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The promise appears targeted at high-profile situations such as the insolvencies of Nortel Networks Corp. and Sears Canada Inc., where employees complained about the unfairness of boosting executive bonuses after a company fails.

Andrew Vaughan

The Conservative Party says it would restrict large payouts to executives at bankrupt companies with underfunded pension plans, a move aimed at curbing the unpopular practice of paying management retention bonuses, even as employees lose their jobs and benefits.

The promise, included in the party’s platform published Friday, appears targeted at high-profile situations such as the insolvency of Sears Canada Inc., where employees complained about the unfairness of boosting executive bonuses after a company fails.

But pension experts say the change proposed by the Conservatives could make it more difficult for distressed companies to retain key executives or hire skilled restructuring teams.

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“I think it would be more symbolic than effective,” said Mitch Frazer, chair of the pensions and employment practice at Torys LLP. “It looks good to attack corporate executives, but functionally it’s not going to do much.”

Mr. Frazer said the situation could be worse if top executives leave and the company ends up liquidating, locking in pension losses for plan members and leaving no opportunity for the plan to return to better health.

The NDP included a similar pledge in its platform, saying it would stop companies from paying out dividends and bonuses when pensions are underfunded. The promise appears broader than the Conservative proposal, in that it would not be limited to bankruptcy situations.

David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, said tackling outsized executive bonuses is a worthy idea. “We don’t see shame in the corporate world over executives being paid bonuses to run the company that they bankrupted. So there’s certainly room to regulate in that area.”

However, he would recommend a more pro-active approach to pension regulation that would target pension shortfall issues upfront. For example, he argues, companies should prioritize pension funding over using cash to pay shareholder dividends or repurchase shares.

“Ideally we don’t get to that point," Mr. Macdonald said of penalties for executive bonuses in underfunded pension situations. “We’d have better regulations at the outset, so we don’t end up with a situation where Sears pays out massive dividends to its American owners while underfunding the pension plan.”

According to a recent Aon PLC survey, 52 per cent of Canadian defined benefit plans were in solvency shortfall as of the end of September.

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The Conservatives also proposed taking steps to help underfunded pension plans return to solvency by allowing the transfer of an underfunded pension plan to another, more successful pension plan.

“That is legitimately a great idea,” said Torys’ Mr. Frazer, noting that some pensions, such as the Colleges of Applied Arts and Technology (CAAT) plan, have initiatives aimed at managing the money of smaller pension plans. “This would give the pension plans the time to become fully funded over time.”

The final Conservative promise on private pensions would be to increase transparency by requiring federally regulated companies to report on the solvency of their pension plans. This could make the information easier to access. Mr. Frazer, however, noted that employees and unions can already request this information.

Also related to pension regulation, the NDP and Green Party platforms both include promises to make pensioners the top priority for repayment in bankruptcy situations. But this concept could make it more difficult for a distressed company to get financing and ultimately push it into a restructuring scenario sooner, said both Mr. Frazer and Mr. Macdonald.

“If you allow pensioners to move further up the priority line, above people who might offer bridge financing, then people won’t offer the bridge financing,” Mr. Macdonald said. He noted that in many cases, the goal of a bankruptcy or insolvency proceeding is to restructure debts but ultimately keep the company running.

“If you knew in advance that the bankruptcy was going to lead to the dissolution of a company, then I would be all for the pre-eminence of pension plans over other creditors. The danger is that you don’t always know in advance how a bankruptcy will proceed.”

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The Liberals did not include promises related to private pensions in their platform.

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