Managing Pension Risks in Corporate Insolvencies and Restructurings

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1 Managing Pension Risks in Corporate Insolvencies and Restructurings Elizabeth M. Brown Hicks Morley Hamilton Stewart Storie LLP Gary Nachshen Stikeman Elliott LLP Canadian Institute Toronto January 22, 2010

2 Introduction Focus will be primarily on issues relating to Ontario-registered pension plans sponsored by corporations subject to federal Companies Creditors Arrangement Act ( CCAA ) Will also look briefly at: - Recent pension-related amendments to CCAA and to federal Bankruptcy and Insolvency Act ( BIA ) - Pension issues in out-of-court restructurings - Future of Ontario Pension Benefits Guarantee Fund ( PBGF )

3 Overview of CCAA Process Court-supervised process granting temporary protection from creditors Employer ordinarily continues to operate during CCAA period Goal is a successful restructuring through a plan of arrangement Process typically involves complexity and uncertainty Multiple stakeholders, including pension plan sponsor, CCAA monitor, unions, active employees, retirees, governments, and/or pension regulators

4 CCAA Process FAQ 1. Does the employer have to make pension plan contributions while under CCAA protection, and what are the legal implications of not making them? 2. Can pension plan deficits and/or pension benefits be compromised in the CCAA process?

5 Key PBA Provisions (Employer Contributions) Section 55 requires employer to make contributions as prescribed Regulation 909 requires actuarial valuation Valuation legally must include: Going concern valuation Solvency valuation Contribution obligations under each normal cost (current service) and special payments (deficit reduction)

6 Key PBA Provisions (Employer Contributions) Regulation 909 dictates timing: Normal cost contributions - Equal monthly installments within 30 days after the month for which contributions are payable Special payments for going concern unfunded liability - Equal monthly installments over a period of 15 years Special payments for solvency deficiency - Equal monthly installments over a period of 5 years (general rule, subject to any available solvency funding relief)

7 Key PBA Provisions (Deemed Trust) Section 57 creates a deemed trust and special lien over employer assets for certain unremitted contributions Applies to: Employee contributions held by employer Employer contributions due and not paid Contributions accrued and owed by employer as of date of plan wind-up Deemed trust should not apply to wind-up deficiency that arises upon a pension plan wind-up pursuant to section 75

8 Key PBA Provisions (Wind-Up) Superintendent of Financial Services ( FSCO ) may order wind-up of pension plan Section 69 sets out wind-up events

9 Key PBA Provisions (Wind Up) 69.(1) The Superintendent by order may require the wind up of a pension plan in whole or in part if, (a) (b) (c) there is a cessation or suspension of employer contributions to the pension fund; the employer fails to make contributions to the pension fund as required by this Act or the regulations; the employer is bankrupt within the meaning of the Bankruptcy and Insolvency Act (Canada);

10 Key PBA Provisions (Offences) Serious consequences for breach of PBA Section 109 and 110 offence sections extend to corporate Directors and Officers Exposure for fines and unremitted contributions - Contrast federal Pension Benefits Standards Act, 1985, which contemplates prison as well as fines, but no individual D&O liability for unremitted contributions

11 Effect of CCAA Proceedings (Initial Order) Court issues order under CCAA granting stay of proceedings against corporation Corporation ordinarily permitted, but not required, to pay pension contributions and benefits pursuant to initial order Typical pattern is for normal cost contributions and registered pension plan pensions in payment to continue unchanged, special payments and SERP benefits to be suspended In some cases, commuted value transfers to terminated employees are also suspended

12 Effect of CCAA Proceeding (Recent Examples) Ivaco General Chemical Slater Steel Collins & Aikman Nortel AbitibiBowater Fraser Papers

13 1. Ivaco Employers ceased remitting special payments during CCAA on consent, triggering deemed trust Secured creditors moved to petition companies into bankruptcy under BIA, so as to reverse the deemed trust pursuant to doctrine of paramountcy of federal insolvency legislation over provincial pension legislation Courts held that elimination of deemed trust is a permissible motive for petitioning debtor into bankruptcy and confirmed deemed trust would not in fact survive bankruptcy Supreme Court of Canada granted leave to appeal, but parties settled before hearing

14 2. General Chemical Two separate defined benefit pension plans During CCAA, company did not make special payments CCAA proceedings terminated and an interim receiver appointed under the BIA Administrator attempted to assert priority in respect of certain assets through application of statutory lien provision under the PBA (s.57(5)) Opposed a proposed interim distribution of assets to company s secured creditor Court held that pension plan administrator is not a secured creditor under the BIA PBA section 57 lien not effective under federal BIA, similar to position on deemed trust as confirmed in Ivaco

15 3. Slater Steel Pre-CCAA actuarial valuations of pension plans showed no solvency deficiency Corporation went into CCAA, then bankruptcy, and plans terminated in deficit position Superintendent brought charges against actuary relating to valuation methodology Charges were dismissed Actuary successful in naming the Directors as third parties in civil claim brought against him by replacement plan administrator, notwithstanding broad scope of protection initially given to Directors Litigation continuing, case not yet decided on the merits

16 4. Collins & Aikman Two Collins & Aikman affiliates filed separately for CCAA protection in 2007 Condition of DIP financing approved by Court was that special payments be suspended to preserve cash flow IP; no objection was raised by FSCO or unions FSCO and unions subsequently sought order that employer still required to make special payments Court held that it has jurisdiction to override express provincial statutory provisions to further CCAA protection, including provisions requiring special payments to pension plans Decision had the effect of overriding express requirements in collective agreements Decision under appeal but appeal has not yet been heard

