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Protection for private pension plans: what Canada can learn from the U.S. Employee Retirement Income Security Act.

Abstract

This paper examines the intersection of Canadian pension and bankruptcy law. Provincial and federal pension legislation requires pension plan sponsors to maintain sufficient assets in a plan to meet their obligations to plan members at retirement. Despite these safeguards, when a pension plan is underfunded and an employer becomes bankrupt, workers face inordinate risk. Simply put, many workers are poor bearers of risk and are almost completely dependent on their employers' pension promises. This paper argues that the existing legislative protections, including recent amendments to the federal Bankruptcy and Insolvency Act, which provide a super-priority for certain pension claims in bankruptcy, ultimately fail to mitigate the growing risk that workers may face benefit curtailments when their employers collapse. The paper argues that extending the super-priority to cover all pension claims would be counterproductive insofar as efficient distribution schemes should ensure as best as possible that secured creditors maintain their priority. Accordingly, to avoid a potential clash between pension plan members and secured creditors, the paper proposes an alternative means of worker protection: a national public pension insurer.

This paper favourably examines one such public scheme, the U.S. Pension Benefit Guaranty Corporation (the "PBGC") and details the protection that it has provided to pension plan members in representative bankruptcies in the airline and steel industries. The paper argues that the combined force of workers' vulnerability in bankruptcy and the relative success of the PBGC weighs in favour of a similar regime for Canada, notwithstanding counterarguments that it could give rise to moral hazard and increased costs. After addressing counterarguments against public pension insurance, the paper outlines the advantages of a national Canadian pension insurer. A national insurer would treat workers across Canada equitably and would not impinge on provincial jurisdiction over property and civil rights because it would operate only when federal bankruptcy legislation is triggered. To this end, the paper addresses the potential constitutional and political hurdles that the establishment of a national insurer could face and concludes that they are surmountable.

Resume

Cette dissertation examine l'intersection entre le droit sur les pensions et le droit de la faillite. Les lois sur les pensions provinciales et federales requierent que les sponsors d'un fond de pension conservent suffisamment d'actifs pour respecter les paiements qu'ils doivent faire a leurs membres retraites. Malgre ces garanties, lorsqu'un fond de pension n'a pas assez d'actifs et qu'un employeur est en faillite, les travailleurs font face a un risque disproportionne. Dit simplement, plusieurs travailleurs sont mal equipes pour porter ce risque sont presque completement dependent des promesses de fonds de pensions de leur employeurs. Cette dissertation soumet que les protections legales actuelles, incluant les modifications recentes a la loi federale de la faillite et de l'insolvabilite qui donnent une super-priorite a certaines reclamations liees a des fonds de pensions, echouent ultimement a diminuer le risque que les travailleurs feront face a des diminutions de benefices lorsque leur employeurs feront faillite. Cette dissertation soumet que d'etendre une super-priorite a toutes les reclamations liees aux fonds de pensions serait contre-productif parce que methode de distribution effective devrait s'assurer que les creanciers securises maintiennent leurs priorites. Du fait, pour eviter un affrontement entre les membres d'un fond de pension et les creanciers securises, cet article propose un moyen alternatif pour proteger les travailleurs: un assureur de fonds de pension publique et national.

Cette dissertation examine favorablement un tel systeme publique, la Corporation Americaine Des Benefices de Fonds de Pensions Garanties (PBGC), et explique les protections qu'elle a fournit a ses membres dans les dossiers de certaines faillites dans l'industrie aerienne et l'industrie de l'acier. L'article explique que la force combinee de la susceptibilite des travailleurs face a la faillite de leurs employeurs et du succes relatif du PBGC suggere qu'un regime similaire devrait etre adopte au Canada en depit d'arguments en defaveur qui mentionnent le probleme de conflits d'ethiques et de couts accrus. Apres avoir discute des arguments contre un assureur de fonds de pension publique, la dissertation expliquera les avantages d'un assureur national et canadien pour les fonds de pension. Un assureur national traiterait les travailleurs canadiens comme de maniere egale, et n'empieterais pas sur la juridiction provinciale vis-a-vis la propriete et les droits civils parce qu'un tel assureur n'opererait que sous la loi federale de la faillite. Pour prouver ce point, cette dissertation adressera les problemes constitutionnels et politiques qui pourrait ce dresser face l'etablissement d'un assureur national et conclut que ces problemes sont surmontables.
  I INTRODUCTION

 II CANADIAN PENSION LAW

III THE TREATMENT OF PENSION PLAN MEMBERS'
    CLAIMS IN BANKRUPTCY

    Priority and the Scheme of Distribution
    Public Pension Insurance in Ontario: The Pension Benefits
     Guarantee Fund

 IV THE BENEFITS OF PUBLIC PENSION INSURANCE IN THE U.S.

  V THE ARGUMENTS AGAINST PUBLIC PENSION INSURANCE

    Moral Hazard
    Cost

 VI CANADIAN PUBLIC PENSION INSURANCE BASED ON THE U.S. MODEL

    Desirability of a Single, Public Insurer
    Constitutional Feasibility
    Political Feasibility

VII CONCLUSION


INTRODUCTION
   Bankruptcy is less a culture and more a tool. It's more a device.
   It's more like a knife on the surgeon's table. Bankruptcy is the
   official, federal, formal way to take legal promises and just slice
   them off. (1)


Professor Warren's words may seem overly pessimistic to some, but they would surely resonate with the workers at Cold Metal Products (CMP) in Hamilton, Ontario. These workers, many of whom had been with the company for over twenty years, relied on CMP's promise of a pension after they retired. After all, this promise was written down in the workers' collective agreement. But as many approached retirement, disaster struck. CMP filed for bankruptcy. Workers were shocked to discover that CMP's pension fund had only half the money necessary to pay out the benefits that the plan had promised. For example, one worker's monthly pension entitlement fell from $2,232 to $962. Many workers, some over sixty, had to postpone their retirement and seek work elsewhere. (2)

This story is but one of many, and it highlights the risk of substantially reduced pension benefits that workers face when their employers become bankrupt and the company pension fund does not have enough assets to meet its liabilities. It will matter little in these circumstances what the employer promised years ago. In the words of one CMP worker, such a promise will become "not worth the paper it's written on". (3)

This paper examines the intersection of pension and bankruptcy law in Canada. It details what steps provincial legislatures and Parliament have taken to protect workers' pensions and the diminished force of these safeguards in bankruptcy. On the basis that workers, or "plan members", are especially vulnerable and are poor bearers of the risk of their employers' failure, I argue that existing pension protections in Canada do not go far enough. In response, this paper proposes the creation of a national public pension insurer to protect plan members in bankruptcy. Even if, in other respects, there is no simple solution that simultaneously and satisfactorily balances the interests of plan members, employers, lenders and other stakeholders in bankruptcy, a robust national pension insurer could at least dampen the sometimes catastrophic effect that bankruptcy has on members' pension expectations.

This paper is organized in five parts. In Part II, I outline the basic elements of Canadian pension law that are relevant in bankruptcy. In Part III, I set out the current limitations on plan members' claims in bankruptcy; outline recent reforms to bankruptcy legislation that purport to improve their positions; and critically assess Ontario's public pension insurer, the Pension Benefits Guarantee Fund. I conclude that existing legislative protections and, in Ontario, the Guarantee Fund, are worthy efforts to protect plan members' rights but are ultimately inadequate.

In Part IV, I examine the benefits of the national public pension insurer in the U.S. and conclude that it results in better protection for members in bankruptcy than would be the case in Canada. In Part V, I address the arguments against the creation of a public pension insurer, which relate to moral hazard and cost. Finally, in Part VI, I discuss the constitutional and political feasibility of introducing a national public pension insurer in Canada based on the American experience. I conclude that a single federal public pension insurer is possible and desirable.

II CANADIAN PENSION LAW

While pension specialists will no doubt be familiar with much of what follows, it would benefit any discussion of pension plans in bankruptcy first to set out the basic legal framework of Canadian pension law. The following background does not aim to be exhaustive, and an excellent treatise exists that more fully canvasses the intricacies of the law in this area. (4) There are ten distinct pension regimes in Canada: nine provincial statutes plus federal legislation. (5) In most cases, pension law falls within the provincial power to regulate "property and civil rights" set out in the Constitution Act, 1867. (6) On the other hand, federal legislation governs pensions associated with federal undertakings, such as banks and railroads. (7) The operative statute in Ontario is the Pension Benefits Act (the "PBA") (8) and, federally, the Pension Benefits Standards Act (the "PBSA"). (9) Although comparable legislation is in force in all but one province, (10) this paper focuses on the provisions of the PBA and the PBSA, both for concision's sake and for the simple reason that Ontario is "the hegemonic centre of Canadian pension registration and membership". (11)

There are two basic kinds of pension plans: defined benefit and defined contribution. (12) In a defined benefit plan, the plan sponsor, usually the employer, promises plan members a specific benefit at retirement. Often, the amount of this benefit is "determined by a formula taking into account a fixed or tiered percentage multiplied by the employee's length of service in the plan and his or her final or career average salary at retirement". (13) While many defined benefit plan members may also receive other benefits at retirement, such as health and dental coverage, it is important to note that only the pension benefit is subject to pension legislation. Defined contribution plans, in contrast, do not promise any particular amount to plan members. Rather, throughout a plan member's working life, periodic regular contributions are made to the plan by the employer, and often by the plan member too. Often this payment is a specified number of cents per hour worked. (14) At retirement, the plan member is entitled to the aggregate of these contributions and the rate of return that investment of the plan fund has earned in the meantime.

