Effective April 27, 2023 the federal Pension Protection Act (Bill C-228), granting pensions “super priority” status over other secured and unsecured creditor claims, became law. The Act has a four-year transition period for pension plans in existence on or before April 26, 2023, but has immediate effect for plans introduced after April 26, 2023. We also expect the release of regulations clarifying components of the Act in the future.

At a time when business insolvencies are on the rise – according to the Office of the Superintendent of Bankruptcy the number of business insolvencies was 55.4% higher in January 2023 than in January 2022, and 39.1 % higher for the 12 months ending January 31, 2023 than 12 months ending January 31, 2022 – the Act ensures claims in respect of unfunded liabilities or solvency deficiencies in pension plans and claims relating to the cessation of an employer’s participation in group pension plans are paid in priority in the event of bankruptcy proceedings. But the Act also has lending and compliance implications and could ultimately push employers to move away from DB plans. Here’s a look at three key implications of the Pension Protection Act.

1. More Pensioner Protection

The Pension Protection Act offers pensioners greater protection in the event of their employers’ bankruptcy by expanding the scope of employer pension liability super priority status. Before the Pension Protection Act, employer pension liabilities had super priority status under the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act only in terms of both:

• Amounts deducted from an employee’s remuneration for payment to the pension fund.
• The unpaid normal cost or other unpaid amounts an employer was required to pay to the pension fund.

The Pension Protection Act amends the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act to expand the scope of pension super priority status to include both:

• Special payments determined in accordance with section 9 of the federal Pension Benefits Standards Regulations, 1985 that an employer was required to pay to the pension fund in relation to an unfunded liability or a solvency deficiency.
• Amounts required to liquidate any other unfunded liability or solvency deficiency of the pension fund.

“Unfunded liability” is the additional amount required to ensure plan assets meet the plan liabilities. The “solvency deficiency” is the additional amount required to ensure the fund meets its obligations if the fund were to be wound up. These two amounts don’t have fixed values but fluctuate over time.

2. Increased Lender Risk

The Act is intended to protect pensioners – but it could make defined benefit (DB) plans less desirable for employers who sponsor them. The Act could impact their ability to borrow money because there could be a perceived increase in lending risk related to the DB pension plan. And this could push employers with DB plans to move to alternative types of plans.

The new protection for unfunded liabilities and solvency deficiencies will have the greatest impact on private sector DB plans, their corporate sponsors and ultimately their pensioners. Defined benefit pension plans offer members a predetermined or predictable stream of income at retirement. Protecting the pension promise of a DB plan depends on the plan being sufficiently funded to meet that promise. Funding for DB plans depends on a complex combination of factors and assumptions resulting in fluctuation and uncertainty of unfunded liabilities and solvency deficiencies. Because these liabilities and solvency deficiencies now have super priority status over secured and unsecured creditors, it will be harder for lenders to determine the potential pension liability exposure in the event of a future corporate sponsor bankruptcy. This has led to speculation that employers with DB plans will thus face higher lending costs or even the inability to borrow. And that could ultimately lead them to decide to move away from their DB plans in favour of alternatives such as defined contribution (DC) plans. The Act is less likely to affect employers with DC plans because the employees’ entitlement and the employer’s liability are limited to the value of predefined contributions, giving greater certainty to lenders’ risk assessment.

3. Greater Transparency

The Pension Protection Act also imposes greater transparency and oversight of employee pension plans on corporate sponsors, consistent with the ongoing adoption of ESG (Environment, Social and Governance) principles by both government and the private sector. The Act amends the Pension Benefits Standards Act to require the federal pension regulator’s annual report to the federal Minister of Finance to contain information on pension plan funding, including corrective measures taken, or directed to be taken, in relation to pension plans that aren’t meeting funding requirements.

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Please contact your McInnes Cooper lawyer or any member of our Pensions & Benefits Team @ McInnes Cooper to discuss how the Pension Protection Act will impact you.