It seems like once you are retired you no longer exist in the eyes of your old company; out of sight-out of mind. After I retired I managed to keep up correspondence with some of my friends and colleagues at Nortel, but over time that diminished and settled down to a small number of people whom I was close to at work. Information from the company was generally one way. I received my pension check, albeit from Nortel’s outsourced administration arm, and I also received annual renewals of the medical plan and the company’s annual report. I wrote officially a few times to the company and received one response in the early years after I retired. Since then it has been a deafening silence.
I watched from afar as Nortel faltered in the early part of the new century, and although there were furious discussions internally I was not involved in any way. Nor were any of my fellow retirees. I thought that strange, after all when we worked at Nortel we were always having communications sessions. We were a communications company after all, and prided ourselves on the information flow up and down the ladder. Maybe it wasn’t flowing quite as well as we thought at the time.
I wrote to various presidents and CEOs offering to help, for free. I suggested that the retiree population would be only too glad to help where they could to reduce costs and bring the wisdom and experience of many years to help the company back onto its feet. No answer. No form letter. Nothing! What a shame. I was disappointed and dismayed. I know that many retirees would have volunteered to assist and take some of the load and cost of the shoulders of the company but it fell on deaf ears.
Since Nortel went into chapter 11 the level of communications inter-retiree has increased exponentially. There have always been some people who, like me, were worried about Nortel’s health and future, and we belonged to a group established on Yahoo: http://finance.groups.yahoo.com/group/Nortel_Pension/. Once the bankruptcy was declared, people flocked to that group and out of it emerged the group in Canada that is representing the pensioners in their case against Nortel. The Nortel Retirees Benefits Protection Committee (NRPC) in Canada quickly gained membership and became a major force in protecting retiree’s rights in Canada. Their web site at www.nortelpensioners.ca provides a wealth of data and information. This group has filled in the huge void that existed in communications between ex-Nortel employees and retirees. Also by virtue of their efforts to engage legal representation using the firm of Koskie Minsky, www.kmlaw.ca, they have forced Nortel to start talking to the retirees and providing information.
In the US a similar committee was formed and also provided a central place that shared information with retirees and ex-employees: www.nnra.org. As discussed in earlier posts, the situation in the US is different to that in Canada and as a result the demand to obtain and use legal representation has not been as large. As more people realize the true impact bearing down on them, that may change.
During all this activity by the ex-employees and retirees, Nortel has avoided informing us about the situation and the possible impacts on us. There have been a variety of internal information sessions at which the senior management has attempted to soothe the inner turmoil and calm the waters. The story has altered as time moved along and more people were laid off. From exhortations to the remaining employees to work hard to help restructure the company, the message has moved to one of selling off the assets and liquidating. But none of this was communicated to retirees. It was only through the assistance of current employees who felt obligated to tell their friends outside that we found out what was being said.
The most recent events were two General Information Sessions held on July 6th 2009 to discuss Pensions. These events were made available to employees on a conference call, but no retirees were invited. Some people out side the company were able to dial in having obtained the access information from friends. I was given some feedback on the US session and I am including it here so that everyone can see it. Is this what is has come to, that such a great company as Nortel is too embarrassed or ashamed to invite the retirees to sessions that directly pertain to them? As it turned out there wasn’t a lot of information that we didn’t already know, except for the news that the Director of Pensions is jumping ship just before the hull settles under the water.
Here is the feedback I was given from the US session:
With respect to the U.S. pension plan. We’re still in a wait-and-see mode for the PBGC. From the tone of the comments it is clear that a PBGC takeover is inevitable.
The transfer to Northern Trust of $3.7M (the actuarially required contribution) will be made on July 15 as scheduled.
The U.S. plan was 74% funded as of January 1, 2009 with an asset allocation of about 50% equities, 50% bonds. (The 74% has no impact on payouts, by either Nortel or PBGC, although it could factor into continued restrictions on lump-sum distributions if Nortel should somehow emerge from bankruptcy intact.)
Employees in scope of business divestitures will generally be treated as terminated Nortel employees, with respect to the Nortel pension. Acquiring companies are NOT assuming liability for Nortel pensions.
Anyone with a non-qualified pension benefit should file a claim with the U.S. bankruptcy court.
