Monday, June 29, 2009

Legal support for US retirees in a bankruptcy situation.

Most people have little contact with lawyers except for wills, sale or purchase of a house, marriage contracts etc. When the company paying your pension goes bankrupt and you face a loss of pension income, it’s only natural that you consider getting legal representation to try to fight for what’s yours. Before you jump into the fire however you need to do some checking and thinking.

If you are being paid a qualified pension from a defined US benefit plan then you will have the support of the Pension Benefit Guaranty Corporation. The PBGC is a government sponsored organization that insures pensions through payments from companies that offer defined benefit plans.

The PBGC will have a seat on the creditor’s committee in bankruptcy proceedings and will represent you in these debates and discussions. It will examine the restructuring or liquidation plans to make sure that a reasonable portion of the money remaining will be paid into the pension trust fund. It will also administer the pension so that you will receive pension checks from the PBGC. So you already have an advocate looking out for you in this case. There is really no need to go seek out a lawyer unless you have over and above the defined pension plan.

If your company offered retiree health care in the US it’s highly likely that they will try to wind up that plan at some point in the bankruptcy proceedings. That means that you may have a claim against the company as an unsecured creditor for the loss of that benefit. The same applies to long term care or life insurance plans that were offered.

The bankruptcy court may call for establishing an 1114 committee to review these benefit plans and the company’s proposals to wind them up. If such a committee is established the judge will require the appointment of a trustee to represent the retirees in the discussions. In this case it is often advantageous for retirees to band together and form a group that can be recognized by the court to sit on the 1114 committee. In the event that the group is given that recognition then they may hire counsel to speak on their behalf and the fees for that will be paid out of the assets of the bankrupt company.

Generally there are legal representatives appointed by the court to act on behalf of the unsecured creditors which include retirees who may have claims against the company. All of the information and decisions made by the court are public and available on a web site that is established for that purpose. Retirees should make sure they know what documents have been presented and what dockets have been issued and recorded. In the case of Nortel the site is managed by epiqsytems and for those who are interested to see the complexity of bankruptcy dockets and proceedings, you can check it out on and browse through the hundreds of documents issued.

For US retirees who are being paid a non qualified pension, or who lost deferred compensation, or severance, it is highly likely that you will want to have some form of legal and actuarial assistance. Doing this on your own can be very costly and may not improve your chance of gaining back the monies owed to you. In our case, we tried to organize as a nation-wide group and seek a single legal representative. We were able to get a few thousand retirees and ex-Nortel to show interest in this approach. We organized regionally with small groups trying to gain the support of people in their region. We also had a steering committee that dealt with the court and also sought out legal representation.

We chose a law firm that seemed to have its act together when it came to arguing bankruptcy claims and then we ran into a roadblock. The law firm was not cheap and they wanted to have at least 1,000 people contributing $250 each before they would start doing any serious business. We ran the campaign nation wide to get people to join up but we were only able to get around 550 people willing to pay and as a result the steering committee and the law firm decided to call it quits. During this early stage one of the lawyers had spent time with the court and had petitioned to have our group represented on the creditor’s committee. The judge ruled against this however and we were set back as basically unsecured creditors.

The strategy of getting a seat on the creditor’s committee is a good one. If others find themselves in the same situation as us with real claims against the bankrupt company, it is important to try to get organized quickly and to petition for a seat on that committee as early as possible. In the case of Nortel by the time we were organized the committee had already bee established and it was very difficult to have the judge recognize a group which seemed to represent a small claim compared to other such as the PBGC who represented a huge pension claim.

In my next report I will continue the saga of our representation and will give you some idea of the work required to get organized.

Thursday, June 25, 2009

Non- Qualified Defined Pensions

When Nortel declared Chapter 11 in January 2009, I was very upset that they would take that step and put thousands of people through a living hell. I was a bit relieved when my Canadian pension check arrived in January, but that turned to anger when my US pension check failed to arrive in February and subsequent months.

