Sunday, May 23, 2010

Bill C-501 Status. - Canadian Bankruptcy Law

BIA bill C-501 was discussed in the Canadian Parliament on May 11. The bill is intended to change the bankruptcy laws to favor retirees and move them to a preferred status. You can read the details at:\

The NDP are the party putting forward the bill. The Liberals kind of support it but didn't stand up to be counted. The conservatives seem to be cool towards it-of course. They are the ones in power but they appear to be siding with the bond holders and other creditors and trying to avoid helping retirees and ex-employees.

Mike Lake, conservative MP, said:

"Some countries, such as Italy and France, have mainly state-funded pensions and few private employer-sponsored pensions, which make the insolvency of contributing employers largely irrelevant to the amount received by pensioners.

Other countries, like New Zealand, treat pension claims as wage claims, giving claimants access to wage guarantee funds instead of protection in the bankruptcy process. Still others, like the United States and the United Kingdom, have pension guarantee funds, financed by premiums or general tax revenues."

Sounds good, however he then went on to say:

"with respect to the protection of unfunded liabilities, like Canada, a large majority of members of the OECD, including such countries as Australia, France, Germany, Italy, New Zealand, Sweden, Switzerland, and the United Kingdom, treat unfunded pension liabilities as unsecured claims in insolvency."

So he is taking the road of avoidance based on false logic. You can help by writing to him and other members of parliament to demand support for this bill since it makes sense to protect retirees rights against other creditors who are insured and who can well afford to take a lower priority than those of us who will lose a large chunk of our livlihood as a result of current bankruptcy law. Diane Urquhart has done the financial analysis and predicts that the impact on interest rates will be mimimal, in spite of what all the naysayers and bond holder suopporters say.

The bill will be back up for a second hour of debate sometime over the next two weeks. After that, the bill will head to the federal industry committee where the bill will be studied further.

Meanwhile we are faced with opposition by people like John Manley who has been appointed chief executive of the Canadian Council of Chief Executives. Manley was former Liberal Finance Minister and a Nortel director. His opinion is absolutely against Bill C-501 and he carries a lot of influence. Try not to get sick when you read what he thinks. Get angry and write to your MP. Here's what he has to say:

Preferred creditor ­status for ­pensions would weaken their ­sponsors

By John Manley

On both a personal and professional level, I know how important the issue of protecting company pensions is for many Canadians. Part of it stems from my experience as a corporate director, but it also has roots in my former career as a politician, when I learned early how policymakers are sometimes tempted to support quick fixes at the expense of broader, longer-term goals.

Many Canadians certainly have a stake in protecting private company pensions — but many would like to pretend there is an easy way to ensure pensions are paid should a company go out of business.

A private member's bill now before the House of Commons purports to do just that. In reality, however, Bill C-501 would weaken the financial viability of companies that sponsor those pensions, as well as the financial well-being of many Canadians who do not have such plans.

Supporters of Bill C-501 say the bill would better protect the pensions of companies that go bankrupt by moving beneficiaries higher up the list of creditors that would have their stakes in the failed company honoured — ahead of, for example, corporate bondholders.

This may sound reasonable, but there is a huge price tag attached. Before leaping on the bandwagon, we should consider who these corporate bondholders are, and what would happen if they suddenly found themselves with "less preferred" status than is the case today.

Corporate bondholders lend companies money so that those businesses can invest, innovate and grow, as well as sustain and create jobs. The interest rate charged on such a loan reflects the perceived degree of risk. Many millions of Canadians have a stake in those corporate bonds as part of their own retirement savings or other investments.

Ironically, granting preferred creditor status to private pension plans could actually erode the value of most Canadians' retirement savings — including the savings of those who might think their pensions would be more secure under Bill C-50.

The equation goes like this. Moving bondholders down the list of preferred creditors increases the risks those creditors face. To compensate for that extra risk, bondholders will charge a higher premium when they lend money. That in turn would increase the financial pressures on companies with private pension plans, potentially impacting the viability of their businesses. It could even push some of the more fragile companies over the edge, moving them closer (if not all the way) into bankruptcy.

To make matters worse, raising the priority status for pension deficits under C-501 could trigger the liquidation of companies with defined-benefit plans that are trying to restructure.

Bill C-501 does nothing to help Canadian businesses avoid bankruptcy. Instead, it only increases the possibility that companies with private pensions will fail. Nor does the bill benefit Canadians who do not have access to private pension plans. In fact, it could potentially hurt Canadians who invest in corporate bonds directly or through their retirement savings plans. The proposed legislation could even hurt the very pension beneficiaries it is designed to protect, because it would make it harder for companies with pension plans to compete against companies without them.

Supporters of Bill C-501 say it would increase the chances that employees who contribute to a company pension plan would recover at least some of what has been lost if and when a company fails. Bear in mind, however, that the bill would not guarantee full pension recovery; rather, it would simply move potential pension beneficiaries up the list of creditors as assets of the bankrupt company are liquidated. What that means in terms of actual amounts received is anybody's guess.

All of us should be concerned about the viability of private company pensions. But in considering this important issue, our elected representatives must be careful to avoid ill-considered quick fixes. And that means refraining from passing legislation, however well-intentioned, that guarantees little but undermines a lot, including investments in retirement savings by countless Canadians and the ongoing financial viability and competitiveness of businesses that have private pension plans.

Financial Post
John Manley is chief executive of the Canadian Council of Chief Executives.

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