Submission : Submission

Morneau Sobeco Submission

February 27, 2009

By e-mail to:

The Honorable Dwight Duncan
Minister of Finance
Attention: Comments on Report of the Expert Commission on Pensions
c/o Pension and Income Security Policy Branch
5th Floor, Frost Building South
7 Queen’s Park Crescent
Toronto, ON M7A 1Y7

Dear Minister Duncan:

RE: Morneau Sobeco, in its capacity as a Replacement Plan Administrator, Submission on the Ontario Expert Commission on Pensions Report

The purpose of this letter is to address issues related to pension funds on insolvency in light of considering The Report of the Ontario Expert Commission on Pensions (the “OECP Report”). We address the issues from the perspective of an appointed pension plan administrator. Momeau Sobeco sent a separate letter addressing other issues in the OECP report, on February 26, 2009.

Morneau Sobeco is a national human resources consulting firm that provides integrated human resources solutions for all types of pension, group benefits, and compensation plans. Morneau Sobeco has over 2,200 employees. Morneau Sobeco’s head office is in Toronto.

When an employer that sponsors and administers a pension plan becomes bankrupt or insolvent, the Superintendent of Financial Services often appoints Morneau Sobeco as the replacement pension plan administrator to wind up the pension plan. The appointment is made under section 71 of the Pension Benefits Act (the “PBA”). To date, Morneau Sobeco has been appointed the administrator for approximately 100 plans on the insolvency or bankruptcy of the pension plan sponsor.

Underfunded Pension Plans

Typically, plan members, pensioners and beneficiaries, of a pension plan do not receive the full amount of their pension entitlements where the insolvent employer who sponsored the pension plan becomes bankrupt. In many instances, the reduction can be 30-40% or more. The PBA provides a means for the administrator to try to secure funds from the estate of the bankrupt employer in respect of the pension plan, since plan members, pensioners and beneficiaries, are unable to secure contributions into the plan in satisfaction of the employer’s obligations.

Pension Administration and Insolvency

As an appointed administrator, Morneau Sobeco owes duties, including statutory duties, to plan members, pensioners and beneficiaries. These duties include satisfying the regulator that all requirements of the PBA have been satisfied. PBA section 22 requires the administrator of a pension plan to “exercise the care, diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.”

In administering the pension plan wind up, the administrator has responsibility for overseeing that the pension fund is invested prudently in accordance with the plan’s statement of investment policies and procedures, which it sets. The administrator interprets the pension plan documents, decides pension rights and entitlements under the pension plan, considers the funded level of the plan, and makes claims on behalf of the pension plan. The PBA, and regulations, effectively makes the administrator the legal representative of the pension plan. PBA sections 19 and 22 set out the requirements of the administrator in Ontario.

As part of its obligations as the replacement administrator, Morneau Sobeco makes an effort to maximize the amount of assets in an underfunded pension plan. Under the PBA, Morneau Sobeco often finds itself in the position of a creditor on behalf of the underfunded pension plan. While the PBA provides a preferred status for the administrator as a creditor on behalf of the pension plan, court decisions have recently undermined some of the administrator’s ability to realize assets for the pension plan.

Pension Benefits Guarantee Fund

Unlike other jurisdictions, in Ontario the Pension Benefits Guarantee Fund (“PBGF”) affords some protection. The PBGF does not fully insure reduced benefits and, therefore, despite the PBGF, when a pension plan is underfunded in Ontario, plan members, pensioners and beneficiaries suffer. Some pensioners who receive reduced retirement benefits have little ability to make up the pension shortfall and have to seek financial and social assistance to survive through their retirement. The result of underfunding that leads to reduced pensions is that there are increased costs to government and taxpayers, contrary to good public policy.

The Pension Charge

Last year the Bankruptcy and Insolvency Act (BIA) was amended by the federal government to introduce a pension charge (section 81.5) over all of the assets of a debtor to secure (a) unremitted employee pension contributions, (b) unpaid employer contributions in respect of defined contribution pension plans, and (c) unpaid normal costs in respect of a defined benefit plan. The legislation that came into force in July 2008 provides a super-priority pension charge in bankruptcy and receivership for certain payments due to a pension fund.