One crucial difference between defined benefit and defined contribution plans is the primary bearer of the risk. (15) With defined benefit plans, employers bear the risk; with defined contribution plans, employees. Since defined benefit plans promise specific payments upon retirement, the employer alone will have to make up any shortfall if the pension fund does not have enough assets to pay the promised amounts. (16) On the other hand, once an employer has made its mandated contribution to a defined contribution plan, its obligations cease for the most part, and employees subsequently bear the risk of a poor return on the investment of the plan fund. This distinction between defined benefit and defined contribution plans is essential to bankruptcy. Defined benefit plan members have considerably more at stake than defined contribution plan members when their employer becomes bankrupt. If a defined benefit plan is underfunded, which is to say that it is unable to pay the benefits promised to its members, those members stand to suffer a significant curtailment of their retirement entitlements if their employer should ultimately fail. Defined contribution plan members, in contrast, usually have less to lose in a bankruptcy because a defined contribution pension plan is fully funded once the employer remits its normal contributions to the pension fund. (17) In this paper, I focus on the interaction between defined benefit plans and bankruptcy law. Virtually all of the case law involves defined benefit plans, and, because the potential for great shortfalls exists, the conflict between creditors and workers is more intense when a defined benefit plan is facing its sponsor's liquidation.

The potential impact of bankruptcy on defined benefit plan members countrywide is tremendous. As of January 1st, 2007, the most recent year for which statistics are available, there were over 5.7 million pension plan members in Canada, with 80 per cent--some 4.6 million--belonging to a defined benefit plan. (18) While Statistics Canada does not separately track defined benefit plans in the public sector, in which employers do not face the risk of bankruptcy, and defined benefit plans in the private sector, data from the latest tables indicate that almost half of Canadian defined benefit plan members work in the private sector. (19) Thus, given the most recent count of the seasonally-adjusted Canadian labour force at 18,380,600, (20) roughly one in eight Canadian workers faces the risk that his or her plan sponsor could become bankrupt. This risk has become more pronounced in the recent recession. The ratio of assets to liabilities in Canadian pension funds (both public and private) fell by 27 per cent in 2008. (21)

When an employer decides to establish a pension plan, legislated rules apply. Over the years, governments have curtailed aspects of an employer's freedom to contract into and out of pension arrangements in order to protect workers, who often suffer asymmetric access to information and inequality of bargaining power. (22) Canadian pension legislation has accordingly established minimum standards to which every sponsor must adhere. (23) The minimum standards are, in turn, enforced by provincial and federal pension regulators. (24)

One of the most important legislated requirements is that the sponsor keep enough assets in the plan to fund its promised benefits. This rule attempts to defray the risks associated with a sponsor's failure by ensuring that pension benefits are pre-funded. (25) In Ontario, s. 55 of the PBA provides:

(1) A pension plan is not eligible for registration unless it provides for funding sufficient to provide the pension benefits, ancillary benefits and other benefits under the pension plan in accordance with this Act and the regulations.

(2) An employer required to make contributions under a pension plan... shall make the contributions in accordance with the prescribed requirements for funding and shall make the contributions in the prescribed manner and at the prescribed times. (26)

Wording to similar effect appears in the PBSA. (27)

So that a sponsor knows what it must contribute, the present and future value of a plan's assets and liabilities, and the ratio of the former to the latter, must be calculated periodically by actuarial valuation. (28) In preparing these reports, actuaries rely on certain assumptions, including assumptions about members' life spans and the rate of return on the investment of plan funds. (29) The actuarial valuation may disclose that there are insufficient assets in the plan fund to meet future obligations, in which case the plan is called insolvent. The amount by which the pension fund falls short is called the unfunded liability. The provincial or federal pension regulators must ensure that the sponsor makes "special payments" over the next five years to return the pension fund to solvency. (30)

Nevertheless, despite statutory solvency requirements, bankrupt sponsors often leave significant unfunded liabilities in their pension plans. These deficiencies may arise in a number of ways. Commonly, underfunding arises when investment returns are less than what was assumed in the actuarial valuation. (31) Investments need not have been unwise to net a less than expected return. The markets may unexpectedly drop as they did in the fall of 2008. The effects of a downturn in the markets are particularly acute when a considerable amount of a pension fund's assets are invested in equities. (32) Other factors may also cause or exacerbate funding deficiencies. Perhaps the assumptions that the plan actuaries made were inaccurate and different actuarial methods have shed light on a deficiency larger than originally envisioned. Whatever the cause, the shortfalls of insolvent pension plans are often daunting. When Algoma Steel became insolvent in 2001, its pension plan was $330 million short. (33) When Air Canada sought to restructure in 2003, its pension deficiency was $1.8 billion. (34) When steelmaker Stelco Inc. filed for bankruptcy protection in 2004, its prospective pension liability was conservatively estimated at $656 million. (35) Eclipsing all of the foregoing, the most recent estimate of General Motors of Canada's pension shortfall tops $7 billion. (36)

III THE TREATMENT OF PENSION PLAN MEMBERS' CLAIMS IN BANKRUPTCY

Priority and the Scheme of Distribution

Constitutionally, the federal government has the exclusive power to govern bankruptcy. (37) There are two main bankruptcy and restructuring statutes in Canada: the Bankruptcy and Insolvency Act (the "BIA") (38) and the Companies' Creditors Arrangement Act (the "CCAA"). (39) Taken together, both statutes have, among other things, the dual goals of rehabilitating debtors and liquidating debtors' assets in an orderly fashion for the benefit of creditors. (40) Both statutes also provide mechanisms through which insolvent companies can restructure. (41)

Upon restructuring, a company may emerge as a viable enterprise. The concerns of creditors may be assuaged and pension plans may remain intact. On the other hand, when restructuring fails or when a debtor enters liquidation immediately, the distribution scheme of the BIA applies. (42) Besides general mention, the particulars of restructuring are beyond the scope of this paper, which focuses on bankruptcy under the BIA in which a debtor's assets are sold off wholly or piecemeal to satisfy the claims of creditors, including plan members, and the debtor business effectively ceases to exist.

Bankruptcy affects plan members uniquely. Most workers are poor bearers of the risk of bankruptcy. (43) Most cannot bargain risk premiums into their compensation packages that are tied to the likelihood that their employers will go bankrupt. (44) In other words, while international sports sensations may negotiate protections into their contracts should their employers disband, most workers lack the resources and bargaining power of star athletes. Workers' relative weakness in bargaining power is particularly acute with regard to pensions. Few prospective or current workers have access to an employer's balance sheet, and fewer still likely receive or demand actuarial reports for the company pension plan. The result is plain: workers need special protection due to their inability to assess and to bear adequately the risk of their employers' bankruptcy. As Richard Ippolito argues: "Risk is not a free good. As in standard models of finance, firms are expected to pay for the risks they impose on workers, and indeed, are expected to pay premia in excess of those implied in financial models if they expose workers to non-diversified risks". (45) This argument bears emphasis, because some models still assume that prospective pension plan members whose employers face a greater chance of bankruptcy will freely bargain for larger amounts of present wages and compensation in return. (46)

There are two claims that plan members may have against their sponsor in bankruptcy. (47) The first claim is for contribution arrears. A sponsor must make these payments monthly or as set out in the pension plan text. In turn, these payments satisfy what is called the "normal cost" of a defined benefit plan. (48) The second claim is for the amount of the unfunded liability. To reiterate, the unfunded liability is the amount by which a plan's promised benefits exceed its assets, and it can arise notwithstanding timely normal cost contributions.

Some provincial pension statutes endeavour to protect these two claims pre-emptively by providing a pension plan's administrator (49) with a lien over the sponsor's assets to the extent of the shortfall or deeming such amount to be held in trust. (50) Despite these provincial efforts, claims for unfunded pension liabilities are unsecured in bankruptcy. Owing to the doctrine of federal paramountcy, which holds that when there are "inconsistent (or conflicting) federal and provincial laws, it is the federal law which prevails", (51) provincial liens and deemed trusts are ineffective in light of the priority scheme set out in the federal BIA. (52) Additionally, while a plan's contribution arrears relating to its normal cost receive a superpriority in bankruptcy, claims relating to an unfunded liability receive neither super-priority nor preferred status. It is now well-established that, as much as special payments required to satisfy a plan's unfunded liability arguably represent, in economic terms, deferred compensation to workers, they fall outside of the preferred claim that Parliament has established for unpaid wages. (53) In this respect, David Baird and Ronald Davis indicate that pension arrears are fundamentally different from wages, and it is often difficult to establish a connection between pension contributions owing and services rendered by a particular plan member. (54)

Even the BIA's super-priority for unremitted normal cost contribution arrears is recent. Responding to a spate of large bankruptcies and insolvencies that curtailed a number of workers' wages and pension benefits, Prime Minister Paul Martin's Liberal government introduced legislation in 2005 that amended the BIA and CCAA to protect workers' pension benefits more strongly by, among other things, granting super-priority to unpaid wages and pension contributions, up to certain limits. (55) Originally, the new protections appeared in Bill C-55. (56) Because of various concerns that stakeholders harboured, (57) Bill C-55 was not proclaimed into force for many years. Bill C-55 became Statute c.47 ("Chapter 47") and again remained on the books for some time unproclaimed. Chapter 47 is, in turn, is amended by Bill C-12, now Statute c.36. (58)

One of the main components of Chapter 47, as amended, is the Wage Earner Protection Program Act (the "WEPPA"). (59) The WEPPA portion of Chapter 47, as amended, was proclaimed in force on July 7th, 2008. The remaining provisions of Chapter 47 remain unproclaimed at the time of writing and are beyond the scope of this paper. The WEPPA purports to solve what used to be a prejudice against contribution arrears by giving claims for these arrears a super-priority in bankruptcy over secured creditors. (60) The super-priority does not apply to special payments required to liquidate a plan's unfunded liability.