17 5. Nortel Filed for CCAA protection on January 14, 2009 Brought a motion to change the transfer ratio upon which commuted values were paid out of the pension plans in settlement of terminated employees rights Transfer ratio had dropped from approximately 89% to approximately 69% since last official actuarial valuation was filed Court permitted use of updated transfer ratio without requiring Nortel to file new valuation report Introduced grandfathering scheme for employees who had already filed their election for commuted value transfer Case also raised issues relating to appropriate carve-up of beneficiary group for court representation purposes

18 6. AbitibiBowater Filed for CCAA protection in Quebec Superior Court on April 17, 2009 Notified union that pension plans would not pay negotiated benefit improvements effective after filing, but continued deducting corresponding employee contribution increase Union filed motion seeking that collective agreements be respected Court agreed with union, ordered AbitibiBowater to pay the benefit enhancements, as CCAA filing does not allow employers to unilaterally amend collective agreement AbitibiBowater also brought motion seeking to suspend special payments to pension plans Court permitted employers to suspend remittance of special payments, which totalled $13 million per month

19 7. Fraser Papers Filed for CCAA protection on June 18, 2009 Brought motion to cease making special payments or past service contributions Fraser Papers took position they related to pre-filing unsecured debt and services provided prior to filing Unions opposed motion, claiming related to services supplied after filing Court held that special payments relate to services before CCAA filing and that court has jurisdiction to order suspension of contributions Court careful to note that suspension of payments is not extinction of funding obligation

20 Practical and Legal Considerations (Labour and Employment) Employer should expect opposition in the CCAA process Suspending contributions typically triggers involvement of retirees, unions and/or pension regulators Unions may claim suspending contributions is a breach of collective agreement Suspension of special payments during CCAA now fairly common, but unremitted contributions must then be dealt with upon emergence

21 Practical and Legal Considerations (Labour and Employment) - Continued Regulators and courts generally especially solicitous of retirees interests Extent to which employer can effect forced, rather than consensual, wind-up of unionized employees pension plans, compromise of wind-up deficits, and/or reduction of benefits under CCAA remains an open question

22 Practical and Legal Considerations (Deemed Trust) Regulator may seek enforcement of deemed trust May jeopardize successful restructuring of the business, and emergence from CCAA which usually depends on new financing Exit lenders ordinarily demand role in post-emergence pension funding and/or pension plan design process in order to preserve the priority of their security

23 Practical and Legal Considerations (Wind-Up) Wind-up order unlikely to be issued by pension regulator during CCAA proceedings Wind-up will trigger crystallization of any solvency deficiency Must consider collective agreements and employment contracts Some restructurings involve continuation of pension plans for unionized employees and termination (or at least closure) of plans for non-unionized employees

24 Practical and Legal Considerations (Directors and Officers) Potential for fines and/or order against Directors and Officers for unremitted contributions Significant issue for Directors and Officers of restructuring companies - Ordinarily addressed in initial CCAA order - Must consider potential effect of interim decision in Slater Steel

25 Role of Third Parties Regulator may or may not choose to take active role FSCO requires that it receive notice of any CCAA proceedings at the outset Wears two hats: pension beneficiaries champion (Ivaco) and administrator of PBGF Regulator may take formal proactive steps to preserve plan assets Quebec introduced Bill 1 in January 2009, allowing the Régie des rentes du Québec ( Régie ) to take over the administration of bankrupt employers retirees pensions

26 Role of Third Parties - continued Régie will administer the assets with the goal of preserving benefits at funded level of plan upon takeover In late 2009, Quebec government indicated intent to extend this measure to plans of employers not just in actual bankruptcy, but also those under CCAA protection including Nortel - Details still being worked out by Régie

27 Role of Third Parties Court may grant representative orders to unions and employee/retiree groups to participate in CCAA process Can trigger requirements for subsidization of such groups professional advisory expenses (Air Canada, Stelco) and issues as to who represents whom (Nortel) Major creditors may also become involved Secured lenders will be concerned about deemed trusts and priority of claims, unsecured creditors about perceived favourable treatment of pension claims Monitor must report regularly to court and stakeholders on status of pension issues, may have to play role in quantification of pension claims

28 Recent Amendments to BIA Super Priority and Role of Pensions in CCAA Arrangements Adopted in 2007, with parts proclaimed into force in July 2008 and in September 2009 Created a super priority for unremitted normal cost contributions under BIA but not for special payments or wind-up deficiencies Amendments also intended to assist regulators, unions and employee groups in seeking to ensure pensions remain adequately funded CCAA now states that plan of arrangement cannot be approved unless it addresses the payment of normal cost contributions Except if the parties have reached an agreement related to these amounts Amendments also clarify that neither the company nor the court has authority to unilaterally repudiate or amend a collective agreement

29 Out-of-Court Restructurings Corporations can also restructure outside CCAA, e.g. under Canada Business Corporations Act or through one-on-one negotiations with relevant stakeholders, including pension stakeholders Pros and cons versus CCAA filing - Privacy and simplicity versus judicial imprimatur - Cross-border considerations and multiplicity of court proceedings Recent examples - Canadian Press - General Motors - Chrysler

30 Future of PBGF 2009 Ontario Budget announced first independent actuarial study of PBGF since its inception in 1980 Following the study, government will consider establishing an independent agency to oversee PBGF In 2009, PBA was amended to clarify that PBGF guarantees are limited to PBGF s own assets PBA was also amended to clarify that government grants and loans to PBGF are discretionary