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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