Arguably, the WEPPA rectifies some of the prejudices that plan members would otherwise face under the BIA. One could argue, for example, that the WEPPA's super-priority for contribution arrears in bankruptcy will go a long way towards ensuring that vulnerable workers do not lose their potential retirement income to more commercially sophisticated secured creditors. Before the WEPPA came into force, claims for contribution arrears were subordinate to a number of preferred claims set out in section 136 of the BIA, which ensured that plan members usually received pennies on the dollar. (61) Additionally, one could argue that the new super-priority for arrears will prevent secured creditors from strategically petitioning a delinquent debtor into bankruptcy solely in order to defeat any lien or deemed trust imposed on a sponsor's assets pursuant to provincial legislation. Courts generally view a petition into bankruptcy aimed entirely at defeating provincially-created priorities as legally acceptable. (62) Now, facing a super-priority for these contributions, secured creditors may think twice before petitioning a debtor into bankruptcy simply to bring about the priority scheme of the BIA. (63)

On the other hand, despite the WEPPA's advantages, there is also a notable shortcoming for plan members. The provisions only protect contribution arrears for a plan's normal cost. They do not address a plan's unfunded liability, which, as the Algoma Steel, Air Canada, Stelco and General Motors cases show, can be hundreds of millions or even billions of dollars. In many cases, sizeable unfunded liabilities dwarf the amount of any contribution arrears and stand to have a substantially greater impact on the quality of plan members' retirements. (64) In this regard, three commentators have indicated that "[i]n practice there are rarely significant arrears of contribution arrears [sic] for current service because of the personal liabilities [of directors] that arise upon a failure to remit". (65) At best, then, the WEPPA can be called insufficient; at worst, a distraction from the real funding issue facing plan members in bankruptcy. When a ship is sinking, it little profits a mariner to be handed a cork.

Public Pension Insurance in Ontario: The Pension Benefits Guarantee Fund

Uniquely in Canada, the Government of Ontario has tried further to protect workers' pension claims in bankruptcy through the Pension Benefits Guarantee Fund (the "PBGF"). Established in 1980, the PBGF guarantees plan members monthly pension amounts subject to a legislated cap of $1,000 per month for most pension benefits. (66) The PBGF is funded by plan sponsors, who pay a set premium per plan member plus an additional levy that depends on the degree to which an eligible pension plan is underfunded. Currently, the set premium is a mere $1 per Ontario plan member and the additional levy ranges from between 0.5 and 1.5 per cent of any deficiency in the plan that the PBGF could be called upon to cover. (67) The latter levy creates a sort of risk premium whereby severely underfunded plans, which presumably have the most likelihood of turning to the PBGF in the future, pay more for the benefit of coverage.

The PBGF has thus far proved inadequate. In 1991, the PBGF almost became insolvent itself when Massey Combines' plan wound up. At the time, the PBGF had just $2.5 million in assets. The Massey Combines pension plan members' insured claim was about $29 million, and the Government of Ontario had to make an emergency loan to the PBGF to cover the shortfall. (68) Compare these relatively small amounts to the scale of the unfunded liabilities in Air Canada and General Motors outlined above. In 2001, the PBGF almost collapsed again during the restructuring of Algoma Steel, because it did not have enough funds to provide the legislated guarantees to Algoma Steel's plan members. Again, the Government of Ontario stepped in to pay plan members directly, albeit a reduced amount. (69) The liability of the PBGF is statutorily limited to its assets, (70) and, as the Massey Combines and Algoma Steel cases show, those assets are often insufficient. As well, when the PBGF does make a payout, it receives a commensurate lien against the assets of the employer, and the Superintendent is subrogated to the plan administrator's claim. (71) Assuming timely normal cost contributions, this lien will, unfortunately, virtually ensure that the PBGF does not recover monies that it pays out because the doctrine of federal paramountcy holds that provincial liens are ineffective under federal bankruptcy law.

The spirit of the WEPPA and the PBGF is doubtlessly one of worker protection, but, in practice, the legislative safeguards fall short. Owing to plan members' inability to bear risk adequately, further reform of bankruptcy law is necessary and desirable. One blunt solution is to extend the super-priority in bankruptcy to claims in respect of a plan's unfunded liability. This solution's simplicity belies a host of problems. To name two, such a change risks drastically increasing the cost of capital because secured creditors would rank behind conceivably massive pension claims. (72) In addition, it could open the floodgates for other arguably vulnerable creditors, such as those claiming priority rights for health or environmental claims, to argue for their own super-priorities. (73) A second simple solution would be to raise the premiums due to the PBGE While this might ensure the fund's solvency, it would not protect members in other parts of the country or change the fact that the BIA trumps provincial statutes in bankruptcies. In light of the inadequacies of these solutions, a better reform would be to establish a national Canadian public pension insurer that operates only in bankruptcy. A similar insurance regime has found success in the U.S. Drawing from the benefit of experience, a review of the American public pension insurer, with all its successes and a few setbacks, can inform suggestions for the creation of a similar scheme in Canada.

IV THE BENEFITS OF PUBLIC PENSION INSURANCE IN THE U.S.

While the particulars of American labour and pension law differ from the Canadian, a broad, underlying principle of worker protection nevertheless buttresses legislated minimum standards on both sides of the border. Of all the countries of the world, the narrative of American labour law has, since the Great Depression, most closely mirrored our own. (74) Given this parallel development, I canvass in this section how the U.S. has approached the problem of pension claims in bankruptcy.

Unlike in Canada, where jurisdiction over pension law falls largely to the provinces, except in the limited case of federal undertakings, pension law in the U.S. is usually a federal responsibility under the "interstate commerce" clause of the U.S. Constitution. (75) All employers who engage in interstate commerce are subject to the federal Employee Retirement Income Security Act ("ERISA"). (76) Much like the PBA and the PBSA, ERISA strives to provide a complete code regulating minimum standards for both defined benefit and defined contribution pension plans. Like Canadian legislation, ERISA requires sponsors of defined benefit plans both to make timely normal cost contributions and to liquidate any unfunded liability. (77) The underlying policy of ERISA parallels that of the Canadian legislation, namely to maintain the integrity of the pension system and assure ERISA-regulated plan participants receipt of their promised benefits. (78) Finally, like the WEPPA, the U.S. Bankruptcy Code ("Chapter 11") provides priority for a significant portion of a plan's contribution arrears. (79)

ERISA also differs from most Canadian pension legislation in a crucial area. Unlike every Canadian pension statute except the PBA, ERISA establishes an insurance body, the Pension Benefits Guaranty Corporation (the "PBGC"), to fund insolvent plans when, among other things, delinquent sponsors become bankrupt. (80) Two commentators describe the PBGC as follows:
   The PBGC is a federal corporation that guarantees the payment of
   basic pension benefits either by becoming the trustee of
   under-funded plans upon termination or by providing financial
   assistance through loans (which are typically not repaid) in the
   event a pension fund can no longer pay benefits when due at the
   guaranteed level (insolvency). (81)


As with Ontario's PBGF, the PBGC caps its payout per member per year, but the American guarantee is much higher than Ontario's $1,000 per month. The amount of the PBGC's coverage depends on the age of the plan member and the year of plan termination, with older members and more recent terminations receiving a greater guarantee. (82) For example, the cap is $4,500 per month per person 65 years or older whose plan terminated in 2009. (83) Because the PBGC's level of guarantee increases with the age of the insured member, it addresses a problem created by the PBGF, whereby vested plan members aged 55, who may have 10 more years of working life, are guaranteed the same amount as vested plan members approaching age 65, who may not have the same potential to seek work elsewhere. (84) As well, the fact that the PBGC caps increase each year ensures a measure of protection against inflation, whereas the PBGF's cap of $1,000 per month has remained the same in nominal dollars since the PBGF's creation thirty years ago.

