The crisis in the financial system led to a recession, an equity market meltdown and a collapse in long-term interest rates. The solvency position of pension plans collapsed at the very moment that plan sponsors faced real-world economic pressures that pulled them under. Active pension plan members and retirees soon found themselves in an unenviable position as unsecured creditors in an insolvency proceeding.
An insolvency proceeding exposes all of the inadequacies of our pension system. In too many cases, the most vulnerable are left asking how and why the system failed, and why sponsors are not required to keep the pension promise.
A recent decision of the Ontario Superior Court of Justice illustrates the frailties of the pension regulatory system. In the Indalex case, the company sought protection from its creditors under the Companies’ Creditors Arrangements Act (CCAA). The assets of Indalex had been sold, and the plan beneficiaries argued that the proceeds of the sale should be used to fund the unfunded deficiency in Indalex’s pension plans.
Under the Pension Benefits Act (PBA), the plan members argued that the sale proceeds were subject to the provisions of a statutorily deemed trust. The value of this argument in an insolvency case is that assets subject to a trust are not available to creditors of the insolvent company. Instead, these assets are the property of the beneficiaries of the trust—in this case, the plan members.
Under the relevant provisions of the PBA, a deemed trust applies to contributions due and not paid to a pension plan, as well as to contributions accruing due to the plan under either the terms of the plan or the PBA and its related regulations.
In this case, Indalex began the process of winding up its pension plans. It continued to make special payments for the unionized plan while under CCAA protection and had made all required contributions to the salaried plan.
The Court concluded that no deemed trust arose under the provisions of the PBA. Accordingly, in respect of Indalex’s plans, no deemed trust could arise because there were no contributions owing and no amounts had accrued or were accruing due.
The Court observed that under these circumstances, it did not have the authority to do what it might deem fair and equitable. In an insolvency proceeding, a Court must protect the interests of all creditors.
However, the question is, How do regulators, sponsors and plan members best guard against the consequences of an insolvency? Some have argued for rules that would grant priority to the unfunded liability of pension plans. But would lenders be prepared to bear the risk of providing capital to defined benefit (DB) plans if they faced the risk of losing their security if a plan had an unfunded liability? And if this were the outcome, would it further discourage employers from sponsoring DB plans if they wanted access to capital from lenders?
Another approach might be to require plan sponsors to focus on investing pension assets in a way that pays attention to plan liabilities. Greater asset and liability matching would surely lead to better protection for plan members.
Members and retirees should also take greater steps to protect themselves. They have the right to information, and they should avail themselves of that right to monitor the plan and raise questions of plan sponsors and regulators before an insolvency occurs. Understanding the situation and holding plan sponsors and regulators more accountable is likely the best defence available to them. BC
Hugh O’Reilly heads the pension and benefits practice group at Cavalluzzo Hayes Shilton McIntyre & Cornish in Toronto.
horeilly@cavalluzzo.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the April 2010 edition of BENEFITS CANADA magazine.