Hung out to dry - Macleans.ca
 

Hung out to dry

The U.S. and Britain protect pensions. So why doesn’t Canada?


 

Hung out to dryWhen Nortel Networks filed for bankruptcy protection in January, it was particularly hard on Ray Hounsell. The 63-year-old’s family had been working for the telecommunications giant for three generations, putting in more than 100 combined years of service—yet he is almost certainly going to get stiffed on his pension. “I spent 38 years in Nortel,” he says. “My dad spent 36 years in Nortel. And his father, my grandfather, spent 30 years in Nortel. Needless to say, it has been extremely difficult.”

Now, Hounsell is preparing to get in line with the rest of Nortel’s creditors—the bondholders, commercial lenders, and suppliers—for a piece of the company’s rapidly diminishing assets. At best, he figures he’ll get 70 per cent of the money he was promised, while banks that made secured loans to the company will likely get back every penny. Other former Nortel employees won’t be as lucky. According to some estimates, ex-Nortel employees entitled to severance payments and employees on long-term disability will get back just 10 per cent of the money they are owed.

If Hounsell had been living in Britain or the U.S. he wouldn’t have to worry. Both countries have funds that protect the pensions of workers when their companies go under. In the States, for instance, the U.S. Pension Benefit Guaranty Corporation steps in to top up defined benefit pensions by as much as $58,500 a year. The corporation has already agreed to cover a $514-million deficit in the pension plan for Nortel’s 23,000 American workers. Similarly in Britain, workers can get up to $52,000 a year in assistance. But in Canada, Ontario is the only jurisdiction that has any sort of guarantee fund at all, and it provides just $12,000 per year, maximum. To add insult to injury, Premier Dalton McGuinty announced in April that the fund is now broke and could not cover pension liabilities should another major company fail. “Right now, companies can voluntarily wind up a pension and basically just walk away, and pensioners don’t get what they are promised—and that’s wrong,” Conservative MP Ted Menzies said last month.

The recession has decimated retirement portfolios and brought big name companies such as Nortel and AbitibiBowater to their knees. Critics charge that Canada isn’t doing enough to protect pensioners—and it’s a problem that will only get worse. In early August, international bond-rating agency DBRS examined 70 defined benefit pension plans at Canada’s largest private-sector companies. Alarmingly, it found that 15 have funding gaps of more than 20 per cent. Some of the companies whose pensions were most underfunded include Nexen (approximately 42 per cent underfunded), Manulife (28 per cent) and Suncor Energy (24 per cent). If any of those companies were to go bankrupt tomorrow, their pensioners would risk getting shortchanged.

Philip Slayton, author and former dean of law at the University of Western Ontario, says the problem is further compounded by the way assets are divvied up in a bankruptcy. He thinks that pensioners should go to the front of the line, but in Canada pensioners have to fight it out with everyone else. The result is that pensioners and disabled former employees can end up battling the high-priced lawyers and accountants hired by big banks to get what’s owed to them, a situation Slayton calls “fundamentally unfair.” Mark Zigler, managing partner at Toronto law firm Koskie Minsky, which is representing ex-Nortel workers, says the situation for disabled employees is especially dire. Canadian companies could be compelled to get third-party insurance to back up their long-term disability programs, but instead, corporations are allowed to self-insure. This means that employees who thought they were getting their disability payments through a big, safe insurance company can find that their benefits suddenly evaporate when the company they worked for goes bankrupt.

The Nortel Retirees Protection Committee has been fighting to change all this. Its goal is an immediate amendment to Canada’s Bankruptcy and Insolvency Act (BIA), giving priority to pension fund deficits and other benefits. It also hopes to convince the Ontario government to rescue workers directly, using the Ontario Pension Benefit Guarantee Fund.

None of that has happened yet, but with an election looming somewhere on the horizon, Ottawa has taken notice of the pension reform issue. The Conservatives have promised to act this fall to protect the value of private pension plans offered by federally regulated companies, such as Bell and CN, and guarantee that workers will get 100 per cent of their pension in cases of insolvency. On Sept. 15, Conservative MP David Tilson tabled a petition in the House of Commons calling on the government to amend the BIA and put pension fund claimants ahead of other creditors in the event of bankruptcy proceedings. Two days later, Liberal MP Robert Oliphant introduced a private member’s bill in the House that would require both public and private pension fund managers to disclose the process by which investment decisions are made. The bill is about transparency, says Oliphant. “It is designed to protect pension members and their right to know how their money is invested.”