I called Mercer, the company that manages pension payments for Nortel, and although the people were polite they basically told me I was out of luck and all non-qualified pension payments were stopped. They were kind enough to give me the telephone number of Epiq Systems, a company that was keeping the records for the bankruptcy court. When I called them, they told me the same thing and advised me to go to their website and fill in a proof of claim form and submit it so that the money owed to me could be officially registered. They also told me that I would be considered an unsecured creditor along with many thousands of others and that we would all be treated the same. In other words, defined pension commitments would not have any priority.

I also called the Pension Benefit Guaranty Corporation, and they were very sympathetic but said they couldn’t help since my NQ pension was not covered by the insurance they provided. They told me that this was a familiar story with a number of bankrupt companies including the Delta pilots. I checked with ERISA and using the FreeErisa website I found Nortel’s pension plan clearly registered there as a defined plan. Nowhere was there discussion of the non qualified portion.

Then I dug out the old pension plan documents. I had obtained a copy when I retired, and in fact I had a copy of the detailed plan as well as the summary. I couldn’t find any mention of non-qualified anywhere in the plan document. I did find an obscure reference to payments being subject to an IRS limit but it wasn’t made clear up front in any of the documents. The calculation sheet that I received when I applied for pension did show that a portion would be treated as non-qualified, but there was little explanation attached.

Since then I have learned that the IRS imposes a limit on the salary that can be used to calculate the commuted value of a pension. The salary limit when I retired was $160K and since then it has gone up to $200K. Any pension payment that is calculated from salary over and above that limit is considered non-qualified and has to be paid by the company out of general funds as opposed to the pension trust fund. This seems like a reasonable approach if the company is healthy and the approach protects the pension trust fund from being diluted. Of course it also means that the company is not obligated to put those monies aside in the trust fund, and so they are basically gambling with people’s pensions.

Some honorable companies establish third party annuities to make sure that the non-qualified pensions continue even if the company goes away. I think this is pretty rare however, and Nortel did not establish any protection to cover these pensions.

In my case I tried to withdraw my entire commuted US pension as a lump sum, but I was not allowed to do so by Nortel, and in fact they required that I take the non-qualified portion over a 15 year period as a monthly pension. I had no say in that matter whatsoever.

So beware the defined pension plan trap when your service and position in the company may mean your salary exceeds the limit. It’s clear that this form of control needs to be modified and companies should be required to purchase annuities for their retirees so that there is stability and clarity of income for pensioners.

Tuesday, June 23, 2009

Pension dilution

When I retired in 2001 my company, Nortel Networks, was doing OK. It had been through a tremendous upsurge during the 1990’s but in the new millennium things were starting to fade and Nortel was losing steam. I wasn’t too worried as I signed the papers for retirement. After all Nortel had a 120 year history and it was a big deal in Canada. It had been the darling of all Canadians as its stock soared and its technology was sought after by companies around the world.

Before I signed the papers, I did look at the risks and just in case there were future problems, I decided to withdraw my US pension as a lump sum and roll it over into my 401K. I couldn’t take it all out due to IRS restrictions but Nortel offered a 15 year certain payment plan on the remainder and that seemed reasonable to me. Little did I know that the part above the IRS limit was considered non-qualified and paid from the company funds which made it subject to immediate elimination in the event of bankruptcy?

I thought long and hard about the Canadian pension as to whether I should take the long term pension or withdraw the commuted value as a lump sum. As I looked at the alternatives I was disappointed by the tax laws in Canada that limited the amount I could roll over into an RRSP (IRA equivalent). Since I was a non-resident, the remainder of the pension lump sum was going to be heavily taxed and I calculated that I would lose substantially by going in that direction. Also, the long term pension had a sweetener with it. Nortel offered a Transitional Retirement Allowance which I could distribute over a number of years. The TRA was over and above my commuted pension plan value and seemed like a very good deal. So I went with the annual pension plan.

When Nortel entered chapter 11 in January 2009, the non-qualified 15 year certain plan stopped immediately. The Canadian pension continued since it was being paid out of the pension trust fund.

