Nortel Retirees' Protection Committee Submission
Nortel Retirees' Protection Committee
Pension Plans In A Perfect Storm
The following is presented by the Nortel Retirees Protection Committee as feedback on the report, "A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules", issued by the Ontario Expert Commission on Pensions
The Ontario Expert Commission on Pensions examined the legislation that governs the funding of defined benefit pension plans in Ontario, the rules relating to pension deficits and surpluses, and other issues relating to the security, viability and sustainability of the pension system in Ontario. Nothing presents the opportunity for a searching examination and appropriate response as when things go wrong. Find the reasons the building fell down and you may build a better building.
A Fine Balance is long on facts and discussion. While it has recommendations, the report lacks a sense of priority and urgency. The sense is rather: this is too complicated a situation to really know what to do but we will present a host of signpost recommendations from which perhaps a judicious selection can be made. Importantly, A Fine Balance appears to have little to say about dealing with present systemic hollowing of pension benefits thought to have been generated over long careers by present Canadian pensioners, nor about the attendant loss of old age security, notwithstanding the terms of reference having included "issues of security". This incidentally is what dominates the thinking of most of Ontario's present pensioner community.
One has some sympathy with the Commisssioner in his characterization of what is truly a complex and problematic situation. But the more complex a situation, the more focused is the need to articulate a clear and manageable set of objectives, get buy in from stakeholders, and set an implementation schedule.
- Nortel is over 100 years old. In its day, it enjoyed the role of darling of Canada's high tech community, performing impressively on the world stage, renowned for its innovation, and with massive R&D commitment in Canada.
- The Nortel Retirees' Protection Committee (NRPC) was formed in January, 2009, to protect the interests of Canadian pensioners when Nortel, facing possible bankruptcy, sought protection under the Companies' Creditors Arrangement Act (CCAA). Nortel has sought similar creditor protection in the US and the UK.
- NRPC has legal counsel, with over 1600 pensioners having submitted retainers. Counsel is working towards gaining official representation status at the CCAA proceedings for the NRPC and the Nortel pensioner constituency. At that time, we expect to receive a full list of Nortel retirees but we believe there are approximately 9700 Nortel pensioners, deferred pensioners, and survivors, mainly in Ontario.
- Because there has been a short time between the start of the CCAA proceedings and the closing date for submissions to the Ontario Expert Commisson on Pensions, the proposals presented herein have been drafted quickly and without full citation of supporting references and context.
- The Nortel DBPP fund was underfunded at its last valuation. Its level was assessed at 86% in a 2006 audit. The value of the plan is inevitably considerably lower now owing to investment losses, although we presently lack clear, up-to-date information and the next mandated evaluation is not due until 2010.
- As an outcome of the present CCAA proceeding, Nortel may declare bankruptcy in which case the pension plan would be wound up pursuant to the Bankruptcy and Insolvency Act with plan members receiving the residual value of their pensions as annuities. This will represent a "perfect storm" for pensioners reflecting the Nortel DBPP fund's underfunded status, all time lows in the investment market, and purchased annuities that will yield record low interest rates. It is speculated that the impact to Nortel plan members could be a reduction of the order of 35% in commuted pension values.
- Retiree beneficiaries of Nortel's DBPP, with few exceptions, were totally unaware of the threat to their pension and benefits at the time that Nortel sought CCAA protection.
- In the course of long careers, expectant beneficiaries of the Nortel DBPP had been unaware of any need to establish alternative income sources or to develop alternative career skills and education. Many retirees disadvantaged by the hollowing of DBPP pensions and benefits are now in situations where they may be seeking to return to the workforce, and at a particularly bad time. Numbered among them are many talented engineers, scientists and managers.
- It is clear that Nortel is neither the first nor last company that, for one reason or another, will seek to end its obligations to erstwhile beneficiaries. There is every reason to see this as a trend. This is occurring against a backdrop of insufficient regulatory oversight and enforcement, the proof of that being in the pudding.
- In contract terms, DBPP sponsoring companies have breached their contracts with beneficiaries. An implicit third party in such contracts is the taxing authority. On the basis of the existence of DBPPs, the taxing authority bars prospective DBPP beneficiaries from some or all of the benefits of RRSP plans extended to others who are not DBPP members. As a result, discriminatory limits are placed on the RRSP contributions a DBPP member can make from pre-tax income. One effect is that a DBPP retiree cannot now enjoy the benefit of income earned from an RRSP not being taxed until money is withdrawn from the RRSP and therefore cannot enjoy the benefit of capital growing faster in the RRSP than if held outside it and subject to tax. Another effect is that a DBPP beneficiary cannot enjoy the benefit of withdrawing money from an RRSP in a tax year when, as a retiree, the DBPP beneficiary is in a lower income-tax bracket than the income-tax bracket at the time of making the contribution.