The government neither funds nor guarantees the PBGC. (85) Rather, all plan sponsors governed by the ERISA fund the PBGC through mandatory periodic contributions. Currently, there is a flat premium of $30 per participant for single-employer plans. (86) In addition, the recent Pension Protection Act of 2006 (87) has imposed a risk-based premium on underfunded plans of $9 for each $1,000 by which the plan is underfunded. (88) The quantum of the latter levy is a policy choice that creates a risk premium whereby those most likely to turn to the PBGC pay more for its coverage while also ensuring, through a cap, that smaller sponsors are not prejudiced by overwhelming obligations. (89) In addition to premiums, the PBGC also receives funds from recoveries from plans that it takes over and investment returns. (90) Accordingly, the ERISA establishes an entity that ensures that plan members will not lose their promised benefits during employer bankruptcy, and Congress has given this entity teeth by granting it the power to raise considerable funds both through periodic premiums and through special risk-based levies. This insurance regime stands in contrast to the lack of safeguards in Canada, including both the absence of public insurance in most provinces and the troubling financial inadequacy of Ontario's PBGF, which is circumscribed by legislation to comparatively slight revenue-raising powers.

Upon paying guaranteed amounts to plan members, the PBGC is subrogated in place of the plan against the employer-debtor's estate. The amount of the PBGC's claim against the debtor will be the difference between the value of the plan's assets at the time of termination and the value of the plan's liabilities to members. (91) On subrogation, plan members themselves will no longer have any claims against their employers for pension deficiencies. According to Circuit Judge Ryan in one such case: "Congress intended the PBGC to be the sole source of recovery of payments to employees". (92) To reiterate, the PBGC's claim for a plan's unfunded liability is an unsecured claim and is not entitled to the administrative priority afforded to contribution arrears, (93) which is what would also occur under Canada's BIA. Nevertheless, even if the PBGC is unlikely to recover the full amount of pension claims from a debtor's estate, it can, as a large institution, bear the loss better than individual plan members, who would otherwise each stand to lose much of their expected retirement income.

The benefits of a public insurer to protect plan members are apparent in recent American bankruptcies. Even when the PBGC's cap per person is reached, the results are almost always better for members when compared to what would have been the case in a Canadian jurisdiction. For example, one of the most significant bankruptcy sagas in recent years has been that of U.S. Airways. The airline, hammered by rising fuel prices and the decline in air travel following the September 11th, 2001 terrorist attacks, filed for bankruptcy in 2003. At the time of filing, the pilots' pension plan's unfunded liability was almost $1.7 billion. (94) While pilots still stood to lose their jobs and a portion of their pensions, the PBGC guaranteed them a minimum amount of $28,614 annually plus a portion of U.S. Airways' promised pension covered by those assets remaining in the plan. (95) Pilots from a certain class originally promised $211,871 annually would, through a combination of the PBGC benefit and a payment from the assets still remaining in the fund, be entitled to at least $68,775. (96) Without the guaranteed PBGC benefit, a pilot of that class would be entitled to only $40,161.

The PBGC has also figured significantly in recent steelmaker bankruptcies. Again, the advantages of having a national pension insurer become evident when we take one of these bankruptcies as an example, that of CF&I Steel Corp. (97) At the time of its filing for Chapter 11 relief, CF&I owed its defined benefit plan almost $65 million in contribution arrears. Its plan also suffered from an unfunded liability of over $263 million. (98) This amounted to a total deficit of roughly $328 million. The litigation ultimately concerned the priority of the PBGC's claims in Chapter 11 and whether CF&I or PBGC's methods of valuing the plan's actuarial liability should prevail. More salient from the pension plan member's perspective is that the PBGC covered almost $223 million of the $328 million shortfall. (99) As with U.S. Airways above, the PBGC's coverage did not liquidate the entire deficiency. In this sense, the PBGC was inadequate. Yet the guarantee of $223 million was nevertheless a great benefit, and certainly more than the plan members acting in concert could have recovered on their own. Only the $65 million in contribution arrears would be subject to an administrative priority over other creditors, so the PBGC payout represented a recovery of almost four times the amount that likely would have been available to pension plan members had there been no public insurance regime in the U.S. In fact, this hypothetical result is precisely what would have happened under the BIA. If CF&I's bankruptcy had occurred in Canada, the BIA would have given a superpriority only to the $65 million in contribution arrears. All other things being equal, had the CF&I Steel plan members been Canadians outside of Ontario, they would have received roughly one quarter of what they received in the U.S. CF&I is but one example. Other notable steelmaker bankruptcies in which the PBGC has played an important role guaranteeing benefits include those of LTV Steel Co., Inc. (100) and Bethlehem Steel Corp., formerly the U.S.'s second-largest steelmaker. (101)

Additionally, the PBGC has already begun to play an active role in the latest recession. When global financial and credit markets crashed in late 2008, many rightfully predicted a new spate of pension plan insolvencies. (102) To take a prominent example, the PBGC has stepped in to insure benefits to members of Lehman Brothers' pension plan. Lehman Brothers, once one of Wall Street's "Big Five" investment banks, filed for bankruptcy on September 15th, 2008. It was the largest bankruptcy in U.S. history. (103) The PBGC took over the plan on June 17th, 2009 and reached a settlement with Lehman for the full $115 million shortfall. In the meantime, members are receiving their full pensions. (104) The PBGC has also been active in the badly-battered North American auto sector. (105)

The above examples are representative; plans in the airline and steel industries have received much of the PBGC's attention and guarantees in recent years. (106) From plan members' perspective, U.S. Airways, CF&I Steel and similar cases demonstrate that a public insurer that provides even only partial benefits upon an employer's bankruptcy will net a better result than no public insurer at all. Moreover, the preceding analysis reveals much in common between the strict plan funding requirements of the ERISA and those of the PBA, PBSA, and like provincial statutes. In other words, the American example shows that a public pension insurer can complement forceful mandatory funding provisions and act as a final safeguard should even the toughest funding requirements fail. (107)

V THE ARGUMENTS AGAINST PUBLIC PENSION INSURANCE

Despite the successes of the PBGC, it is not perfect. Rather than focusing on the criticisms of the PBGC in particular, this section examines the main arguments against public pension insurance generally: moral hazard and cost. These two grounds represent more than passing academic concern, for it was on these bases that the Joint Expert Panel on Pension Standards recently declined to recommend the creation of a public guarantee fund to cover Alberta and B.C. plans. (108) I address each counter-argument in turn.

Moral Hazard

Public pension insurance arguably gives rise to the same problem associated with all insurance: moral hazard. (109) Moral hazard refers to the incentives that the insured have to engage in riskier behaviour because the financial perils associated with that behaviour are wholly or partly mitigated by the insurance. (110) For example, the beneficiary of a maritime insurance policy may choose a faster but more dangerous shipping route because he or she knows that insurance will cover the losses that are more likely to materialize on the new course. In the context of pensions, insurance could encourage plan sponsors to make riskier investments of plan funds because, while the sponsor might be able to retain all of the potential gains from a high-risk investment, the public insurer would bear at least part of the loss. The Association of Canadian Pension Management, a national lobby group, has voiced this fear. (111) In other circumstances, public insurance could encourage sponsors that view their own bankruptcy as likely or inevitable to reduce their required pension contributions leading up to the bankruptcy and to divert the savings to other creditors. In these cases, even if the public insurer were to take over plan members' claims arising from plan underfunding, sponsors could nevertheless rest assured that, in a bankruptcy, they would, as a practical matter, only have to pay the subrogated pension insurer cents on the dollar. (112) In addition, without clear safeguards, public pension insurance could encourage strategic bankruptcy, (113) including the creation of "follow-on plans". (114) In other words, a sponsor could declare bankruptcy to lock pension liabilities in with the public insurer. During the bankruptcy proceedings, the same sponsor could then introduce follow-on plans, which would provide employees and retirees with benefits equal to the shortfall between the amount of the public guarantee and the sponsor's original promise. The sponsor could thereby avoid labour strife, since the net position of plan members would not have changed, but still offload a significant liability to the public body and potentially emerge from bankruptcy with fewer obligations than before. In the U.S., the PBGC has the power to prevent this arrangement and to restore the original plan to any follow-on sponsor. (115) Without express rules, however, public pension insurance could incentivize this behaviour.