Pension reform seems to be gaining momentum, but pensioners aren’t convinced. If changes don’t come soon, many fear, they could spend their declining years in poverty. “We’re frustrated—not because we are not getting our message through, but because it seems that there is no sense of urgency,” says Antony Marsh, a 69-year-old former Nortel employee and member of the Nortel retirees group. “The government is going to take a long time to make the changes that we think are so obvious and desperately needed.”


 
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Hung out to dry

  1. Also consider that the same laws that put pensioners together with everybody else also forced us to be part of the pension plan and the government made the tax laws so that basically we could not invest in RRSPs by assigning a value to the theoretical money that Nortel was paying into the pension plan. That calculation ate into our RRSP room

    So we were forced into the pension plan, we were excluded form RRSPs and now they are letting us "hung to dry" like you write.

    I feel very much cheated by, besides Nortel, the politicians and bureaucrats that make laws from the perspective of their secured and indexed pensions.

    • "….politicians and bureaucrats that make laws from the perspective of their secured and indexed pensions." Don't blame all bureaucrats and not even all politicians. Politicians and bureaucrats, like you, were forced into their pension plan. It was part of the pay package, costing in the case of us military, 25.02% of salary, so we paid for it, like you paid for yours. Would you feel secure with 25.02 % of your salary under the control of politicians? We have already lost, and virtually the only people who know about it are the public servants and politicians who did it to us. Indexing was limited for two years even though, unknown to us, inflation decreased he cost of our pensions!! See my post below. Incidentally I have suggested to my MP and MPP that Nortel retirees pensions should be paid in full with contributions from government to compensate for harmful government legislation. Good luck.

    • "….politicians and bureaucrats that make laws from the perspective of their secured and indexed pensions." Don't blame all bureaucrats and not even all politicians. Politicians and bureaucrats, like you, were forced into their pension plan. It was part of the pay package, costing in the case of us military, 25.02% of salary, so we paid for it, like you paid for yours. Would you feel secure with 25.02 % of your salary under the control of politicians? We have already lost, and virtually the only people who know about it are the public servants and politicians who did it to us. Indexing was limited for two years even though, unknown to us, inflation decreased he cost of our pensions!! See my post below. Incidentally I have suggested to my MP and MPP that Nortel retirees pensions should be paid in full with contributions from government to compensate for harmful government legislation. Good luck.

  2. I am Nortel employee on long term disability who will soon be forced into poverty because Nortel’s disability and health plans were not adaquately funded. The provinces regulate insurance companies but exempt companies like Nortel who self insure i.e. do not insure. The provinces know employees are bearing the risks of bankruptcy but refuse to take responsibility and allow companies to save millions on insurance costs. Unlike pension plans company benefit plans are completely unregulated even though they get tax breaks from CRA. The federal government says this is a provincial responsibility yet under federal law we find ourselves as unsecured creditors. So governments please get together and fix this not just for Nortel but all Canadian employees. And Canadians check your benefit plans and be cautious of self insurance.

    • especially if your company is as badly managed as Nortel was for years.

      Your story is unfortunate.

      this disability fund is a seperate question but the pension one convinces me further that dfined benefit programs should be outlawed. They are all too often promises that companies cannot keep and create a illusion of security where none exists in reality.

      Defined contribution plans is how all pension benefits should work.

      That companies are allowed to make promises 30 or more years down the road amazes me. I saw this in the early 80's with my father and Massey ferguson. It has only gotten worse since then. In the long run the government should save comanies from themsleves by not even allowing them to make this deseptive promise.

      As to what should be done to clean up the mess, thats a different story. Nortel has been an on going management disaster since Roth played fast and loose with stock based compensation in 80's….the telecom boom, the captive client (Bell) and its sheer size just delayed the rot that was sewn then.

