Retirement plans and organization to claim against a bankrupt company.

Organizing to have representation for claims against a bankrupt company may make sense in some situations. It depends on the type of claim that a retiree or ex-employee may have. In our case against Nortel we had a wide variety of claims which in some cases conflicted. People who had retired had a variety of plans that were providing retirement income, and many employees who had just been laid off or let go had unvested pensions as well as severance and deferred compensation as well as health and long term care benefits. In many cases these benefits stopped the moment Nortel entered chapter 11. The following provides some idea of the variety of claims.

The traditional defined pension plan. (US)

The plan is one that has been in general use for decades. In this plan the company puts money into a retirement trust fund and over the years the employee builds a value in the plan which is promised to be paid as a pension when he or she retires. The pension is determined by a combination of age, service in the company, and final average earnings. The factors are used to compute a commuted value. Then a variety of pension options are offered to the employee to chose from. These options take into account the projected lifetime of the employee and spouse if a joint pension is selected. Many plans also provide for withdrawal as a lump sum which can then be rolled over into a tax protected IRA.

The payments fall into Qualified and Non-Qualified categories. A Qualified Pension is one which falls within the guidelines set up by the IRS to limit the calculations on final average salary below a number which is currently around $200K. Most people will fall into this category and their pension will be considered Qualified. All Qualified pensions from Defined Pension Plans are protected by the US Pension Benefit Guaranty Corporation; (www.pbgc.org). This organization has been set up to take over a pension trust fund in the event that a company goes bankrupt. It has some limits and rules on what it will pay out as a pension so there could be an impact on the pension paid by them. However in general they will pay the same pension that a retiree has been receiving from their company before bankruptcy.

The PBGC represents the retirees who have a Qualified benefit from a Defined Pension Plan, so in that case the retiree would not need any further legal representation since the PBGC automatically has a seat on the creditor’s committee and defends the rights of the pensioners to the trust fund.

Retirees who have an additional Non-Qualified payment however, are not protected by the PBGC. These payments can be in the form of a life time annuity, either single or joint, or they can be over a fixed period of time as defined by the company. The payments are not paid out of the trust fund and come directly from the company’s cash. When a company enters chapter 11 these payments normally stop. At that point the retiree is considered an unsecured creditor and will have to place a claim on the company to try to get back the money owed to them. Since there are usually thousands of different creditors it becomes useful for the people who fall into this category to consider banding together to obtain legal advice and support to file their claims against the company. A claim can also be filed individually but there may be less chance of defending the calculation used in the claim during the court proceedings if it is not supported by professionals who understand the actuarial factors and the interest rates used to determine payments.

In our case we found that the number of people receiving Non-Qualified benefits was small compared to the number who had only PBGC protected pensions. As a result there were not enough people represented by the group to obtain a seat at the creditor’s committee and we decided not to use legal representation for that purpose.

However we did start working with an actuarial firm that has experience in determining the calculations needed to defend the Non-Qualified claims in court. We are still waiting for this to occur. The actuarial firm and the court appointed legal firm serving to represent all un-secured creditors have advised our group that Nortel will need to file a list of creditors with the amount of their claims. There should also be a form sent directly to us by Nortel with our claims identified using a special bar code that allows the court monitor to properly gather the information and aggregate the total. At this point there is no deadline for filing these claims ands we have not yet received any forms from Nortel.

In my next report I will provide some information on the other types of claims that people have against Nortel.