A recent study of Canadian plan funding levels has identified the potential presence of moral hazard in Ontario, the only jurisdiction in Canada that provides for limited public pension protection. (116) Specifically, the study's authors, Norma Nielson and David Chan, found that plans eligible for PBGF coverage exhibited a lower degree of plan funding than did the other Canadian plans in the sample. (117) Based on this study, Nielson reported to Ontario's Expert Commission on Pensions that "the guarantee fund is either a cause or is highly correlated with something that causes Ontario plan sponsors to invest fewer dollars into their defined benefit pension plans". (118)

I offer three responses to the arguments that moral hazard could derail the viability of a national pension insurer in Canada. First, in response to Nielson and Chan's conclusion that the PBGF has led to increased underfunding in Ontario, I would argue, without denying the validity of their data, that the correlation between the PBGF and lower plan funding does not necessarily mean that the PBGF causes plans to have lower levels of funding. Ontario's Expert Commission on Pensions similarly questioned the study's conclusion on this basis. (119) In fact, Ontario plans often operate in a unique economic environment compared to the rest of Canada; for example, the manufacturing industry is more prevalent in Ontario than in other provinces. (120) Consequently, it cannot easily be concluded that levels of underfunding in, say, Ontario's steelmaker and automotive company plans are necessarily or even primarily the result of public insurance backstops and not other challenges facing those industries, such as legacy costs and reduced demand for product (for example, cars made by the Big Three). (121)

Second, public insurance would not inevitably lead to sponsors making riskier investments with plan funds safe in the knowledge that insurance would cushion any investment loss. On the one hand, governments could address this hazard through restrictions on investments of plan funds. Such rules exist federally in Canada, (122) but may not be an ideal solution because they could stifle legitimate investments by sophisticated plans. Fortunately, however, there is already equitable protection against the risk of any cavalier investment that public pension insurance might engender. Pension plan administrators who invest plan assets are fiduciaries, (123) and it should be noted that many defined benefit plans are trusts. The administrator's decisions, expertise and delegation to professional investment advisors may earn some deference, but at bottom they are prevented in equity from unnecessarily putting the plan funds at risk through reckless decisions. (124)

Third and finally, the argument that public insurance would create a moral hazard for sponsors approaching bankruptcy to reduce their pension contributions or to declare strategic bankruptcy ignores the strong possibility that other stakeholders who would also stand to lose out upon bankruptcy could intervene to prevent such an outcome. Most sponsors have numerous stakeholders to consider, which, in addition to plan members, include secured and unsecured creditors, suppliers, governments and shareholders. A plan sponsor wishing to avoid its pension obligations by declaring bankruptcy and availing its plan of public pension insurance would thereby also crystallize the competing claims of its other creditors and destroy the value of any shareholders' equity. The sponsor's decision would incur the ire of secured creditors, who would have an incentive to challenge the validity of the strategic bankruptcy to the extent that they face a demotion of their security against unpaid wages and pension contribution arrears under the BIA. Consequently, while the presence of public pension insurance could introduce moral hazard for near-bankrupt businesses, it is not inevitable because other stakeholders have an incentive to monitor the business inasmuch as their own interests could suffer as a result of bankruptcy.

When a sponsor contemplates strategic bankruptcy and has enough assets to satisfy secured creditors, there is the added danger that sponsor and secured creditor alike conspire to enter into liquidation, secure, so to speak, in the knowledge that the business's most powerful creditors would still receive full repayment. Specific legislated rules could counteract this form of moral hazard. Without interfering with the distribution scheme of the BIA and further undercutting secured creditors' priority, statutory provisions could expressly increase individual directors' liability for pension claims or impose liability on related members of a corporate group for pension claims against another member when that member has filed for bankruptcy primarily to avoid its pension obligations. (125)

Cost

In addition to arguments related to moral hazard, opponents of public pension insurance contend that its cost would be prohibitive. Specifically, a public pension insurance regime with compulsory sponsor contributions could disrupt companies' cashflows; could, without adequate safeguards on premiums, actually push companies into bankruptcy; and could itself face collapse in tough economic times when many sponsors fail at once. In this section, I outline and address these three cost-related concerns.

Insurance is not free. Someone will have to pay for coverage, both in real dollars and in opportunity costs. Plan members could stand to receive lower wages because their employers would have the added cost of increased pension insurance premiums. As well, prudent sponsors that face no funding issues would still have to pay premiums, whether calculated on a per-member basis or otherwise, and thereby subsidize delinquent sponsors to some extent. In the worst case, the government might, depending on its policy choices, have to inject taxpayer money into a public insurance regime to prevent catastrophic failure. (126) With an adequate premium structure, this last outcome is not unavoidable. In all cases, increased premiums demanded from employers could reduce their cash flow and potentially slow economic growth.

There also exists the danger that risk-based premiums could push already teetering companies over the edge into bankruptcy. Pension insurance premiums would be partly tied to a sponsor's risk of bankruptcy. Paradoxically, the closer that a sponsor sits to bankruptcy, the more adverse the impact an increased premium would have. From this point of view, public pension insurance could exacerbate its own liabilities by indirectly forcing weak companies into bankruptcy and accelerating plan members' claims against the guarantee fund.

Finally, a public insurer's liabilities would necessarily increase during economic downturns when more sponsors fail. Further aggravating these increased obligations, the public insurer's revenues from premiums or returns on investment would almost always decrease in tough times when fewer sponsors exist to make payments and the stock markets in which the insurer invests shed value. A public insurer could therefore face insolvency itself just when plan members need it most. In this regard, many fear for the long-term sustainability of the PBGC as plan terminations increase in number. (127) I have, until this point, held up the PBGC as an exemplar of the benefit of public pension insurance, but most would acknowledge that, in the current economic climate, a string of significant plan failures would strain the PBGC's resources. In fact, the PBGC is currently underfunded by $33.5 billion. (128) If many plans failed at once, the PBGC might not be able to pay the full amount of guaranteed benefits. (129) Amy Lassiter even argues that in light of ballooning deficits, the PBGC is "rapidly approaching financial catastrophe". (130)

This paper acknowledges the challenges of funding a public regime and does not dispute that certain costs are necessary. Foremost and as a matter of policy, if protecting vulnerable plan members is a worthwhile goal, then some level of cost is justified. This cost is in turn better borne by those receiving the benefit of coverage, sponsors, than by the taxpayer. There are also specific counterarguments to each of the three cost-based arguments set out above.

First, while I acknowledge that public pension premiums would impose an additional obligation on sponsors, this cost by itself would simply be a means to a greater end. Pension insurance would, like any insurance benefit, necessarily require payments from a beneficiary. In this regard, pension insurance would be no different than property or director and officer insurance, which most businesses similarly purchase with the hope that they may never have to call upon the policy. And, while some might argue that pension insurance would cause prudent sponsors to subsidize delinquent sponsors, this contention confuses an incidental effect with the program's direct outcome. The policy underlying pension insurance is that employers make contributions when times are good so that, should circumstances change, those same employers may benefit from insurance relief. (131) In this sense, the very concept of successful insurance, whether public or private, is premised on the notion that there are more funds remitted by policyholders than there are claims for restitution. Even if the premiums of prudent plan sponsors could be characterized as subsidizing the plans of bankrupt sponsors, the situation would be no different from other types of insurance in which, for example, healthy Ontarians subsidize ill Ontarians needing hospital care under the Ontario Health Insurance Plan or good drivers subsidize those who consistently get into fender benders. To this end, some commentators advocate for a variable risk premium based on a sponsor's likelihood of failure. (132) This premium would reduce the burden on sponsors that feel that they will never benefit from coverage and should accordingly have to contribute less.

Second, risk-based premiums need not push a sponsor into bankruptcy if there is a mechanism for contribution limits. The PBGC currently caps risk premiums at $9 per $1,000 of underfunding. Even in Ontario, and for all its other deficiencies, the PBGF addresses the danger of pushing sponsors into bankruptcy by imposing a ceiling on annual contributions. (133) There is no reason that a similar ceiling could not exist under a national insurance program, and any unfairness that it might create for prudent plan sponsors would be mitigated by the cost certainty it would provide to companies, especially smaller companies, planning to avoid bankruptcy. Research is necessary to determine the optimal ceiling. Otherwise, those opposed to pension insurance on the basis of moral hazard might argue that the ceiling would represent a necessary fixed cost that large companies could pay in order to otherwise avoid their legal and equitable duties to remit timely contributions. Data from Ontario make clear the benefits of a contributory regime with an adequate ceiling:
   FSCO data shows that 98% of all plans pay annual PBGF premiums
   lower than $100,000 per year; that no plans are affected by the
   normal premium cap of $4 million; and that only two plans are
   affected by the special contribution cap of $5 million imposed by
   the 1992 "too big to fail" regulation. For 96% of all defined
   benefit plan sponsors, PBGF premiums represent less than 5% of the
   annual solvency cost of the plan. (134)


The PBGF is currently significantly underfunded, and so contribution rates should increase. Nevertheless, Ontario's Expert Commission on Pensions concludes that the PBGF should be continued and improved for at least the next five years. (135) That the Expert Commission made this recommendation after careful study of the regime's costs suggests that the financial issues associated with a public insurer are not insurmountable.

Third and finally, while the problems currently experienced by the PBGC are troubling, the fact that the PBGC is currently underfunded does not mean that it will collapse. As I suggest above, one consequence of public pension insurance is that its obligations are cyclical and increase in recessions. It is unsurprising therefore that the funding levels of the PBGC are lower in downturns than during periods of growth. Until claims do bankrupt the PBGC, though, it will always have the opportunity to replenish its funding levels through investment and premiums when the economy improves. As Acting Director of the PBGC Vince Snowbarger recently told a Senate Special Committee: "The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums," though Snowbarger did concede that "over the long term, the [PBGC's] deficit must be addressed." (136) In contrast to Snowbarger's cautious optimism, Daniel Keating argued in 1991, during another major recession, that in light of the PBGC's then multi-billion dollar deficit, it "finds itself on the brink of financial ruin". (137) Some commentators are making similar predictions today, (138) some 18 years after the PBGC was thought to stand on "the brink of financial ruin". The PBGC did not collapse in 1991, but rather took over a number of plans and proceeded to develop a surplus at the end of the 1990s. While the PBGC is underfunded again, in line with the latest recession, predictions of its demise remain premature.

