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.

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