The pension charge is deficient because, among other things, the scope of the pension charge is too narrow. It includes normal cost payments due up to the date of bankruptcy. It does not include unpaid special payments required to liquidate any going concern unfunded actuarial liability or solvency deficiency. Given the narrow scope of the protection, the underfunded pension plan of a bankrupt employer will remain underfunded. Plan members, pensioners and beneficiaries, will face reduced benefits.

Currently, the Companies Creditors’ Arrangement Act (“CCAA”) contains no protections for plan members, pensioners and beneficiaries, of underfunded pension plans of an insolvent employer.

BIA and Interaction with Provincial Legislation

The BIA allows creditors of a bankrupt to pursue claims by collective action through a trustee. Pursuant to section 136 of the BIA, secured creditors are entitled to realize on, and receive, the proceeds of their security ahead of unsecured creditors. The BIA defines “secured creditor” in section 2(1) broadly. But, BIA section 136 defers to provincial law for the creation of secured creditors.

Under section 91 of Part VI of The Constitution Act, 1867, bankruptcy falls within the jurisdiction of Federal Parliament. The Supreme Court of Canada has ruled against provincial attempts to re-order priorities under section 136 of the BIA. A limitation on provincial authority to create secured creditors arises from the doctrine of paramountcy. However, throughout Canada, provincial legislation defines secured creditors, including secured creditors for municipal tax liens, construction liens, repairers’ and storers’ liens, that are recognized in bankruptcy cases across Canada. Pension legislation falls under provincial jurisdiction, except for federally governed employment. The PBA has attempted to provide security for pension benefits by granting the administrator security.

Legislative Protection under PBA

The PBA contains three means to assist plan members, pensioners and beneficiaries, of an underfunded pension plan whose employer is insolvent or bankrupt:

  1. the PBGF;
  2. deemed trusts, for employee contributions received by the employer but not yet remitted to the fund under subsection 57(1), and for unpaid employer contributions under subsection 57(3); and
  3. a pension plan administrator’s lien and charge for unpaid employer contributions under subsection 57(5).

PBA section 57 provides that pension contributions an employer was required to make, but did not make, are deemed to be held in trust by the employer for the benefit of the pension plan. The same amount is also subject to a lien and charge in favour of the pension plan administrator.

Court Interpretation of Legislative Protection

Despite its purpose, these PBA mechanisms to protect pensions on insolvency have not been effective because of negative-court decisions and poor legislative drafting. The effect of the lien and charge in a bankruptcy was considered in Harbert Distressed Investment. Fund, L.P. v. General Chemical Canada Ltd. [2007] O.J. No. 3296 (hereinafter referred to as the case of “General Chemical”). In General Chemical, Morneau Sobeco became the appointed administrator of two defined benefit pension plans, a salaried plan and a unionized plan, after General Chemical Canada Ltd. (“GCCL”) became bankrupt. While it was an active company, GCCL was the administrator of both plans. GCCL did not make all required contributions to the pension plans, nor were adequate contributions made during the time GCCL was under CCAA protection. Outstanding special payments owing to the pension plans totaled more than $4 million. In the absence of the additional funding, when the pension plans ultimately wind up plan members, pensioners and beneficiaries, will face having their pension benefits reduced.

GCCL’s interim receiver had sought and obtained the court’s authorization to make an interim distribution of the company’s remaining assets to one of the company’s secured creditors - Harbert Distressed Investment Fund L.P. (“Harbert”). Morneau Sobeco opposed the payment based of the lien and charge provision of the PBA, claiming secured creditor status, on behalf of the pension plans, for contributions that GCCL was required to pay and did not pay into the pension plans. Morneau Sobeco took the position that as a secured creditor it ranked in priority to the secured claims of Harbert for at least a portion of the pension arrears. The Ontario Superior Court concluded that the lien and charge provisions of the PBA were not enforceable in a bankruptcy setting. The Court noted that the BIA legislated the priority scheme in which creditors of a bankrupt company were to be paid and held that the PBA attempted to do indirectly, what it could not do directly, namely to legislate priority under the BIA for unpaid pension plan contributions. Morneau Sobeco appealed this decision.