      • Government is the problem. See my post below

  3. Both the US and UK are supporting their Nortel disabled workers through their pension protection plans. Canada must be the only G8 nation to force their disabled into poverty. We should be ashamed of our government.

    • Right you are, Greg! And with a looming election, at least Nortel employees can call one federal MP to account – and defeat Gordon O'Connor who stood by, and allowed his constituents to swing in the wind. The Tories have no use for out of work Canadians, preferring to protect their government from unpopular deficits. It is obvious that Stephen Harper cares only for Tory voters, and only to the extent they vote for him. It reminds me of Trudeau's famous words: Who speaks for Canada? In this case, who speaks for Canadians?

      It looks like constitutional lawyer and CMA Scott Simser will run for the Liberals against O'Connor. A guy who understands the complexities of the economy, and has successfully fought the government for disabled Canadians for a number of years. Yes, I know the guy, and yes I will be helping his campaign. This Tory farce has to stop somewhere.

      • It is a much larger farce than Tories, Kanata Guy. Not one party will fix the Defined Benefit mess. Even the NDP.

        • even lesss the NDP

  4. I certainly hope that Canadian taxpayers' PUBLIC money won't be used to bail out pensioners of a PRIVATE companies. While the bad luck of Nortel employees is unfortunate, we must remember that the vast majority of Canadians have NO pension plan offered by their employers. Most have to save for retirement on their own. Are we really at the point where the MAJORITY is expected to pay for the misfortunes of a small minority who, in many cases, earned a lot more than the average employee over their lifetimes?

    • I agree, public money should not be used to fund private companies or pension funds. Why should I as a youngish person pay for the mistakes of the genrations ahead of me. My pension contribution rates are doubling next year due to bad investments in the market. Shouldn't they at least try to offset the cost by reducing benefits. Why does my generation have to shoulder this burden, but the pensioners do not. These pensions a massive ponsi sceme where the baby boomers steal from the generations after it.

      • You are wrong Michelle. See my post below and at the top in reply to Jose Miguel Peleato. It is government interference that has caused most of the problems with pension plans both private and government. Please work to get the Defined Benefit plans set up properly. Can I suggest emails to your MP and MPP "I understand that there are problems with Defined benefit Plans – even the indexed ones are affected adversely by inflation, and, legislation requires funds to be closed when a company fails." Don't accept this decrease in benefits business. It is part of your pay package. The pensions are not a ponsi scheme – you pay for your pension while you work. Subsequent people do not have to carry retirees.

      • You are wrong Michelle. See my post below and at the top in reply to Jose Miguel Peleato. It is government interference that has caused most of the problems with pension plans both private and government. Please work to get the Defined Benefit plans set up properly. Can I suggest emails to your MP and MPP "I understand that there are problems with Defined benefit Plans – even the indexed ones are affected adversely by inflation, and, legislation requires funds to be closed when a company fails." Don't accept this decrease in benefits business. It is part of your pay package. The pensions are not a ponsi scheme – you pay for your pension while you work. Subsequent people do not have to carry retirees.

    • If we had the right legislation, no public money would be involved. Instead, the pensioners would be first in line for compensation from Nortel's assets. Since their pensions were based on Nortel stock, now wastepaper, it is only fair they get first crack at it.

    • What is being asked for is a CHANGE IN FEDERAL BANKRUPTCY LAWS so that pensioners and those on Long Term Disability (due to serious health problems) are FIRST in line (not LAST as it is at present) to be paid from the proceeds of the sale of assets of a bankrupt company. The TAXPAYERS DO NOT HAVE TO PAY A CENT! I hope this is clear. Nortel employees who worked in R&D (I was one of them) were all non-union & salaried workers who put in long work days (10+ hours) without overtime pay – because the company came first and you were a professional. Some were on call 24 hours a day. The majority ( almost 100%) had bachelors degrees or higher. Nortel salaries were set (to increase or freeze) in line with other companies in a similar business, ie, market driven. Unfortunately for Nortel employees, pensioners & those on LTD, what was promised to them when they started work for the company and believed in for the time they worked for Nortel, has now gone up in a puff of smoke because of the outdated bankruptcy laws of this country. I am certain that if you were in a similar situation you would agree with me.