At first the company executives claimed that their intent was to obtain relief so that they could restructure the company and come out of chapter 11 a smaller but stronger entity. That gave a little bit of hope to the retirees that maybe their pensions would continue. But as time went along and hundreds of motions and documents were presented to the courts it became clear that the executives were really planning to split up the company and sell it off in parts. The legal fees for all the court actions in multiple countries rocketed and the millions that could have made up shortfalls in the pension trust funds flowed out of Nortel and into the pockets of the well paid lawyers. At the same time the executives voted themselves and senior employees millions of dollars of bonuses to stay on and help them rend the company apart. All of these funds reduced the cash on hand. Funds that could have bolstered the trust funds vanished.

Whilst the executive were patting themselves on the backs for their smart moves, people were being laid off in droves and were not being paid severance payments; something that had been a normal part of business at Nortel for decades. Severance payments ceased for those who had been let go before the chapter 11 announcement. Others found that their supplemental health plan was no longer in effect. And hundreds of former employees who had deferred their salaries into special tax sheltered accounts found that they could no longer access them.

For those of us with regular pensions, we were going through a period of false hope as out checks kept arriving. But we all knew that there was something rotten in the background. When people started to make enquiries it was clear the trust fund was not adequately funded, and in fact was probably only able to support about 60% of the payment obligations.

Our future financial stability had been diluted, seemingly without any concern by the executives who had a responsibility to ensure that we retirees would receive what had been promised to us and had been defined in signed contracts when we retired. We all know that life isn’t fair, but this is something that could have been controlled with some foresight by the government and by the pension board committee of the company.

Failsafe mechanisms should have been in place to raise the alarm when the funding went below a predefined level. As it is, we now have a diluted fund and a host of pensioners who will suffer and lose, and many will fall into a spiral of poverty and depression as they become victims of a system that rewards the executives, protects the corporation, and turns its back on the people who most likely made the largest contributions.

Monday, June 22, 2009

Bankruptcy impact on pension income

The usual thinking is that people can live on a pension if their income is about 80% of what they earned when they were working. This seems reasonable if the kids have grown up, the mortgage has been paid off, and other debts retired. At 80% income, people can make adjustments and live a lifestyle that is much like what they had before.

Since retiring 8 years ago, my income has been at or above the 80% level, and especially during the boom times as the stock market went up. My lifestyle was much as it was before retirement and it was a pleasant life. Then came the market meltdown and my investments took a nose dive. At least my pension income was still proceeding along at the same rate even if my investment returns were negative, and during 2008 it seemed like we would be OK and be able to weather the storm.

Then in January 2009, the company paying my defined pension declared bankruptcy and went into chapter 11. Immediately my income dropped 30%. We had to take stock and I reluctantly had to turn to the savings in my IRA to make up that difference. Luckily we have money in the IRA even though it too had been pounded by the market. As conservative investors we had managed to keep most of the capital but it had suffered close to a 20% drop which was a shock to our system.

After some calculation we went ahead with a new plan to withdraw funds from the IRA to replace the missing pension income. Our total income then returned to the level it was before the bankruptcy but we are prematurely eating into our IRA investments to maintain it.

Part of our other income was also at risk however. Since I had worked for the same firm for 35 years, part in Canada, and part in the US, I was receiving pension from those two subsidiaries. My US pension had ceased immediately since it was considered non-qualified, but my Canadian pension was ongoing. It was being paid out of the pension trust fund.

When the company, Nortel, declared bankruptcy they continued to manage the pension trust funds, however, in spite of government regulations on pension trusts, the funds were woefully under funded.

The best estimates of the pension trust fund showed it was probably only able to support about 60%- 70% of its long term obligations.

So now we face the prospect of another cut in pension income as Nortel liquidates and winds up the pension funds. For the US retirees who are receiving a qualified pension as part of the defined pension plan, there is protection by the PBGC. Unfortunately we don’t qualify for that.

