A bill intended to provide defined benefit pension plan members with super-priority in the event of a plan sponsor’s insolvency passed in the House of Commons last week, furthering division among stakeholders on whether the legislation will cause more harm than good in the long term.
The Association of Canadian Pension Management, the Canadian Chamber of Commerce, the Canadian Bankers Association, the Pension Investment Association of Canada, the Canadian Manufacturers and Exporters and the Canadian Association of Insolvency and Restructuring Professionals are among the organizations opposed to the new legislation, warning the bill could lead to “unintended consequences.”
In an Oct. 17 open letter to the House of Commons Finance Committee, the ACPM argued the legislation could result in the ordinary course of borrowing becoming more difficult, expensive or impossible for some DB pension plan sponsors and could result in organizations terminating their plans.
The ACPM’s concerns aren’t unfounded, says Jordan Fremont, partner at Bennett Jones LLP, noting it’s reasonable to conclude increased borrowing costs would follow from a change that results in super-priority for pension plan members.
Banks are going to take that additional risk into account and will either make it more costly to borrow or simply refuse to lend, neither of which will be a good outcome for employers that may need financing, he says.
“The potential implication is distressed businesses can’t get financing and therefore can no longer continue to operate. Now, that’s the scenario that this bill is intended to address . . . in [giving] . . . pensioners extra protections. But it [also] means that a business that might otherwise successfully restructure and continue in operation would cease to continue, leaving current employees without jobs. The adverse implications, which we can reasonably assume, would follow from this change, could have negative consequences for the operations of businesses, their current employees and pensioners.”
Private sector employers have been looking at ways to mitigate the risks associated with DB plans for quite some time and one of those mechanisms is to close these plans, says Fremont, adding the legislation could lead to many more employers closing their DB plans, annuitizing them or even freezing entitlements in an effort to protect those benefits.
Additionally, many DB plans are tied to union contracts, so these employers may negotiate with a much greater emphasis on this issue than they might have in the past. “If they can’t get relief on the pension through negotiations, they may . . . seek concessions elsewhere,” says Fremont. “The unanticipated consequences can trickle down into other areas.”
The legislation could impact other terms of employment, including employees’ remuneration and benefits, as well as the viability of businesses, he says, adding the extra risk could also lead to fewer acquisitions of Canadian companies. “I think there’s a number of potential consequences that could flow from this and, unfortunately, the people that may be impacted the most adversely is the current workforce.”
Not all organizations believe these concerns have merit. In a statement on its website, the Canadian Association for Retired Persons noted, while critics have argued extending super-priority will limit access to capital and increase borrowing costs, this hasn’t been the case in other instances. The organization also noted it believes super-priority can be implemented without impacting capital markets.
But Fremont says the fact that many other jurisdictions around the world haven’t gone that route is telling. “If the majority of other jurisdictions have decided not to do this, there are probably reasons for that and probably good reasons for it. That’s why, in this instance, looking to other jurisdictions can be informative in terms of what might [or] might not work and why.”