      • No laws regarding these pensions should be applied retrocatively, thus you would be doing a great service to future pension contributors, but make no mistake, we canadian are serious about not willing to top up anyone pension fund shortcoming. Listen if its welfare you need, I am more than willing to conribute should you need it.
        But apart from that, no way hose

  5. Regarding problems with uninsured underfunded LTD plans brought to light by Nortel's insolvency:
    All Canadians should realize that long term disability is an important issue for everyone.
    LTD handling needs an overhaul – maybe it should be handled as a form of pension. It should be a national program for all.
    Until this change is made, all private sector non-unionized employees need to check if their employee benefits are paid out of a Health and Welfare Trust (HWT). These trusts are uninsured and can be underfunded, which means you can lose your benefits (even LTD like Nortel's disabled employees) in your company's insolvency/bankruptcy and possibly even in a merger/takeover. Again, check your employee benefits in these times of mergers, layoffs, bankrupties, insolvencies and takeovers. If you don't like what you see, talk to your employers and lobby the government for changes to legislation/regulations for HWTs and bankruptcy/insolvency laws.

  6. Asking the taxpayer to protect the "defined benefit pension plans" of government employees and private companies is inappropriate. 2/3rds of the workforce in Ontario have no organized pension plan. A better solution would be to work within the Canada Pension Plan to provide a decent pension for everyone, and beyond that put any additional pension savings into the hands of individuals.

    • You are lucky, as are the 2/3 of the workforce that you say are without pension plans. Some employers opt to pay employees in cash, others opt for some cash plus a pension. Without a pension plan you have control of all your earnings. For exaample we military have no control of 25.02% of our earnings, that is the actuarial cost of our pension plan. See my post below for further.

      • As for the 25%? Is that like not an add-on to your actual pay? Just curious. Some companies somewhat take it off the top and some pay your salary plus give 25% of this to a pension plan in as your contribution.  I think they coulnt afford to do this otherwise. From what i can tell from relatives in the forces, none are bitchin of their quite early  retirement and well pensionned off. Actually they wont stop boasting. I think it’s pretty cool they have it for the retired armed forces.
        Especially when i’m one of them that actually paying for this .  Enjoy it,  while it last’s. look at greece. i wouldnt want to be a government worker today, check the news

    • You are lucky, as are the 2/3 of the workforce that you say are without pension plans. Some employers opt to pay employees in cash, others opt for some cash plus a pension. Without a pension plan you have control of all your earnings. We military have no control of 25.02% of our earnings, that is the actuarial cost of our pension plan. See my post below for further.

    • You are lucky, as are the 2/3 of the workforce that you say are without pension plans. Some employers opt to pay employees in cash, others opt for some cash plus a pension. Without a pension plan you have control of all your earnings. We military have no control of 25.02% of our earnings, that is the actuarial cost of our pension plan. See my post below for further.

  7. LTD plans and defined benefit plans must be constituted to stand alone apart from the company. Corporations do not have long enough lifespans. 60 or 80 years is not a long time.

    • Agree. A good suggestion.

  8. Expecting taxpayers to contribute is improper. What would be the point of allowing any employer to legally offer a defined benefit plan? The employer, whether negotiating with employees as individuals or as members of a bargaining unit, could simply promise the moon and leave others (taxpayers) to clean up the mess once the company folds up operations.

    • See my reply to Jose Miguel Peleato – top of page

  9. In addition to that glaring inequity, consider from where the money must come. To top up one pension by $50K+ would require the entire federal income tax contribution of 7 or 8 "average" taxpayers. Furthermore, all dollars being fungible, it takes funds from people who have no pension or whose private savings were recently hammered, none of whom were invited to exercise a veto over badly conceived plans. And when a government can't raise enough money from taxation or bond auctions, there is usually pressure on the central bank to buy the bonds (ie. "print money"). That deflates the currency and is effectively an attack – a tax – on savings and on fixed incomes. Asking people on fixed incomes to prop up pensions in the high 5 figures is a bad joke.