The Canadian pension however, has no insurance protection whatsoever. There is no Canadian PBGC equivalent. As a result our Canadian pension will drop probably by 40% or maybe even as much as 50%. So my pension income in total will be reduced by 50%-60%. Hence I face the prospect of living on about 40% of what I expected as pension income plus the withdrawals from my IRA

This doesn’t seem reasonable at all. After spending so much time and energy helping to build a company and contributing many hours above and beyond what I was getting paid for, my reward is a like a slap in the face. Surely our society is better than that?

Retirees should be treated with more respect than this and pension funds need to be fully protected by all governments. Relying on companies to look after their retiree population is preposterous. It seems that once you are gone, you are forgotten and the ongoing payments become a burden rather than a necessary expense.

Well, I’m sure we will survive somehow, but this lesson needs to be brought forward to make sure the next generation to retire faces some stability in their last years.

Sunday, June 21, 2009

Surprises in retirement

After 35 years working for Nortel Networks, a well respected international company, I retired in 2001 with what I thought was a secure and reasonable pension. Even after the dot com bubble caused major problems for my old company, it seemed to survive and looked like it might stagger on. However a series of management fiascoes and bad decisions resulted in staggering losses, and when the financial meltdown hit in 2008 the company dropped to its knees and sought chapter 11 protection in the US and similar status around the world.

I had been worried about my pension over the last 8 years as the fates dealt one blow after the other and seemed to take aim at Nortel. I did some research and knew that parts of my pension were in possible jeopardy, but nothing focuses the mind like crisis, so in January 2009 I started looking at this more seriously and re planning my finances in case my pension was severely impacted. It was.

In February I didn't receive my pension check from the Nortel US subsidiary though I did receive the pension check from the Canadian subsidiary where I had worked for 18 out of the 35 years. This drop in income was a big shock, and I had to work with my financial planner to start early withdrawals from my IRA. It looks like I might be able to replace that part of my income for at least the foreseeable future, though my IRA had taken a huge hit in the market decline. My original retirement plan is now a shambles since I was expecting to grow my IRA until I was 70 and that way I could stretch it out and make sure my wife I were covered.

Luckily the health benefits in the US continue at least for now. I expect that they will stop at some point in time and then I will be faced with additional costs to cover my wife until she is medicare eligible. So I expect this will reduce my net income further.

Now, in June 209, Nortel has announced that it is planning to liquidate its assets. This is a big blow since it means that the pension plans will be wound up. In the US, the plan will be taken over by the PBGC which will continue to pay pensioners who were receiving defined benefits up to certain limits. In my case my US pension was non-qualified so that means the PBGC will not pay me anything at all.

In Canada there is no federal insurance plan or organization similar to the PBGC, so that means all the pensioners receiving defined benefits are totally out of luck. The trust fund will be handed over to an administrator who will determine how much is left and then purchase annuities for the pensioners based on what's left. Of course, because of a lack of regulation, the trust fund is way underfunded. At last estimate it may be 69% though that is just a guess. By the time the administrator works out annuities at much smaller interest rates and does the actuarial math, it is more than likely that we will end up with about half of what we were getting.

This decision to liquidate also means that the health insurance payments are going to stop. The company has been very secretive about all this and has basically ignored the retiree's requests for information and guidance.

So here I am; 67 years old, not likely to find a job in this economy; market losses in my IRA and personal savings; no US pension income; about to lose half or more of my Canadian pension; and also about to lose my health insurance benefits. Am I bitter? Yes, but I am also positive about the future. I will have enough to survive for the immediate future and I will have to make major adjustments, but it doesn't mean life ends and a spiral into poverty. No! I intend to use my skills in writing and the wisdom and knowledge I have gained to start generating other income.

This blog is part of that plan. I think that I can help others who are approaching retirement to look for the signs and do the research to make sure they are forewarned as to what to expect under such catastrophic circumstances. This has definitely been a learning experience. I hope that I can use it to help other avoid the traps and pitfalls that I have run into, and perhaps we can all work to change the laws and rules to ensure reasonable security and happiness in retirement for the generations that follow.