Skip to main content

A federal bill that will make pension plan members the highest priority in company bankruptcies when plan funding falls short has been passed by the Senate, after years of failed attempts at similar bills.

Senators voted in favour of Bill C-228 without amendments Tuesday, passing a proposed law that received unanimous support from 318 MPs in the House of Commons late last year.

The bill will change bankruptcy and insolvency law to give pensioners superpriority for unfunded liabilities in private-sector defined-benefit company pension plans. By putting pension liabilities ahead of secured and unsecured creditors, plan members will have a better chance of being made whole – or at least receiving almost full value for the pensions they have earned – in an insolvency.

Defined-benefit pensions are attractive because they promise members a fixed monthly benefit after retirement for as long as they live, but such plans have been in decline in Canada as many employers have shifted to pension plans based on fixed contributions that can be less onerous and costly.

The bill’s critics have warned that it will make it less attractive for employers to maintain defined-benefit plans by driving up costs to borrow money to fund operations or make new investments. They fear it will have the unintended consequence of hastening the demise of the plans currently offered to the members it seeks to protect.

The private member’s bill was sponsored by Conservative MP Marilyn Gladu. It is similar to several previous bills introduced since 2010, each of which failed to gain traction. Now that it has been passed by the House and Senate, the bill needs royal assent, and the higher priority for pensioners in a bankruptcy will take effect four years after that assent is granted.

The bill’s supporters say it prevents companies from shifting the burden of unfunded liabilities in defined-benefit plans onto plan members in the event of a bankruptcy. “It will mean that people that worked hard their whole lives will get the pensions that they worked for,” Ms. Gladu said in an interview. “We’ve allowed four years for businesses to be able to get their house in order.”

As examples, she and supporters of the bill have pointed to prominent insolvencies such as those at Sears Canada Inc. and Nortel Networks Corp. that led to former employees having their pension benefits cut. Ms. Gladu said one of the inspirations for the bill was a neighbour who worked at Sears and received about 70 cents on the dollar for her pension.

Supporters hope the bill will provide better protection but also change company behaviour, compelling employers to keep plans fully funded and avoid falling behind on their obligations.

Detractors counter that companies may instead scrap the plans altogether, pushing employees into defined-contribution plans that offer less definite benefits at retirement. And they say that restructurings that could keep companies from going out of business could be harder to negotiate and fund.

In an open letter last November, the Association of Canadian Pension Management – an advocacy group for pension plan sponsors and managers – said “the proposed super-priority approach in this bill has numerous flaws and has serious consequences for existing private sector DB plans.” The letter argued that the bill poses an “imminent threat” to the continued existence of private-sector defined-benefit plans.

The ACPM testified to MPs last year that membership in such plans has fallen to 9 per cent from about 21 per cent two decades ago.

“The reality is that defined-benefit plans have been declining, with or without this bill,” Ms. Gladu said.

Remaining Canadian defined-benefit plans are currently well funded, with a median solvency ratio of 116 per cent as of March 31, according to consulting firm Mercer Canada Ltd. “So this is a really good time to do this because they’re not in trouble at this point in time,” Ms. Gladu said.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe