension insurer.

This paper favourably examines one such public scheme, the U.S. Pension Benefit Guaranty Corporation (the "PBGC") and details the protection that it has provided to pension plan members in representative bankruptcies in the airline and steel industries. The paper argues that the combined force of workers' vulnerability in bankruptcy and the relative success of the PBGC weighs in favour of a similar regime for Canada, notwithstanding counterarguments that it could give rise to moral hazard and increased costs. After addressing counterarguments against public pension insurance, the paper outlines the advantages of a national Canadian pension insurer. A national insurer would treat workers across Canada equitably and would not impinge on provincial jurisdiction over property and civil rights because it would operate only when federal bankruptcy legislation is triggered. To this end, the paper addresses the potential constitutional and political hurdles that the establishment of a national insurer could face and concludes that they are surmountable.

Resume

Cette dissertation examine l'intersection entre le droit sur les pensions et le droit de la faillite. Les lois sur les pensions provinciales et federales requierent que les sponsors d'un fond de pension conservent suffisamment d'actifs pour respecter les paiements qu'ils doivent faire a leurs membres retraites. Malgre ces garanties, lorsqu'un fond de pension n'a pas assez d'actifs et qu'un employeur est en faillite, les travailleurs font face a un risque disproportionne. Dit simplement, plusieurs travailleurs sont mal equipes pour porter ce risque sont presque completement dependent des promesses de fonds de pensions de leur employeurs. Cette dissertation soumet que les protections legales actuelles, incluant les modifications recentes a la loi federale de la faillite et de l'insolvabilite qui donnent une super-priorite a certaines reclamations liees a des fonds de pensions, echouent ultimement a diminuer le risque que les travailleurs feront face a des diminutions de benefices lorsque leur employeurs feront faillite. Cette dissertation soumet que d'etendre une super-priorite a toutes les reclamations liees aux fonds de pensions serait contre-productif parce que methode de distribution effective devrait s'assurer que les creanciers securises maintiennent leurs priorites. Du fait, pour eviter un affrontement entre les membres d'un fond de pension et les creanciers securises, cet article propose un moyen alternatif pour proteger les travailleurs: un assureur de fonds de pension publique et national.

Cette dissertation examine favorablement un tel systeme publique, la Corporation Americaine Des Benefices de Fonds de Pensions Garanties (PBGC), et explique les protections qu'elle a fournit a ses membres dans les dossiers de certaines faillites dans l'industrie aerienne et l'industrie de l'acier. L'article explique que la force combinee de la susceptibilite des travailleurs face a la faillite de leurs employeurs et du succes relatif du PBGC suggere qu'un regime similaire devrait etre adopte au Canada en depit d'arguments en defaveur qui mentionnent le probleme de conflits d'ethiques et de couts accrus. Apres avoir discute des arguments contre un assureur de fonds de pension publique, la dissertation expliquera les avantages d'un assureur national et canadien pour les fonds de pension. Un assureur national traiterait les travailleurs canadiens comme de maniere egale, et n'empieterais pas sur la juridiction provinciale vis-a-vis la propriete et les droits civils parce qu'un tel assureur n'opererait que sous la loi federale de la faillite. Pour prouver ce point, cette dissertation adressera les problemes constitutionnels et politiques qui pourrait ce dresser face l'etablissement d'un assureur national et conclut que ces problemes sont surmontables.

I INTRODUCTION II CANADIAN PENSION LAW III THE TREATMENT OF PENSION PLAN MEMBERS' CLAIMS IN BANKRUPTCY Priority and the Scheme of Distribution Public Pension Insurance in Ontario: The Pension Benefits Guarantee Fund IV THE BENEFITS OF PUBLIC PENSION INSURANCE IN THE U.S. V THE ARGUMENTS AGAINST PUBLIC PENSION INSURANCE Moral Hazard Cost VI CANADIAN PUBLIC PENSION INSURANCE BASED ON THE U.S. MODEL Desirability of a Single, Public Insurer Constitutional Feasibility Political Feasibility VII CONCLUSION INTRODUCTION

Bankruptcy is less a culture and more a tool. It's more a device. It's more like a knife on the surgeon's table. Bankruptcy is the official, federal, formal way to take legal promises and just slice them off. (1) Professor Warren's words may seem overly pessimistic to some, but they would surely resonate with the workers at Cold Metal Products (CMP) in Hamilton, Ontario. These workers, many of whom had been with the company for over twenty years, relied on CMP's promise of a pension after they retired. After all, this promise was written down in the workers' collective agreement. But as many approached retirement, disaster struck. CMP filed for bankruptcy. Workers were shocked to discover that CMP's pension fund had only half the money necessary to pay out the benefits that the plan had promised. For example, one worker's monthly pension entitlement fell from $2,232 to $962. Many workers, some over sixty, had to postpone their retirement and seek work elsewhere. (2)

This story is but one of many, and it highlights the risk of substantially reduced pension benefits that workers face when their employers become bankrupt and the company pension fund does not have enough assets to meet its liabilities. It will matter little in these circumstances what the employer promised years ago. In the words of one CMP worker, such a promise will become "not worth the paper it's written on". (3)

This paper examines the intersection of pension and bankruptcy law in Canada. It details what steps provincial legislatures and Parliament have taken to protect workers' pensions and the diminished force of these safeguards in bankruptcy. On the basis that workers, or "plan members", are especially vulnerable and are poor bearers of the risk of their employers' failure, I argue that existing pension protections in Canada do not go far enough. In response, this paper proposes the creation of a national public pension insurer to protect plan members in bankruptcy. Even if, in other respects, there is no simple solution that simultaneously and satisfactorily balances the interests of plan members, employers, lenders and other stakeholders in bankruptcy, a robust national pension insurer could at least dampen the sometimes catastrophic effect that bankruptcy has on members' pension expectations.

This paper is organized in five parts. In Part II, I outline the basic elements of Canadian pension law that are relevant in bankruptcy. In Part III, I set out the current limitations on plan members' claims in bankruptcy; outline recent reforms to bankruptcy legislation that purport to improve their positions; and critically assess Ontario's public pension insurer, the Pension Benefits Guarantee Fund. I conclude that existing legislative protections and, in Ontario, the Guarantee Fund, are worthy efforts to protect plan members' rights but are ultimately inadequate.

In Part IV, I examine the benefits of the national public pension insurer in the U.S. and conclude that it results in better protection for members in bankruptcy than would be the case in Canada. In Part V, I address the arguments against the creation of a public pension insurer, which relate to moral hazard and cost. Finally, in Part VI, I discuss the constitutional and political feasibility of introducing a national public pension insurer in Canada based on the American experience. I conclude that a single federal public pension insurer is possible and desirable.

II CANADIAN PENSION LAW

While pension specialists will no doubt be familiar with much of what follows, it would benefit any discussion of pension plans in bankruptcy first to set out the basic legal framework of Canadian pension law. The following background does not aim to be exhaustive, and an excellent treatise exists that more fully canvasses the intricacies of the law in this area. (4) There are ten distinct pension regimes in Canada: nine provincial statutes plus federal legislation. (5) In most cases, pension law falls within the provincial power to regulate "property and civil rights" set out in the Constitution Act, 1867. (6) On the other hand, federal legislation governs pensions associated with federal undertakings, such as banks and railroads. (7) The operative statute in Ontario is the Pension Benefits Act (the "PBA") (8) and, federally, the Pension Benefits Standards Act...