A four-year transition clock is now ticking for employers offering defined benefit (DB) pension plans, after Bill C-228 the Pension Protection Act, received royal assent in late April. The change amends the federal Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act to ensure that claims related to unfunded pension plan solvency deficiencies are given priority in bankruptcy proceedings.
Jason Vary, president of Actuarial Solutions, in a report written for the C.D. Howe Institute, entitled Bill-C228: The Four-Year Countdown Starts Now, looks at the potential consequences the legislative change might have going forward, saying the legislation will be a new factor for firms to consider when negotiating merger and acquisition transactions. Employers also face the possibility that lenders will respond with new covenants for borrowers related to their DB pension plans. “Borrowing costs may increase, say industry experts, and borrowers may be required to maintain full DB plan funding at all times,” he writes.
The four-year transition plan applies to plans in existence before April 27. Those established after April 26 are subject to the new laws today. Although Vary agrees that the establishment of a DB plan today is unlikely, he adds that it would apply to situations where companies spin off a new division and have the new entity setting up a plan mirroring existing pension benefits.
He adds that funding the plan on a going-concern basis could also provide an unfair advantage to plan members that is inconsistent with the purpose of the law. He also says it makes no sense to impose the regulations on Multi-Employer Pension Plans (MEPPs), Targeted Benefits Plans and Jointly-Sponsored Pension Plans (JSPPs).
“It would be a real shock if employers in these plans were held responsible for funding shortfalls in case of insolvency,” he writes. “Legislators have said this is not the intention and that the law will only apply to employers legally responsible to backstop their pension plan. Nowhere, however, is this said in the law as written. Unless the regulations – presumably forthcoming – clearly address this issue, the courts may have to provide the final answer as is so often the case in pension plan matters.”