I do not mean to deny that efforts to create a public pension insurer must be attentive to issues of moral hazard and cost. Arguments from these premises demonstrate that, if structured incorrectly, a public pension insurance scheme could lead sponsors to engage in high-risk behaviour or incur excessive costs, including when sponsors can least afford them. I assert, however, that the arguments advanced against public pension insurance are not enough to counterbalance the pressing policy goal of protecting plan members in bankruptcy and that insurance can be designed in such a way to mitigate the risks discussed above.

VI CANADIAN PUBLIC PENSION INSURANCE BASED ON THE U.S. MODEL

Desirability of a Single, Public Insurer

To address plan members' inability to bear adequately the risk of their employer's failure, Canada ought to take steps to create a national insurer to dampen the unfairness that they face in bankruptcy. Indeed, the idea of an insurance scheme to cover workers in cases of their employer's bankruptcy is not alien to Canadian bankruptcy policy. The WEPPA, for example, has already established the Wage Earner Protection Program (the "WEPP"), a national guarantee scheme for wages owing. Drawing from the federal government's Consolidated Revenue Fund, the WEPP gives unpaid workers up to $3,000 in back wages originating no more than six months before their employer's bankruptcy. (139) Some commentators continue to question the adequacy of this cap. (140) Even given the cap, though, the creation of the WEPP shows that the drafters of Canadian bankruptcy law contemplate public insurance programs to lessen the impact that bankruptcies have on vulnerable workers.

As with the PBGC, a Canadian pension insurer should remain public. Pesando envisions public administration as necessary and desirable. He argues:
   Termination insurance is public, not private, for the following
   reason. Corporate bankruptcies are highly correlated due to the
   systematic risk inherent in macroeconomic fluctuations. So are the
   returns to pension fund assets. Thus private markets may not be
   able to provide plan termination insurance, even if demand for this
   insurance exists at premium rates that are commensurate with risk.
   This "market failure," in the view of many, provides the
   fundamental rationale for the public provision of plan termination
   insurance. (141)


To put Pesando's argument differently, it is unclear whether private insurance could provide the safeguards for pension plans in times of economic crisis, when they need it most. In these circumstances, private insurers could themselves face the risk of failure and accelerating claims could hasten their demise and put other insured plan members at risk.

The BIA's current super-priority for contribution arrears has already laid the foundation for a viable public insurer by providing a mechanism through which the subrogated insurer could at least recover some funds from the bankrupt's estate. The Organisation for Economic Co-operation and Development (the "OECD") shares the position that super-priority for contribution arrears is a desirable buttress for an effective pension insurance system: "[Pension guarantee] arrangements also function most effectively when the underwriting entity has priority rights for missed or unpaid contributions in the case of insolvency of the plan sponsor." (142) Subrogation to a plan's super-priority claims would prevent a Canadian public pension insurer from simply subsidizing the recoveries of commercial lenders by removing plan members from the creditor queue. (143)

A single public insurer is preferable. In the U.S., the federal PBGC provides insurance to all plan members falling within the ERISA countrywide. Advantages of a single insurer are three-fold. First, it would preclude unequal treatment of plan members in different provinces. Were each province to institute its own public guarantee fund like the PBGF, it is possible that caps, eligibility and excluded types of plan would vary across the country. A miner in B.C. could stand to receive only a fraction of what a comparable miner working for a comparably sized employer would receive in Ontario. In fact, employees of the same company could face different treatment if they resided in different provinces. In the interests of harmony and fairness, a single national pension insurer is more desirable. Second, a national insurer would avoid potential federal paramountcy issues that pit provincial claims against conflicting federal priorities. Third, a single insurer would promote efficiency. David Baird notes that the WEPP will ensure prompt payment of wage arrears when unpaid workers need the money as soon as possible for their daily living expenses. (144) Older plan members who find themselves with reduced pensions upon their employer's bankruptcy are in the same position as unpaid workers vis-a-vis the struggle to meet daily living expenses. Accordingly, a single pension insurer could immediately offer pensioners the appropriate amounts. As a large institution with cash reserves, the insurer could better bear the administrative delays inherent in seeking to recover from a debtor's estate.

Constitutional Feasibility

A national pension insurer based on the PBGC would be constitutionally feasible. Of course, under the U.S. Constitution, which confers jurisdiction over most labour matters to Congress under the interstate commerce clause, the mechanics of establishing a single insurer in the U.S. appear substantially easier than in Canada. In Canada, federal regulation of labour matters, including pensions, is the exception rather than the rule. Aside from employment insurance, which required a constitutional amendment to render it a federal power, (145) provinces are free to develop their own labour and pension legislation for all employers operating in their jurisdiction, with the exception of federal undertakings.

On the other hand, as with the WEPP, express federal legislation could underpin national pension insurance, notwithstanding the restraints of Canadian federalism. (146) In order to prove constitutionally valid, such federal legislation must not directly impinge on the provinces' power to legislate over property and civil rights. Under established constitutional doctrine, federal legislation creating a national pension insurer would have to govern the federal subject matter of bankruptcy in "pith and substance". (147) In this regard, the pith and substance doctrine requires the identification of a law's "dominant or most important characteristic". (148) Indeed, the Supreme Court of Canada has observed that "[i]t is rare that all the subjects dealt with in a statute fall entirely under a single head of power." (149) Because an impugned law may have a valid dominant purpose even if it makes ancillary encroachments into another government's exclusive jurisdiction, the pith and substance doctrine allows Parliament to enact laws "with substantial impact on matters outside its jurisdiction". (150) The creation of a national pension insurer would be one such law.

To determine the validity of legislation creating national pension insurance under the pith and substance doctrine, a court would have to approve of both the law's true purpose and its legal effect. (151) In assessing a law's true purpose, courts will "look beyond the direct legal effects to inquire into the social or economic purposes which the statute was enacted to achieve". (152) A national public insurer as I envision it would have the primary social and economic purpose of protecting plan members' pension claims in bankruptcy, when resources are scarce and members' positions are relatively weak. Its purpose would be limited to mitigating the fallout of federally-regulated bankruptcies. Its purpose would not be to protect plan members otherwise governed by provincial legislation in all circumstances in which they bear risk. Such broad coverage would probably be ultra vires Parliament because it would effectively supplant and potentially contradict existing valid provincial pension statutes like the PBA. This paper's proposed pension insurer would not therefore provide any redress if sponsors failed to make required payments to the plan or otherwise breached their fiduciary duties. It would not even provide coverage if a plan terminated or wound up otherwise than as a result of bankruptcy. (153) Its purpose would be limited to protection ih bankruptcy, a situation which my discussion thus far has attempted to show introduces new risks for vulnerable workers and eviscerates existing provincial safeguards for plan members through the doctrine of federal paramountcy.

Notwithstanding a valid purpose, to remain constitutional the law creating a national pension insurer must not have invalid effects. In examining an impugned law's legal effect, "the Court must take into account any public general knowledge of which the Court would take judicial notice, and may in a proper case require to be informed by evidence as to what the effect of the legislation will be". (154) In addition, the case law supports the notion that the actual administration of legislation is a factor in determining its effect for constitutional purposes. (155) Since there is as yet no national pension insurer, any inquiry into its administration would be hypothetical. The following analysis therefore assumes that a national Canadian insurer would operate like the PBGC in bankruptcy. The various actions that a Canadian insurer would undertake after a sponsor declared bankruptcy would be difficult to impugn as ultra vires. In times of bankruptcy, federal legislation occupies the field, and conflicting provincial law is of no force. Outside of bankruptcy, though, a Canadian insurer would also have to levy ongoing premiums. It would do so against solvent sponsors in the normal course of their operations, which is to say when provincial pension law should otherwise apply. Such levies would be necessary to ensure that the insurance fund retained adequate resources to provide coverage. A national pension insurer would therefore have the effect of increasing the day-to-day financial burden on plan sponsors by requiring periodic contributions, which some might view as an ongoing infringement into provincial jurisdiction.

Since, however, a national pension insurer's levies would be linked inextricably to the guarantee scheme concomitant with bankruptcy, they would ultimately pass constitutional muster. Regulatory charges, in this case premiums, are valid if they relate to a constitutionally sound regulatory scheme. (156) The Supreme Court has further held that the pith and substance of a levy is "its dominant or most important characteristic". (157) Contributions demanded from covered employers would be dominantly "regulatory charges" within the Supreme Court's definition of the same:
   [R]egulatory charges are not imposed for the provision of specific
   services or facilities. They are normally imposed in relation to
   rights or privileges awarded or granted by the government. The
   funds collected under the regulatory scheme are used to finance the
   scheme or to alter individual behaviour. The fee may be set simply
   to defray the costs of the regulatory scheme. Or the fee may be set
   at a level designed to proscribe, prohibit or lend preference to a
   behaviour. (158)


Because premiums would finance the insurance fund and nothing else, they would be the sine qua non of the fund and would be valid insofar as the fund's overarching purpose was constitutionally valid.

