New Bill Will Protect Employee Pensions if Company Declares Bankruptcy

A Sears Canada store in Saint-Eustache, Quebec, in a file photo. The company's collapse in 2017 left retirees with a $133 million shortfall in their company pension plan. (The Canadian Press/Ryan Remiorz)

The House of Commons passed a private member’s bill on Nov. 23 that will protect employee pensions if a company declares bankruptcy. Sponsored by Conservative MP Marily Gladu, Bill C-228 passed unanimously with a vote of 318 to 0.

The bill was based on a concept that had previously been attempted in multiple legislative attempts over the past several decades, with advocates having sought to amend federal bankruptcy law since 1975.

But every bill for bankruptcy reform has failed up until now.

Bill C-228, an act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, and the Pension Benefits Standards Act, 1985, will ensure that employees’ pensions are prioritized before any other financial liabilities are addressed should a corporation become insolvent or declare bankruptcy.

Employees would in effect become preferred creditors in bankruptcy settlements, according to Blacklock’s Reporter.

“It has been a long journey,” said Gladu. During the bill’s third reading debate, she said it was the right thing to do for Canadians, to “protect people who have worked their whole lives and paid into a pension fund.”

Gladu pointed to the 2017 bankruptcy of Sears Canada as an example of why this legislation was necessary. When Sears collapsed, it left employees with a $133 million shortfall in their company pension plan.

“Sears Canada paid more than $3 billion in dividends to shareholders even as it was operating at a loss and its pension plan was underfunded,” Gladu said.

Protect Workers’ Retirement

Opposition Leader Pierre Polievre said during the same debate that the bill would force businesses to invest enough money and set aside sufficient funds to “secure the future and the retirement of their workers.”

An estimated 1.2 million private sector workers with defined benefit plans will have their pensions protected with this bill, according to Finance Canada.

In 2021, the Canadian Bankers Association testified during hearings of the House standing committee on industry and technology that a similar Bill C-253 would lead to higher borrowing costs for companies.

Polievre disagreed.

“Businesses should obviously set aside sufficient funds to guarantee that in the event of bankruptcy or falling stock markets they will have enough money to fund these pensions,” he said during the debate in the House.

“However right now businesses do not have to pay these pension liabilities before paying other creditors. That is legal and the courts decide who gets what.”

The Association of Canadian Pension Management (ACPM) was also not in favour of the bill.

In an Oct. 17 letter to the House of Commons Standing Committee on Finance, the ACPM said the proposed means to accomplish the goal of securing retiree pensions in the event of employer insolvency “are flawed and will have serious and undesirable unintended consequences.”

It said ordinary borrowing “will become more difficult, expensive, or impossible” for some companies that sponsor defined benefit pension plans.

This is because the priority placed on pension security would fundamentally change a company’s risk profile that is assessed by financial institution creditors, which in turn would have to adjust their own approaches.

Creditors may require borrowers to agree not to assume any new defined benefit pension plan over the course of a loan, for example.

The APCM also warned the legislation could lead to higher interest rates on loans, higher demands for collateral, and potential negative impact on the credit ratings of affect companies with define benefit plans. Some companies with defined benefit plans may terminate those plans as a result.

The bill, which passed first reading in the House on Feb. 3 and third reading on Nov. 23, proceed to the Senate for first reading on Nov. 24.