Canadian Update

Understanding Bill C-228: The Pension Protection Act

The Pension Protection Act, or Bill C-228 colloquially known as the Pension Super-Priority Bill, received royal assent on April 27, 2023. The passing of this law marks a significant milestone in Canadian pension protection legislation.

Efforts to establish stronger pension protection laws in Canada have been ongoing for several years, often to no avail, until now. Previous attempts have sought to address the challenges faced by workers when their employer-sponsored pension plans encounter financial difficulties. The passage of Bill C-228 represents a crucial step toward enhancing pension security for such employees across the country.

Sarnia-Lambton MP Marilyn Gladu, who introduced the private member’s bill in February 2022, describes the purpose behind the bill: “Pension funds will be solvent, in general, and when there is a bankruptcy, large creditors are way more likely to be able to survive one company’s going bankrupt than an individual who has paid into their pension and is counting on it for their retirement.”

Governmental interjection is welcomed by many, following in the wake of historic bankruptcies that left many pensioners pension-less. Traditionally coined as the ‘Cadillac of retirement plans’, defined benefit pension plans felt much more secure prior to the collapse of Nortel (2009) and Sears (2017), whose insolvencies left hardworking employees with just a fraction of their expected retirement funds.

Canada's current pension protection laws vary by jurisdiction, leading to disparities in the level of protection provided. The introduction of the Pension Protection Act addresses these inconsistencies and aims to establish a more unified and comprehensive framework to safeguard pension payouts.

Implications of the Law

The Pension Protection Act brings numerous positive impacts and benefits for Canadian workers and retirees. The key implications are:

1. Enhanced Protection.

The Act ensures greater security for plan members by establishing stronger fiduciary duties for plan administrators, imposing stricter reporting requirements, and strengthening the oversight of pension funds. This helps prevent mismanagement and enhances the accountability of pension plan administrators.

2. Super-Priority Status.

One of the significant provisions of the Act is granting pension deficits super priority in bankruptcy and insolvency proceedings. This prioritizes pension obligations over other creditors, significantly improving the chances of recovering pension benefits for plan members. The Globe and Mail reports that this provision received widespread support, providing the fire necessary to get the legislation passed through the Senate after a history of failed attempts.

3. Improved Governance.

The Pension Protection Act promotes better governance practices within pension plans. It emphasizes the establishment of a pension advisory committee to enhance plan member representation and influence in decision-making processes. This allows plan members to have a voice in shaping the management of their pension plans and ensures greater transparency and accountability.

4. Transparent Communication.

The legislation emphasizes the importance of clear and timely communication between pension plan administrators and plan members. It mandates the provision of accurate and up-to-date information regarding pension benefits, enabling plan members to make informed decisions about their retirement planning.

The Act will serve as direct protection for many Canadian pilots who continue to accrue years of service within their grandfathered defined benefit pension plans. Moreover, pilot groups seeking to implement new retirement savings vehicles may reconsider the value and safety provided by the defined benefit structure. Although the design flexibility and lower costs of a defined contribution plan has made them popular in recent decades, the protection against longevity risk offered by defined benefit plans is still a significant advantage. Pilot groups seeking to support their members with retirement readiness may view the defined benefit structure as a guiding hand toward future financial stability.

The Act provides for a four-year transition period before the amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) will apply to the existing defined benefit pension plans. However, any defined benefit plans established following the date of royal assent will be immediately subject to the act’s full suite of provisions.

Despite the act’s well-meaning intentions, some industry stakeholders have raised their concerns about the potential for unintended negative consequences. Sponsors of defined benefit pension plans may worry the super-priority provision can lead to increased costs and liabilities, potentially straining their financial resources. The risk profile of lenders to sponsors of defined benefit pension plans may be impacted; their credit now less of a priority than pension benefit payout obligations in bankruptcy or insolvency. Gavin Benjamin of LifeWorks’ pension and benefits solutions business explains, “While the goal of [Bill C-228] is to protect the pensions of members and retirees in the event of a company’s insolvency, it could have adverse consequences for certain companies that sponsor DB pension plans.” Such critiques of the act emphasize the importance of striking a balance between protecting plan members' interests and the feasibility of sponsoring a plan. It can be argued that while safeguarding pension benefits is crucial, it should be done in a manner that considers the long-term sustainability of pension plans and the economic viability of employers. Such views are backed by the Association of Canadian Pension Management and the Pension Investment Association of Canada.

On the positive end of the varied spectrum of sentiments about the act, plan members who rely on their pension plans for financial security in retirement support the act. It is viewed as a crucial measure to safeguard retirement savings. Increased protection and enhanced transparency in pension plan management provides plan members with a greater sense of security. Bea Bruske, president of the Canadian Labour Congress, affirms, “We are glad to finally see workers being prioritized over banks and CEOs in bankruptcies situations.”

While stakeholders may hold differing opinions on the act, it is essential to recognize the positive impact it brings, such as improved protection, enhanced governance, and increased transparency. By prioritizing pension deficits in insolvency proceedings, the Act significantly improves the chances of Canadian pilots receiving their rightful benefits.

As the Pension Protection Act is implemented and its implications unfold, ongoing dialogue and collaboration throughout the industry will be crucial. Future developments may include refinements to balance the interests of all parties involved, ensuring both the long-term sustainability of pension plans and the financial security of Canadian workers.