- Inappropriate regulations attending DBPPs together with insufficient oversight and enforcement by the Financial Services Commission of Ontario (FSCO) created a regime in which surpluses in DBPP funds have not been permitted or have been penalized in good times, and underfunding of DBPP funds has been allowed in difficult times. This is nearsighted to say the least: you stock the pantry when food is plentiful so that you have something to eat when it is scarce. With Nortel's retreat into CCAA protection and possible bankruptcy, this nearsighted regime presents pensioners with an unexpected and devastating loss in security and wellbeing.
- The Nortel DBPP is topical because its ravages are occuring now as comment is being sought on the report from the Ontario Expert Commission on Pension, because Nortel DBPP problems stem from a number of simultaneously arriving hits, and because other Ontario companies holding DBPPs are likely in future to take the action Nortel has taken.
These recommendations have been formulated by NRPC in response to the Patent Situation set out previously. While not, strictly, a commentary on the report A Fine Balance, NRPC recommendations presented here that reflect positions of the report signal our strong support of those positions. And NRPC recommendations that are not presented in the report are here urged for consideration by those tasked with implementing the philosophy and recommendations of the report.
- Working with the other Canadian provinces and territories, establish Canada-wide agency to take over and manage DBPPs that do not satisfy specific thresholds of plan health and management, including establishing and implementing regulations, making corporate assessments and managing pension funds.
- It is clear that DBPP sponsoring companies no longer want the sponsorship and management of DBPPs either as an ongoing concern or in any legacy capacity. And consequently, they will continue to seek ways to end such sponsorship and management. Many DBPP plans have retirees across Canada. The CPP investment board works and has experience and practices which could be exercised in managing such DPBBs.
- The UK appears to have had a minister for pension reform since 2007. He is proposing a number of initiatives to overcome pension issued there including adopting some of the concepts of the CPP.
- Establish corporate assessment funding necessary to make the Ontario Pension Benefit Guarantee Fund a viable fund able to meet the demands expected from a DBPP retiree consitutency seeking specific performance from terminated DBPPs.
- Although increasing numbers of DBPP sponsoring companies may seek to avoid obligations under DBPPs, many under the shelter of CCAA and bankruptcy, it is clear that successor businesses frequently have the same "bones" and customers and are therefore appropriate funding sources.
- Establish a mechanism for permitting postponement of bankruptcy induced DBPP wind-up if at a time of low investment values and annuity rates. Establish interim management of the DBPP funds (see Recommendation 1) and re-sourced corporate assessment (see Recommendation 2) with a view to value recovery.
- Clearly, the wrong time to wind up a DBPP is when expected annuity returns are meagre. While an investment climate can always get worse, it could get better and there should therefore be provision for a defined postponement period to see if the climate improves.
- In January, 2009, the province of Quebec introduced Bill 1 to create just such a mechanism.
- For terminated DBPP plans paying reduced pensions, conduct an actuarial audit of the real income loss owing to DBPP members not having access to RRSP tax treatment accorded to others who were not members of a DBPP. Make ongoing, corresponding tax concessions to disadvantaged DBPP members.
- Pension Situation, Point 6.
- Establish corporate assessment and related regulations for DBPP management that will provide improved buffering against the effects of fluctuation in the fortunes of DBPP sponsoring companies.
- A corporation will be focused on chopping expense in difficulties times but can be prevailed upon to be expansive in good times: Pension Situation, Point 7.
- Establish investment and related regulations for the management of DBPPs that will provide improved buffering against the effects of fluctuation in the investment market.
- A DBPP should be mandated to be a relatively conservative investment regime. In current fund management practice, that appears often not to be the case.
- Establish a more robust and penalty-driven regime for overseeing and enforcing regulations for the management of DBPPs.
- This is critical. The corporate entity and its agents are notoriously prone to bad behaviour and without such a regime, statutes and regulations are nugatory.
- Establish obligations on DBPP holders and managers to provide full, regular, immediate access to DBPP information including up-to-date assessment of plan values, up-to-date actuarial assessment of plan obligations, retirees' lists and prompt notice of all DBPP change proposals.
- Pension Situation, Point 3. A regular, prompt, accurate, and full report that is readily accessible to DBPP plan beneficiaries would, in some respects, act as a natural watchdog. Reporting currently is a ponderous process, but that is partly because it is not an integral and required part of DBPP practice.
- Establish a program to make available at discounted cost access to skills retraining, job placement and small business assistance for DBPP retirees who have experienced a hollowing of their pensions and benefits. See Point 4, Pension Situation.
Stuart Wilkinson and Don Sproule
on behalf of
Nortel Retirees Protection Committee
26 McLaughlin Crescent