If Nortel should cease to exist, retiree medical and COBRA are likely to stop. What would happen to the Hewitt contract for 401K administration is unclear, but there would be some kind of termination and distribution process for the 401K.
The Director of Pensions, is leaving the company next week. Leila Wong will take over administration of pensions.
Friday, July 10, 2009
Tuesday, July 7, 2009
Retirees and ex-employees claims against a bankrupt company.
When a company enters chapter 11, many forms of payment to ex-employees and pensioners cease. The people who were receiving these payments are then classified as unsecured creditors and can file claims against the company in bankruptcy court in order to seek repayment. It is unlikely that the claims will be paid in full unless the company emerges from chapter 11 and then prospers before it pays out on the claims. Most likely only a percentage will be returned to the creditor.
The unsecured creditors are required to file a proof of claim with the company that is handling the bankruptcy dockets for the court. In the case of Nortel that was Epiqsystems in the US. The record of proofs of claims is made public on their website and is required to properly assess the liabilities of the company in chapter 11. The information can be seen on the web at http://chapter11.epiqsystems.com/Nortel under the claims category.
For retirees and ex-employees there are a number of different claims that they may have on the company. For people who were receiving a non-qualified pension which ceased when the company entered chapter 11 that will be one of their claims. The non-qualified pension may be for a fixed period of time or it may be in the form of a lifetime annuity.
Calculating the claim is extremely important since it is possible that the company may dispute the claim. In this case it may require legal representation to argue the claim before the court. This is especially true where the claim is determined from a lifetime annuity since it involves actuarial factors and interest rate assumptions. The factors used by the company will no doubt be to their advantage and will probably result in a sum that is less than the claim put forward by the creditor. This is one reason that creditors who fall into this situation should band together and hire an actuarial/legal firm to work with them to determine the factors and to argue them on their behalf.
In the case of a fixed term non-qualified pension the sum owed to the creditor is basically the monthly payment times the number of months left in the term. There is a catch here however involving the cost of money. The company’s lawyers will no doubt argue that an inflation factor should be used to reduce the future cost of money that would be paid out in today’s dollars. This would result in a sum that is less than the simple arithmetic of multiplying the number of months left times the monthly payment.
Once again, professional actuarial support to determine and apply that interest rate is advantageous and will assist in reaching agreement with the company on the actual amount of the claim in today’s dollars.
Once agreement has been reached on the values of the unsecured creditor’s claims a ruling can be determined as to the percentage that the company can offer to settle those claims. If that percentage is agreed to by the creditor’s committee then it will be applied to all unsecured creditor’s claims equally. So if the court rules that 30% for example is what creditors would get back on their claims, that is the percentage that every unsecured creditor would receive.
To complicate matters, rulings of this nature would be paid out as lump sums and subject to income tax as if they were regular earnings. As far as I know at this point, it is not possible for the amount to be moved into a tax sheltered annuity, so the creditor will be hit with a triple whammy. (1) a reduced amount of claim due to future cost of money, (2) a percentage reduction as ruled by the court, (3) a tax payment that will probably be in the upper range of tax percentages.
Other payments that are outside the normal defined pension paid from the trust fund will be subject to the same situation. For example senior executive retirement pensions paid to the top level management retirees will fall into this category. Retirement Transition Payments made directly from the company funds will stop. Severance payments made to laid off employees will stop. Deferred compensation is generally maintained in a fund external to the pension trust fund and as such will no longer be accessible by employees whether still working, laid off, or retired. Each of these categories become claims against the company and calculating the value accurately is important in order to maximize what the creditor gets back.
Nortel also offers health care, long term care, and life insurance benefits to their employees and retirees. In the case where these plans are terminated the retirees may have a claim against the company for the amount that these lifetime plans represent. Most of these plans have a clause indicating that if the retiree does not pay the monthly premium after a grace period of 30 days they are removed from the plan and if that happens there is no claim. So it’s important to maintain the premium payments to keep active in the plan and ensure that you have a claim if the plan is stopped.
At this point Nortel’s US health plan is still continuing, but the writing is on the wall and at a recent information session by Nortel the employees were told that it is possible that the health plan will cease.
Calculating the claims associated with health care, long term care, and insurance is very complicated and best left to professionals. Each person’s history and family status will come into play to determine the value of the claim, so it is probably a good reason to have a group approach that involves people who have experience in determining these claims.
