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.

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.