  10. The Goverments helped the over paid car workers and their companies with billions why not help other workers in the same way.

  11. Taxpayers will always be at the losing end in the short run

    • Taxpayers gain at the expense of federal employees when they retire. Calculating the pension to be paid based on averaging salaries in 5 years means the 5 differnet dollars (not quantity, but quality) are averaged. Then the pension is paid in first year of retirment dollars, dollars having the lowst purchasing power. Similarly employers in the private sector gain at the expense of their retirees.

  12. The government was wrong to bail out the auto companies for the same reason. Why not help everyone who lost money from their own retirement savings?

  13. Sure is a lot of logical inconsistencies in these comments.

    • The blogosphere buddy. Idiotic screaming in Arial 10pt.

  14. Why do so many people believe that Nortel employees are asking the government for a HAND OUT. If the laws are changed to put pensioners, disabled and severed employees at the top of the creditors list when companies fall into bankruptcy, this will NOT affect the taxpayer or government in any way. The Nortel employees were not given an option of whether to join the pension plan. I personally know of people who tried to opt out and both the government and the company said that this could not be done. However, the government did say that we could only save a small amount of money into our RRSP as we had a defined pension plan and would be secure. Also, please be aware that the pensioner generation is not stealing from anyone. Who do you believe paid for your education – and I had no children? Who do you believe pays for your employment insurance – when I have never collected. Who do you believe pays for your maternity/parental leave – when my generation didn't have that benefit. Who do you believe pays for your welfare – when I have never collected. Who has contributed tax dollars toward hospital health care – when I have never been ill. There but for the grace of God go you and I. I was willing to pay for these benefits for the younger generation in order for us to live in a prosperous, educated and healthy society. Even the working conditions have improved over the last 50 years. We at Nortel, are simply looking out for CANADA – not just ourselves – isn't that a novel idea in this day and age. At the present time, the organization that you are working for could filter their monies out of this country and declare bankruptcy to avoid paying pensions, severance and disability payments. REMEMBER, any of the benefits that Nortel claimed to pay on our behalf were taxable benefits. Please remember, this could be you, your children or your grandchildren – next week, next month or next year – unless we change the laws.

    • But they are asking for a handout from taxpayers. It is unfortunate that secured creditors are at the top of the payout list. I believe that suppliers should get paid out first, after paycheques for hourly employees simply because of the collateral damage done when a large company not paying its bills forces the closure of a dozen or so small businesses. Even more so when it is the bankruptcy trustee that runs up the supplier bills. After that can come secured creditors and the government.
      Kind of wonder why the union reps on the pension board would allow such huge under funding. Also how can it be a benefit if it is taxable?

      • "why the union reps on the pension board would allow such huge under funding" Couldst be the union is in bed with the company? Besides I understand that there was no union.

  15. The problem with big companies they only care about profit and human worker doesn’t cound.
    Look at big corporations like walmart,canadiantire,loblaws they pay little and you must work twice as hard.
    This is disrespectful towards workers. If this rich ceo would work hard on cash registry they would understand.

  16. "Its goal is an immediate amendment to Canada's Bankruptcy and Insolvency Act (BIA), giving priority to pension fund deficits and other benefits."

    That reflects a desire for change to protect the priority of the workers in the lineup of creditors.

    But this – "It also hopes to convince the Ontario government to rescue workers directly, using the Ontario Pension Benefit Guarantee Fund." – amounts to a request for a handout.

    The first is problematical, since it requires widespread abrogation of the agreed placement of creditors. We are a nation of laws which must honour its past agreements, except when it doesn't suit us?

  17. This whole mess should never have happened, if the CEO's at Nortel didn't have their hands in our pockets. They fudged the #'s to suit themselves, walked away from the company — with LARGE settlements; and left us high and dry. We didn't question all the years that we worked for Nortel, as to wether or not our pension would be there. We just expected it would be. The Gov't. was supposed to be watching how well it was funded — they did a great job of that, didn't they. If at the end of this mess we are left without the pension that was promised, then we WILL go to the gov't for whatever handout there is to be had. I never dreamed in my wildest dreams that the comapny I worked for would be permitted to go up in smoke, and leave me in ruins in the process.