We have such a group already formed in the US called Nortel US Retirees protection Committee. (NRPC-US) The group is in contact with an actuarial firm to determine what help they can provide but at this stage the only action we would suggest to everyone is to gather all the relevant information regarding your benefits and have it readily available so that it can be used to calculate the claim. There is more information on this group at www.nnra.org.
The unsecured creditors are required to file a proof of claim with the company that is handling the bankruptcy dockets for the court. In the case of Nortel that was Epiqsystems in the US. The record of proofs of claims is made public on their website and is required to properly assess the liabilities of the company in chapter 11. The information can be seen on the web at http://chapter11.epiqsystems.com/Nortel under the claims category.
For retirees and ex-employees there are a number of different claims that they may have on the company. For people who were receiving a non-qualified pension which ceased when the company entered chapter 11 that will be one of their claims. The non-qualified pension may be for a fixed period of time or it may be in the form of a lifetime annuity.
Calculating the claim is extremely important since it is possible that the company may dispute the claim. In this case it may require legal representation to argue the claim before the court. This is especially true where the claim is determined from a lifetime annuity since it involves actuarial factors and interest rate assumptions. The factors used by the company will no doubt be to their advantage and will probably result in a sum that is less than the claim put forward by the creditor. This is one reason that creditors who fall into this situation should band together and hire an actuarial/legal firm to work with them to determine the factors and to argue them on their behalf.
In the case of a fixed term non-qualified pension the sum owed to the creditor is basically the monthly payment times the number of months left in the term. There is a catch here however involving the cost of money. The company’s lawyers will no doubt argue that an inflation factor should be used to reduce the future cost of money that would be paid out in today’s dollars. This would result in a sum that is less than the simple arithmetic of multiplying the number of months left times the monthly payment.
Once again, professional actuarial support to determine and apply that interest rate is advantageous and will assist in reaching agreement with the company on the actual amount of the claim in today’s dollars.
Once agreement has been reached on the values of the unsecured creditor’s claims a ruling can be determined as to the percentage that the company can offer to settle those claims. If that percentage is agreed to by the creditor’s committee then it will be applied to all unsecured creditor’s claims equally. So if the court rules that 30% for example is what creditors would get back on their claims, that is the percentage that every unsecured creditor would receive.
To complicate matters, rulings of this nature would be paid out as lump sums and subject to income tax as if they were regular earnings. As far as I know at this point, it is not possible for the amount to be moved into a tax sheltered annuity, so the creditor will be hit with a triple whammy. (1) a reduced amount of claim due to future cost of money, (2) a percentage reduction as ruled by the court, (3) a tax payment that will probably be in the upper range of tax percentages.
Other payments that are outside the normal defined pension paid from the trust fund will be subject to the same situation. For example senior executive retirement pensions paid to the top level management retirees will fall into this category. Retirement Transition Payments made directly from the company funds will stop. Severance payments made to laid off employees will stop. Deferred compensation is generally maintained in a fund external to the pension trust fund and as such will no longer be accessible by employees whether still working, laid off, or retired. Each of these categories become claims against the company and calculating the value accurately is important in order to maximize what the creditor gets back.
Nortel also offers health care, long term care, and life insurance benefits to their employees and retirees. In the case where these plans are terminated the retirees may have a claim against the company for the amount that these lifetime plans represent. Most of these plans have a clause indicating that if the retiree does not pay the monthly premium after a grace period of 30 days they are removed from the plan and if that happens there is no claim. So it’s important to maintain the premium payments to keep active in the plan and ensure that you have a claim if the plan is stopped.
At this point Nortel’s US health plan is still continuing, but the writing is on the wall and at a recent information session by Nortel the employees were told that it is possible that the health plan will cease.
Calculating the claims associated with health care, long term care, and insurance is very complicated and best left to professionals. Each person’s history and family status will come into play to determine the value of the claim, so it is probably a good reason to have a group approach that involves people who have experience in determining these claims.
We have such a group already formed in the US called Nortel US Retirees protection Committee. (NRPC-US) The group is in contact with an actuarial firm to determine what help they can provide but at this stage the only action we would suggest to everyone is to gather all the relevant information regarding your benefits and have it readily available so that it can be used to calculate the claim. There is more information on this group at www.nnra.org.
Monday, July 6, 2009
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.
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.
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