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Private Members Bill C-228: Super-Priority for Pension Deficits

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Private Members Bill C-228: Super-Priority for Pension Deficits

December 15, 2022

On February 3, 2022, Marilyn Gladu, the Conservative Member of Parliament (MP) for Sarnia-Lambton, introduced Bill C-228, a private members bill that as it is currently drafted, would amend bankruptcy and insolvency legislation to create a “super-priority” for the funding deficit of a pension plan in the event of a bankruptcy or insolvency.

What are the proposed objectives?

The objective behind Bill C-228 focuses on amending bankruptcy and insolvency legislation to provide for a super-priority for the following amounts:

  • special payments determined in accordance with Section 9 of the Pension Benefits Standards Regulations, 1985 that the employer is required to pay to the fund to liquidate an unfunded liability or solvency deficiency; and
  • any amount required to liquidate any other unfunded liability or solvency deficiency of the fund.

Prior to Bill C-228, bankruptcy and insolvency legislation already provided for super-priority for unpaid amounts deducted from employee remuneration for contribution to the pension fund, as well as unpaid "normal costs" or other unpaid amounts that the employer was required to contribute to the pension fund or administrator under a defined contribution provision or registered pension plan respectively.

With this, Bill C-228 would significantly increase the amount covered by super-priority from contributions that are due but not paid to the entire unfunded liability of the pension plan. The super-priority provisions of Bill C-228 provide for a four-year implementation period to provide plan sponsors some time to prepare for the changes.

In addition to the super-priority provisions, Bill C-228 would amend the federal pension legislation to require an annual report to be tabled with the House of Commons in respect of the solvency of pension plans.

The bill passed the third and final reading in the House of Commons on November 23, 2022, with all members voting in its favour. It is currently being considered by the Senate with the likelihood that Bill C-228 will become a law.

What were the stakeholder submissions?

Prior to being passed in the House of Commons various amendments were suggested, however, only the amendment providing for a four-year delay in the implementation of sections relating to the priority for unfunded liabilities/solvency deficiencies was accepted.  

The House of Commons voted on the bill following a review by the Standing Committee of Finance, which included hearing from 18 stakeholder witnesses and the review of 5 briefs submitted on behalf of various stakeholders. A number of stakeholders supported the security that they believe Bill C-228 would provide for pensions, including the Canadian Federation of Pensioners (CFP), Canadian Labour Congress (CLC), and Canadian Association of Retired Persons (CARP).

A few stakeholders, including the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), the Pension Investment Association of Canada (PIAC) and the Association of Canadian Pension Management (ACPM) provided submissions expressing concerns with the Bill with respect to unintended consequences, including:

  • that borrowing for some Defined Benefit (DB) plan sponsors will become more difficult, expensive or impossible.
  • many of the remaining DB plan sponsors will wind-up their plans and employers may offer a Defined Contribution (DC) plan instead.
  • insolvent companies may not be able to restructure as debtor-in-possession (DIP) financing may be unobtainable or obtainable under very restrictive or expensive terms;
  • other effects, including:
    • the impact on other claimants who would likely receive less or nothing as a result of the changes in insolvency/bankruptcy priorities.
    • de-risking strategies in an attempt to stabilize the investment risk of DB pension plans.

Instead, the ACPM recommends, for example, in the case of company insolvency:

  • eliminating the crystallization of pension deficits at wind-up so that funding could recover over time (as for example was done with Stelco).
  • taking advantage of the federal government’s innovative measures including Variable Payment Life Annuities (VPLAs) and Advanced Life Deferred Annuities (ALDA); and
  • pooling assets similar to Retraite Québec or taking advantage of the asset management services available in the existing federal public pension regimes.

The ACPM also points to a number of technical issues with the current version of Bill C-228, including:

  • the amount being given priority is not clear and may not meet the target of the legislation in that it provides a point in time actuarial valuation and not the cost of settling the plan benefits through a plan wind-up.
  • the amount subject to the super-priority is not clear as many jurisdictions do not require 100% solvency funding (i.e. Ontario, Nova Scotia and New Brunswick) or do not require employers to fund on a wind-up basis (i.e. Quebec); and,
  • while the bill is expected to apply to defined benefit (DB) plans, it is not clear whether the super-priority will apply to other plan designs that vary across provinces (i.e. target benefit plans or shared risk plans).

The Senate and next steps

Bill C-228 was read in the Senate for the first time on November 24, 2022, and the second reading is expected shortly.  

The next step is for the Senate to complete two more readings. If the Senate adopts the bill without any amendments to it, the House of Commons will be informed of it passing the Senate and royal assent is normally granted shortly thereafter.  If the Senate makes amendments to the bill, the passage of the bill may be delayed.

Royal Assent is granted once the identical bill has passed both the House of Commons and the Senate. The amendments with respect to the super-priority will be in force four years after the Act comes into force. The other provision under Bill C-228, providing for annual solvency reports will be in force once it receives Royal Assent, as specified in the Act, or on a day set by the Governor in Council.

What does the future hold?

If Bill C-228 is passed, it will impact the order of payments in the event of a bankruptcy or insolvency in that certain unfunded liabilities or solvency deficiencies of a pension plan will be paid before other creditors.  This could have a significant effect on the creditworthiness of DB plan sponsors and could lead them to consider changes to their DB plan funding and risk management approach.

TELUS Health (formerly LifeWorks) is available to assist, once Bill C-228 passes, in assessing any possible impact on your plan and assisting with the establishment of appropriate holistic risk management strategies, including strengthening plan governance and adopting prudent funding policies and investment strategies. 

Click here for more information.