Even if a court were to find that the mandatory contributions to the national pension insurance scheme did encroach on provincial jurisdiction, it could still find them valid under the ancillary doctrine. (159) The Supreme Court has held that federal law encroaching on areas of provincial jurisdiction may still be valid if that encroachment is "necessarily incidental" to the effective operation of the federal statute or program. (160) In City National Leasing, Dickson C.J.C. set out a three-step inquiry as to whether a given provision would be necessarily incidental to the operation of a larger scheme: First, whether the impugned provision intrudes on the jurisdiction of another level of government; second, whether the impugned provision forms part of a valid regulatory scheme; and third, whether the impugned provision adequately fits within the greater regulatory scheme. The ongoing collection of premiums would be necessary to the operation of the insurance scheme, for otherwise the insurer would have no funds with which to pay affected members. As such, these premiums would not constitute a gratuitous foray into provincial jurisdiction. As a final argument, if the federal WEPP can withstand constitutional challenge even though regulation of wages is usually a provincial power related to "property and civil rights", it is unlikely that a similarly structured pension protection program would fail to clear the constitutional hurdle.

Political Feasibility

Beyond the law, there may also exist political opposition to a national public pension insurer. To take an analogous case, many in recent years have voiced their opposition to a national Canadian securities regulator and have offered various arguments that a centralized body would not be able to protect investors currently covered by provincial legislation. (161) Given Nielson and Chan's study showing that Ontario plans covered by the PBGF are more underfunded than comparable Canadian plans, some provincial governments could even argue that a national insurer would constitute a veiled attempt to transfer funds from healthy Maritime, Quebec or Western plans to Ontario. One response to this argument is to point out that Nielson and Chan's study predates the drop in commodity prices brought about by the recent recession. (162) Western Canadian plans, for example, may also soon find themselves in positions of significant underfunding as the wells, both literal and figurative, run dry. All levels of government ought to take the current recession as a reminder that economic booms are cyclical and that plans countrywide that have been healthy in one decade may not be as healthy in the next. A national pension insurer could benefit all plans, and the fact that benefits may not be paid to plans in different provinces at the same time does not affect the good chance that presently well-funded plans may also one day have to rely on the national insurer.

VII CONCLUSION

This paper begins with the story of Cold Metal Products and the hard-working men and women who came to rely on their employer's promise of pension benefits. When CMP became bankrupt, those promised benefits lost more than half their value, and many workers' retirement prospects were destroyed. In light of my analysis, it becomes clear that, in this one respect, these workers had the misfortune of living and working in Canada. Had they been American, they would have received payouts from a public insurer tO satisfy at least some of the pension benefits that their employer should have provided but did not. Had they worked in the U.S., those who had to postpone retirement might have been able to retire despite their employer's bankruptcy.

The WEPPA has started Canada down the path already trodden by the U.S. It is an effort to ensure that stories like CMP's never happen again. It does so by securing an employer's contribution arrears with a super-priority over secured creditors. It does not, however, end the process. More is needed to ensure that a pension plan's unfunded liability does not derail workers' retirement hopes after their employer's bankruptcy. Securing this amount with a super-priority is not desirable, especially, as recent Canadian steelmaker, airline and automotive restructurings show, when this amount is in the hundreds of millions or even billions of dollars. Such a super-priority would dissuade even the boldest commercial lender from extending credit. A public pension insurer funded by periodic employer premiums would, on the other hand, liquidate at least some of the unfunded liability without threatening secured creditors with subordination of their claims. It would, in short, best satisfy everyone's interests. It would provide benefits to vulnerable workers who rely on their employer's promises. It would shift the burden of subsidizing plan members' claims from subordinated lenders to the employers who sponsor the plans. A public pension insurance scheme has thrived across the 49th Parallel. It is time to make it work here.

* This article was first presented at the University of Toronto Faculty of Law Review's Fourth Annual Conference on Student Publishing in Law on March 6th, 2009. The author would like to thank the editors of the University of Toronto Faculty of Law Review, Professors Anthony Duggan and Stephanie Ben-Ishai, Natasha vandenHoven of Davies Ward Phillips & Vineberg LLP, and the participants at the Conference for their many helpful comments. Any errors are the author's alone.

(1) Interview of Elizabeth Warren (6 February 2006) on Frontline, PBS, Boston.

(2) Diana Swain, "How Safe Is Your Pension?" CBC News (15 November 2004), online: CBC <http://www.cbc.ca/news/background/pension>.

(3) Ibid.

(4) Ari N. Kaplan, Pension Law (Toronto: Irwin Law, 2006).

(5) There is currently no legislation governing pensions in force in Prince Edward Island.

(6) (U.K.), 30 & 31 Vict., c. 3, s. 92(13), reprinted in R.S.C. 1985, App. II, No. 5. See also Toronto Electric Commissioners v. Snider, [1925] A.C. 396 (P.C.) (provincial employment legislation regulates property and civil rights in pith and substance).

(7) Constitution Act, 1867, ibid., ss. 91(15) & 92(10)(a). See also Bell Canada v. Quebec (Commission de la sante et de la securite du travail), [1988] 1 S.C.R. 749 (Parliament has exclusive jurisdiction to enact labour legislation related to federal undertakings).

(8) R.S.O. 1990, c. P.8 [PBA].

(9) R.S.C. 1985, c. 32 (2nd Supp.) [PBSA].

(10) Employment Pension Plans Act (Alberta), R.S.A. 2000, c. E-8; Pension Benefits Standards Act (B.C.), R.S.B.C. 1996, c. 352; Pension Benefits Act (Manitoba), C.C.S.M., c. P32; Pension Benefits Act (New Brunswick), S.N.B. 1987, c. P-5.1; Pension Benefits Act, 1997 (Newfoundland and Labrador), S.N.L. 1996, c. P-4.01; Pension Benefits Act (Nova Scotia), R.S.N.S. 1989, c. 340; Supplemental Pension Plans Act (Quebec), R.S.Q., c. R-15.1; and Pension Benefits Act, 1992 (Saskatchewan), S.S. 1992, c. P-6.001.

(11) Kaplan, supra note 4 at 4.

(12) Variations of these two kinds of plans, such as jointly-sponsored pension plans (PBA, supra note 8, s. 1(2)); multi-employer pension plans (PBA, s. 1(3); PBSA, supra note 9, s. 2(1)) and cash balance plans, which guarantee a minimum benefit that is topped up by returns on investment income, are beyond the scope of this paper.

(13) Kaplan, supra note 4 at 2.

(14) Ibid. at 3.

(15) James E. Pesando, "The Containment of Bankruptcy Risk in Private Pension Plans" in Insurance and Private Pensions Compendium for Emerging Economies, (Paris: Organisation for Economic Co-operation and Development [OECD], 2000) at 2, online: OECD <http://www.oecd.org/dataoecd/50/49/1815710.pdf> [Pesando, "Containment of Risk"].

(16) A recent study by the C.D. Howe Institute questions the accepted view that employers bear the sole risk of a defined benefit plan's funding shortfall. James E. Pesando, "Risky Assumptions: A Closer Look at the Bearing of Investment Risk in Defined-Benefit Pension Plans" (2008) 266 C.D. Howe Institute Commentary: The Pension Papers at 5, online: C.D. Howe Institute <http://www.cdhowe.org/pdf/commentary_266.pdf>. The study suggests that "the ultimate incidence of additional employer contributions to a defined benefit plan required by poor investment performance could fall exclusively upon employees. If there is an unanticipated shortfall, due to adverse investment outcomes, employees could eventually bear the cost through reductions elsewhere in their compensation package, or in the case of contributory plans, by increases in the employee contribution rate". Notwithstanding Pesando's alternate approach, this paper builds from the traditional assumption that employers bear the sole risk of funding shortfalls while members bear the risk of plan collapse in bankruptcy. In fact, if Pesando's alternate framework proves valid, then the case for protecting members' pension claims in bankruptcy would be even stronger because affected workers would also have traded off wages for increased pension contributions prior to the bankruptcy.

(17) Kaplan, supra note 4 at 385.

(18) As of January 1, 2007, there were 11,056 defined benefit plans registered in Canada and 7,160 defined contribution plans. See Statistics Canada, "Registered pension plans (RPPs) and members, by jurisdiction of plan registration, sector and type of plan" (18 June 2009), online: Statistics Canada <http://www40.statcan.gc.ca/101/cst01/famil117a-eng.htm>.

(19) Ibid.

(20) Statistics Canada, "Labour force characteristics, seasonally adjusted, by province (monthly)" (10 July 2009), online: Statistics Canada <http://www40.statcan.ca/101/cst01/lfss01a-eng.htm>.

(21) Lori McLeod, "Canadian pension plans' solvency at record lows" Globe and Mail (8 January 2009), online: Globe and Mail <http://business.theglobeandmail.com/servlet/story/RTGAM. 20090108.wpensionfunding0108/BNStory/crashandrecovery>.

(22) Geoffrey England, Individual Employment Law, 2nd ed. (Toronto: Irwin Law, 2008) at 3.

(23) Kaplan, supra note 4 at 9.

(24) The PBA is enforced by the Superintendent of the Financial Services and the PBSA by the Office of the Superintendent of Financial Institutions. In this paper, general references to "the Superintendent" denote the appropriate pension regulator.

