The Trudeau government’s last budget before the fall election has produced a scattershot series of measures designed to burnish its progressive credentials. It has everything from aid for first-time home buyers to the beginnings of a national pharmacare program to more generous loan repayment terms for students.
But the budget is a big-time fail for one group the government promised to help: workers and pensioners for companies that go bankrupt.
When Sears Canada folded its tent in 2017, its non-Ontario pensioners lost 30 per cent of their income. That is because, as it stands now, if a company goes bankrupt the workers and pensioners are at the back of the line when it comes to dividing the spoils. The preferred creditors are the banks and other financial institutions that have lent the company money. Those businesses often get everything that’s owed them, plus interest. Pensioners and active workers who have contributed to pension plans get the leftovers, sometimes nothing at all.
The Canadian Labour Congress (CLC) and seniors’ groups such as the Canadian Association for Retired Persons (CARP) have long urged the government to make pensioners preferred creditors, to give them “super-priority status” in the event of bankruptcy or insolvency. That would put them at the front of the line. The government has chosen to not heed that advice.
Nor have the Liberals taken up the suggestion that they institute, federally, what Ontario has provincially: mandatory pension insurance to look after pensions and benefits in cases of bankruptcy. It is because of that insurance plan that Sears’ retirees in Ontario were protected.
In last year’s budget, the Trudeau Liberals promised to do something about situations such as that of the Sears Canada bankruptcy.
They bemoaned the fact that we see “companies, such as Sears Canada, entering the insolvency process with substantial unfunded pension liabilities. As a result, workers and pensioners … are faced with unexpected financial losses that impact their retirement security …”
The Liberal promise of 2018 was to seek “feedback” from pensioners, workers, and companies, and take a “whole-of-government, evidence-based approach” towards what it called “assuring retirement security.”
Interested groups came up with some robust suggestions, including Ontario-style mandatory pension insurance and front-of-the-line treatment for workers and retirees.
Tinkering, but no real change for pensioners, despite confusing language
Budget 2019 does not deliver either of those or any other effective solutions. In fact, it does very little to protect pensioners and employees in the event of bankruptcy. It offers some micro-measures that play around on the edges of the problem. But nothing in the Liberals’ 2019 budget will prevent another Sears fiasco.
However, if you were to read the relevant section of the budget document, on page 67 to be exact, you could be forgiven for believing it tells workers and retirees the exact opposite — that the government intends to fully protect them in the case of bankruptcy.
The relevant section of the budget document is called “Protecting Canadians’ Pensions.” It states, in black and white, that the government “will protect Canadians’ hard-earned benefits by clarifying in federal pension law that if a plan is wound-up, it must still provide the same pension benefits as when it was ongoing.”
That sentence seems to mean: Do not worry, pensioner, if your company declares insolvency or goes bankrupt, we, the government, will make sure you continue to receive exactly the same pension and benefits you have been receiving.
Sadly, that is not the case.
That statement in the budget does not, in fact, enunciate a new policy on bankruptcy. It only affirms what is already the case for companies and employee groups that jointly and voluntarily decide to wind up their defined benefit pension plans. (Defined benefit plans are those that provide a guaranteed pension payout to retirees, as opposed to defined contribution plans which are, in essence, glorified retirement savings plans, which do not guarantee any specific level of pension benefit.)
Current federal law provides that all retirees and workers who are part of a defined benefit plan at the time of a voluntary wind-up must continue to get exactly the payments and benefits provided by the plan. Any new regime only applies to those who are hired after the wind-up.
But here’s the rub. This law only governs companies that are a going concern, not those that are going bankrupt.
When bankruptcy happens, we do not get an orderly, rules-based wind-up of a pension. We get something grimmer: termination. And in such case, bankruptcy law, not pension law, applies. Without belabouring the point — federal bankruptcy rules put workers and retirees at the end of the line, after all of those preferred creditors, who must be paid first.
Salutary small measure, but a ‘missed opportunity‘ according to the CLC
What the 2019 budget does provide for is more openness and transparency in the bankruptcy process, and more flexibility for companies going bankrupt.
There is, for instance, a specific measure that will give bankruptcy courts the “ability to review payments made to executives in the lead-up to bankruptcy.” That might prevent outrages like the Sears case, where executives got generous bonuses, while the company stiffed retirees.
The budget also allows company pension plans to “transfer the responsibility to provide pensions assets to an insurance company through the purchase of annuities.” This measure, the 2019 budget says, will better protect retirees’ pensions from the risk of employer insolvency.
Those measures do not get at the heart of the issue, which is the fact that those receiving pensions and those contributing to pension plans have scant protection in the event of bankruptcy.
The CLC has praise for a number of the budget’s measures, such as one that will allow low-income seniors who receive the Guaranteed Income Supplement to earn up to $5,000 rather than the previous $3,500 before any of their pension income is clawed back. But the labour group considers the paltry and minimalist announcement on bankruptcy and insolvency to be a “missed opportunity.” We can expect groups representing Canada’s seniors to concur, once they have had a chance to study what the government is offering.
The budget does make vague reference to planned but non-specified changes to several pieces of legislation that govern bankruptcy. However, the cruel fact for workers and retirees whose companies might go bankrupt is that there will be little time to make any of those changes before the October election.
Bankruptcy law is of great interest to big banks and other major financial players, and you can be sure the government will tread very lightly indeed when those powerful institutions are affected.
Any changes to the bankruptcy regime will certainly raise alarm bells on Bay Street and throughout the halls of financial power in Canada and elsewhere. If and when this or any future government looks at even tinkering with bankruptcy law, in any way that could have an impact on the “rights” of lenders and investors, you can be sure there will be many, many months of consultation first.
What is most disappointing about the measures in budget 2019 that deal with bankruptcy and pension plans is not their minimalist nature. What is most disturbing is the misleading way the government has announced them.
When the budget states that the government will “clarify” federal pension law, it means just that — clarification of what exists, not creation of something new. The government plans to reaffirm that in cases where going-concern (not bankrupt or insolvent) companies move from a defined benefit pension plan to another regime, all those inside the plan must be protected. That’s all the Liberals plan to do: reaffirm what is already the case.
The current law does nothing to protect workers and retirees in cases of bankruptcy. For those folks, there are only some marginal, minimalist measures in this year’s budget, despite the confusing language that might lead some to think the government is doing a lot more than it is.
Karl Nerenberg has been a journalist and filmmaker for more than 25 years. He is rabble’s politics reporter.
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