In his final days as Canadian Auto Workers president last August, Buzz Hargrove reassured worried members that pensions were untouchable.
The prospect of trimming pension benefits was “so remote,” Mr. Hargrove said, “that it's not worth speculating on.”
Who could blame the retired CAW chief for such a view? Until recently, Canadian pensioners have been shielded by the most protective legal regime on the continent. Historically treated as sacrosanct trusts by the courts and no-go zones in corporate restructurings, Canadian pensions have mostly been impervious to the corporate stresses and courtroom manoeuvres that vaporized scores of U.S. retirement plans in broken industries such as the steel sector.
Now, Canadian pension champions such as Mr. Hargrove are eating their words. A severe recession, global competition for cheap labour, and life-threatening cash shortages at the country's largest airline, auto, forestry and technology companies has put pension benefits in the crosshairs.
Under siege are hundreds of defined benefit pensions crafted a generation ago to offer guaranteed incomes to retirees. The fixed legacy pension incomes are much more lucrative than modern plans, which call for companies to contribute only set payments to pensions.
Many distressed companies are already billions of dollars short of the funds they are required to set aside for defined pension plans. Executives of the worst basket cases are raising the spectre of corporate liquidations in a bid to pressure workers, governments and the courts for a pension do-over.
Against this backdrop, lawyers are girding for waves of pension litigation and collective bargaining battles. Pensions have always been fertile ground for legal fights, but the ground is shifting. For decades, most legal challenges involved pension surpluses. Companies wanted the right to tap surplus funds and workers fought back, arguing that surpluses should be kept for rainy days.
Well, the rainy days are here and troubled companies saddled with pension shortfalls are fighting again, this time to trim defined pension benefits they say they can no longer afford.
“History has led us to the point where employers have shirked their obligations to properly fund their pensions,” said Susan Philpott, a pension expert with Koskie Minsky LLP representing a group of Nortel retirees. “I expect to see some hard, hard fought changes to these pension plans. It is not going to be easy.”
Ms. Philpott's corporate world opponents are also bracing for conflicts. “We are going to see a dramatic increase in pension litigation,” said Brett Ledger, a pension litigation specialist with Osler Hoskin & Harcourt LLP who represents several Canadian companies.
In the face of so much economic turmoil, he said companies will push the courts to revisit pension plans. Historically, Canadian courts have been reluctant to tamper with pensions because they were developed here under our trust laws, making it very difficult to impose changes detrimental to the interests of pensioners.
In a few recent cases, the courts have shown a greater willingness to tamper with pensions with an eye to the broader interest of preserving a company and its ability to support pensioners in some fashion over the long term.
“It has been very hard to mess with or change pensions. But the question now is: Are the courts going to make an accommodation with these traditional trust principles to achieve a reasonable commercial result?” Mr. Ledger said.
The answer appears to be yes if the company is forest products business AbitibiBowater Inc. Earlier this month, Quebec Superior Court Justice Danièle Mayrand stunned AbitibiBowater's unions by allowing the company's request to suspend $13-million in monthly payments it owed to replenish a pension shortfall of $1.4-billion that is required by federal and provincial laws.