  18. Buttons is right . The problem is Tony Clements who lies when he recently told Parliament that the provinces have pension protection. Only Ontario has some minimal protection. This inaction not to provide national pension protection when a company goes bankrupt like the U.S &U.K. is unforgiveable and hopefully is reflected in the next federal election.

  19. My disability pension from NT is less then $950 a month and that's before taxes, so please don't assume that we disabled are all rich. I require medication to keep myself alive and if I get 10 cents on the dollar I will recieve $95 a month. I paid for insurance to keep myself from being a burdon on Tax payers. I must work very hard to survive on what I get now, but I really don't think that I can make it on $95 a month. I need the government, or a lawyer or the people of Canada to make me and my fellow disabled Canadians a prefered creditor in this Nortel mess. I don't want to take from the tax payers of Canada, but I know I won't be able to make it, on $95 could you? If you haven't actually seen a copy of your long term disability policy from your employer chances are you could be trying to live on what I will be expected to should your company restructure, merge or die

  20. So Nortel employees and retirees are crying about their pensions. Perhaps if they had not just stood on the side lines when government employees were being robbed, and public servants in particular where being vilified, they would receive some sympathy from government retirees now. See below.

    Perhaps if they had used their acknowledged analytical minds they would realize that 70% deficiency in their pension plan is "normal". That is what virtually every investor in the stock market experienced. Deficiencies and surpluses are normal in a pension fund since they are largely stock market invested. Just hang in there.

    Anne van Arragon Hutten (Mail Box Oct 19) says: "There is too big a discrepancy between those with company or public sector pensions and those without." Pensions were mandated by the employer so workers received less salary in dollars. 25.02% less for us military.

    • For 70% deficiency. read 70% of required assets.There is a 30% shortage, a deficiency which is no big deal.

  21. Defined Benefit Pensions give the employer a cash cow. Those pensions are affected by inflation, even those called "Public Service Fully Indexed". This is caused by the method of calculating pensions, namely salary over 5 years is averaged to provide a pension base. That means that 5 different dollars are being averaged, and the pension is then paid in first year of retirement dollars, dollars with the lowest purchasing power of any of the dollars. As a result, pensions this year will be about 6% less in cost and purchasing power than if inflation were zero. 1982 pensions are 26% less in cost and purchasing power than if inflation were zero.

    An employer's cash cow. Government regulators and the administrators of the government employees pension funds are aware of this effect. The "cure" is simple. But naught is done about it, presumably because of political direction. I have resorted to wishing them all an appropriate afterlife.

  22. Scare tactics. Fear mongering. Thousands of words. Speculation. First in Macleans, then Globe and Mail. All cover up the dirty secret of Defined Benefit Pensions. The method of calculating the pension to be paid decreases the cost to the employer by decreasing the purchasing power of the pension to be paid. A classic case of inflation transferring wealth. More than $3 billion per year, year after year. Clever because it is so simple.

    Typically salaries in the last five years of employment are averaged to provide a base for calculating the pension to be paid. Five years. Five different dollars. Then the pension is paid in first year of retirement dollars, the dollars with the least purchasing power of all the dollars in the calculation. The result: pensions for 2009 retirees will have about 6% less purchasing power than if inflation were zero. Pensions for 1982 retirees, a period of high inflation, are about 26%less than if inflation were zero at that time. A good return on investment for employers at the expense of old people. Despicable.

  23. The ultimate cover-up. In all the years that Defined Benefit Pensions have been used, this dirty secret has never been mentioned by knowledgeable politicians, public servants, actuaries and pension plan administrators, and the media.

    I am certainly glad that the good Lord did not exercise his option when we veterans, as the media tells us, put our lives on the line for freedom of the press.

  24. To all that made great salaries for most of their adult life, stand in line with the rest of us in this great nation. Youve thought yourselves invincable at the time while most struggled, especially the small business/self employed. With uge government  employees salaries, where the heck you think all this money is going to come from to protect these pensions? us, us, us, the working dudes that makes the economy move.
    Wouldnt shed a tear sorry