On appeal, the Ontario Court of Appeal refused to overturn the outcome of the decision of the lower court, but disposed of the appeal for different reasons. The Court of Appeal decided that the administrator did not fit the definition of “secured creditor” under the BIA and, accordingly, could not assert a secured claim. The decision of the Court of Appeal is in conflict with the decision of at least one other Court of Appeal in Canada and a number of lower court decisions that hold that a person who is the legal representative of a fund is a secured creditor under the BIA. The Supreme Court of Canada denied leave to appeal.

Case law suggests that the deemed trust provisions have been rendered inapplicable in bankruptcy. In a non-bankruptcy situation, such as a CCAA proceeding or a receivership, the utility of the deemed trust is ambiguous.

The result is that some statutory protections under PBA intended to benefit plan members, pensioners and beneficiaries, are now useless. Without the ability of a pension administrator to enforce the intended provisions of PBA, the plan members, pensioners and beneficiaries, have no party who can act to enforce their intended rights. The courts have raised the issues of the defects in the legislative drafting under the PBA.

OECP Report

Morneau Sobeco supports recommendations 6-7 to 6-11 of the OECP Report. Morneau Sobeco would support bi-lateral consultations between the Ontario government and the federal government so pension promises could be better protected in the event of employer bankruptcy or insolvency. Morneau Sobeco would support consideration of strengthening the long-term financial viability of the PBGF.

Recommendation 6-7
Morneau Sobeco urges the Ontario government to encourage the federal government to extend the current super-priority to include outstanding special payments for solvency deficiencies owing to the pension fund.

Recommendation 6-8
Morneau Sobeco supports amending the PBA to allow for the Superintendent to have the authority to approve arrangements in respect of insolvency. This recommendation would take on greater urgency if a related change to the Companies’ Creditors Arrangement Act (“CCAA”) comes into force.

Recommendation 6-10
Government cooperation at the federal and provincial level should apply to support consistent policy goals for both governments in protecting pension funding on insolvency. The deemed trust provision under subsection 57(3) and the lien and charge provision under subsection 57(5) of the PBA should be amended now to make the provisions valid in both bankruptcy and non-bankruptcy situations. The PBA should contain a priority clause stating that both the deemed trust and lien and charge has priority over all other security claims of other creditors. Accordingly, the Ontario Personal Property Security Act should also be amended.

The idea of a deemed trust to protect plan members has been proposed in the 2009 Federal Budget released on January 27, 2009. The deemed trust, rendered virtually useless by courts for provincially regulated pension plans, is being promoted for federally regulated plans.

The federal policy direction signals a good reason for the Ontario government and the federal government to cooperate to ensure legislated deemed trusts and liens and changes are effective for provincially and federally regulated pension plans. Moreover, unless the pension administrator has legal authority to enforce the intended provisions of PBA, the plan members, pensioners and beneficiaries, have no party who can act to enforce their intended rights

Recommendation 6-11
The Ontario government and the federal government should work to make legislation for plan administration and funding effective on insolvency and bankruptcy. The Court of Appeal in General Chemical has left the appointed administrator without the standing to enforce the intended provisions of the PBA, As a consequence, plan members, pensioners and beneficiaries, have no party who can act to enforce their intended rights. The PBA should be amended to provide the replacement administrator with the ability participate effectively in proceedings affecting the plan.

Concluding Remarks

Thank you for considering our submission. We would be pleased to discuss these issues or participate further concerning pension reform.

Respectfully submitted,

Morneau Sobeco Limited Partnership

Orginal signed by

Per: Lawrence J. Swartz