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

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 is to improve pension security for pension plan members and retirees by 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.

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 current draft of 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, the current version of 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 amendments providing for a four-year delay in the implementation of sections relating to the priority for unfunded liabilities/solvency deficiencies and deleting changes to federal pension legislation to, among other things, transfer assets and liabilities to another plan, were 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).

The CFP made submissions before the House of Commons Committee that the same argument against Bill C-228 that there “would be significant negative impacts” was made when the Wage Earner Protection Program Act was introduced, and there is no evidence that the negative impacts occurred. In addition, the CFP made written submissions to the House of Commons Committee, arguing for:  

• a shorter implementation period than the five years suggested by the original bill that was introduced, with only one year argued as sufficient by the CFP; and
• the deletion of amendments to federal pension legislation to purchase insurance to cover the unfunded liability of a plan or to move a distressed pension to another plan to, over time, bring the distressed plan to a healthy condition.

The arguments of the CFP and other stakeholders were largely accepted by the House of Commons with the implementation of the super priority provisions being amended to come into force after four years, and further with the deletion of the amendments to federal pension legislation allowing for transfers between plans of assets and liabilities .

Conversely, 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  Bill C-228 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.

Pension Priority in the Courts

Most Canadian provinces have already attempted to create a priority for pension contributions with “deemed trust” provisions in their respective pension legislation and although language varies, the basic premise is the same in that certain amounts owing to a pension plan are deemed to form a trust and do not form part of the estate of an insolvent employer. While these provisions have been considered by courts, they have been interpreted conservatively and arguably not to the full extent pensioners have advocated.

In Sun Indalex Finance, LLC v. United Steelworkers, the Supreme Court of Canada (SCC) considered the deemed trust provisions of the Ontario Pension Benefits Act, R.S.O. 1990, c. P. 8. The SCC overturned a decision of the Ontario Court of Appeal which had ruled in favour of pensioners. Although the SCC ruled in favour of a debtor in possession, it left a number of issues unclear regarding the role of plan members, pension plan governance and the application of deemed trusts to wind ups declared retroactively.

In Arrangement relatif à Bloom Lake, the Quebec Superior Court of Justice found that Newfoundland and Labrador’s statutory deemed trust provisions conflicted with the CCAA and invoked federal paramountcy[1] and as a result the statutory deemed trust provisions were not effective in the CCAA proceedings of Bloom Lake (Wabush Mines).

Given the disappointing application of statutory deemed trust provisions, pensioners continue to advocate for amendments providing pension deficits super-priority and, in some cases, have been able to recover amounts through other claims. For example, in the CCAA proceedings of Sears, three claims were advanced against the former Directors of Sears and other parties by various stakeholders (including the administrator of the Sears pension plan on behalf of plan members relating to the pension plan’s deficit) alleging a dividend declared prior to the CCAA proceedings was a transfer at undervalue. Claims were also made against certain parties for breach of fiduciary duty, breach of duty of care, oppression and conspiracy. Two settlements were reached which will lower the Sears pension plan’s deficit amount, however, Sears pensioners are still severely impacted by the insolvency proceedings.

The Senate and next steps

Bill C-228 was read in the Senate for the second time on December 14, 2022. The bill has been referred to the Standing Senate Committee on Banking, Commerce and the Economy.   

Following the report from the Senate Committee, the next step is for the Senate to complete one more reading. 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 also 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.

[1] Federal paramountcy is a constitutional doctrine that resolves conflicts between federal and provincial laws. The doctrine provides that where there is an inconsistency between validly enacted provincial and federal legislation, the provincial legislation is inoperative to the extent of the inconsistency.