(25) Fiona Stewart, "Benefit Protection: Priority Creditor Rights for Pension Funds" (2007) 6 OECD Working Papers on Insurance and Private Pensions at 10, online: OECD <http://www.oecd.org/dataoecd/39/0/37977393.pdf>.

(26) Supra note 8 [emphasis added].

(27) Supra note 9, s. 9(1).

(28) PBA General, R.R.O. 1990, Reg. 909, ss. 13(1) & 14(1) [PBA Reg.]; PBSA, ibid., s. 12. A valuation report is due within 60 days of the establishment of a new plan and typically at three-year intervals thereafter. There are two main kinds of actuarial valuation: going concern and solvency. Very generally, a going concern valuation assumes that the business and pension plan will continue in the normal course. A solvency valuation assumes that the plan terminates, or "winds-up", immediately and consequently that all of the plan's liabilities become due. By its nature, the solvency valuation almost always leads to more significant unfunded liabilities than the going concern valuation, because under the solvency valuation's assumptions the sponsor will not have any time, neither years nor decades, over which to make up any shortfall through increased contributions or better investments. Because this valuation assumes that the plan winds-up immediately on the date of valuation, it closely mirrors the situation that would exist if the plan sponsor were actually to become bankrupt. Accordingly, this paper focuses on unfunded liabilities that arise as the result of a solvency valuation.

(29) Kaplan, supra note 4 at 411-16.

(30) PBA Reg., supra note 28, s. 5(1)(e); Pension Benefits Standards Regulation, SOR/87-19, s. 9(1)(4) [PBSA Reg.]. In light of the recent economic crisis, most governments in Canada have extended or are considering extending the existing five-year amortization requirement temporarily. For a detailed catalogue of this and other proposed relief, see Natasha vandenHoven and Janet Ferrier, "Pension Funding Relief" Davies Ward Phillips & Vineberg LLP (29 January 2009), online: Davies Ward Phillips & Vineberg LLP <http://www.dwpv.com/images/ Perspective_-_Pension_Plan_Funding_Relief.pdf>.

(31) Pesando, "Containment of Risk", supra note 15 at 2, n. 1.

(32) Juan Yermo & Jean-Marc Salou, eds., (2008) 5 Pension Markets in Focus at 4, online: OECD <http://www.oecd.org/daf/pensions/pensionmarkets> at 4; Pesando, "Containment of Risk", ibid. at 21.

(33) Kaplan, supra note 4 at 548. For a detailed analysis of Algoma Steel's restructuring, see Janis Sarra, Creditor Rights and the Public Interest: Restructuring Insolvent Corporations (Toronto: University of Toronto Press, 2003).

(34) Re Air Canada, No. 03-CL-4932 (Ont. S.C J.), Eighth Report of Monitor (31 July 2003) at paras. 15-16.

(35) Re Stelco (2004), 48 C.B.R. (4th) 299 at para. 66 (Ont. S.C.J.).

(36) Shawn McCarthy, Karen Howlett and Greg Keenan, "Pension deficit threatens GM's viability" Globe and Mail (13 May 2009), online: Globe and Mail <http://business.theglobeandmail.com/servlet/story/ RTGAM.20090512.wpension0513/BNStory/Business/home>.

(37) Constitution Act, 1867, supra note 6, s. 91(21).

(38) R.S.C. 1985, c. B-3 [BIA].

(39) R.S.C. 1985, c. C-36 [CCAA].

(40) Janis P. Sarra and Ronald B. Davis, "Analysis of Factors Leading to Insolvency and Restructuring and Their Effects on Pension Plan Wind-ups and Closures" (Toronto: Queen's Printer for Ontario, 2007) at 20.

(41) The BIA provides a scheme for commercial proposals which allows debtors a chance to restructure their affairs under a court-imposed six-month stay of proceedings. A commercial proposal could result in reductions of debt, extensions for repayment or changes to a creditor's debt and equity structure. See BIA, supra note 38, s. 2(1) s.v. "proposal". The CCAA allows debtors with over $5 million in debt to negotiate a plan of arrangement whereby they reach a compromise with their creditors. One of the CCAA's goals is to avoid, when possible, the devastation that the closure of a debtor's business could have on its employees and the community. See Re Algoma Steel Inc. (2002), 30 C.B.R. (4th) 1 at para. 8 (Ont. S.C.J.).

(42) Generally, the order of distribution is." certain unpaid suppliers in respect of goods delivered within 30 days of bankruptcy as well as unpaid farmers and fishers; the Canada Revenue Agency in respect of unpaid source deductions; wage earners in respect of certain unpaid wages; plan members in respect of unremitted pension contributions; secured creditors; preferred creditors (see BIA, ibid., s. 136, which provides a detailed sub-scheme of distribution for various preferred claims); and unsecured creditors.

(43) David Baird and Ronald Davis, "Labour Issues" in Stephanie Ben-Ishai and Anthony Duggan, eds., Canadian Bankruptcy and Insolvency Law: Bill C-55, Chapter 47 and Beyond (Markham, Ont.: LexisNexis, 2007) at 82. See also Legislative Review Task Force (Commercial), Insolvency Institute of Canada [IIC], "Report on the Commercial Provisions of Bill C-55" (14 October 2005) at 38, online: IIC <http://www.insolvency.ca/papers/LRTF%20Report_final_Oct-14-05.pdf>.

(44) Stewart, supra note 25 at 4-5.

(45) "Bankruptcy and Workers: Risks, Compensation and Pension Contracts" (2004) 82 Wash. U.L.Q. 1251 at 1251-52. Workers are typically not "diversified" because they "receive their current and future income from one source, and their pension may he the only substantial financial asset they own". Stewart, ibid. at 5.

(46) See e.g. Pesando, "Containment of Risk", supra note 15 at 4.

(47) Janis Sarra, Rescue! The Companies' Creditors Arrangement Act (Toronto: Carswell, 2007) at 211 [Sarra, Rescue!].

(48) Kaplan, supra note 4 at 385.

(49) The administrator is often the employer but may also be a separate entity. If the same as the sponsor, the company is essentially granted a lien over its own assets.

(50) See e.g. PBA, supra note 8, ss. 57(3) (deemed trust) & (5) (lien).

(51) Peter W. Hogg, Constitutional Law of Canada, 5th ed. supp. (Scarborough, Ont.: Thomson Carswell) at 16-2 - 16-3. Hogg summarizes the doctrine thusly: "The doctrine of paramountcy applies where there is a federal law and a provincial law which are (1) each valid, and (2) inconsistent. To be valid, the "'matter' (or pith and substance) of the law [must] come within the 'classes of subjects' (or heads of power) allocated to the enacting Parliament or Legislature". Provincial legislation deeming trusts in respect of outstanding pension contributions is valid under the provincial power over property and civil rights. On the other hand, federal legislation exhaustively establishing the scheme of distribution on bankruptcy is valid under the federal power over bankruptcy. Enforcing the provincial deemed trust would frustrate the BIA's distribution scheme, which does not provide any priority for such amounts, and this inconsistency means that the BIA is paramount.

(52) For the inefficacy of provincial statutory liens and deemed trusts under the BIA, see British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24 at 35; Re I.B.L. Industries Ltd. (1991), 2 O.R. (3d) 140 (Gen. Div.) at 144.

(53) BIA, supra note 38, s. 136(1).

(54) Baird and Davis, supra note 43 at 80-81.

(55) House of Commons Debates, 128 (29 September 2005) at 1005 (Hon. Joe Fontana).

(56) A Bill for an Act to Establish the Wage Earner Protection Program Act, to Amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to Make Consequential Amendments to Other Acts, 1st Sess., 38th Parl. (rec'd Royal Assent 25 November 2005).

(57) See e.g. IIC, News Release, "Insolvency Experts Say Proposed Legislation is Flawed: The Insolvency Institute of Canada Expects Legislative Reform to Fail to Meet its Objectives if Changes Not Made" (17 November 2005), online: IIC <http://www.insolvency.ca/papers/Bi11%20C-55%20Press% 20Release%20for%20IIC_final_Novl7.html>.

(58) An Act to Amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and Chapter 47 of the Statutes of Canada, 2005, 2nd Sess., 39th Parl., 2007 (as passed by the House of Commons on 29 October 2007).

(59) 2005, c. 47, s. 1.

(60) BIA, supra note 40, ss. 81.5(1) & 81.6(1). Secured creditors receive, in turn, a preferred claim under BIA, s. 136(1)(d.02) to the extent that their security interest is diminished by the superpriority. See E. Patrick Shea, Bankruptcy and Insolvency Act; Companies' Creditors Arrangement Act; Bill C-55 & Commentary (Markham, Ont.: LexisNexis, 2006) at 6.

(61) David Baird (lecture delivered at the University of Toronto, Faculty of Law, 15 February 2008) [unpublished].

(62) Bank of Montreal v. Scott Road Enterprises Ltd. (1989), 57 D.L.R. (4th) 623 at 630-31 (B.C.C.A.).

(63) This paper adopts a favourable view of the WEPPA. I note though that the super-priority for contribution arrears is not without potential fallout, though it can be justified in light of the policy goal of worker protection. Still, the WEPPA's super-priority for contribution arrears risks prejudicing commercial creditors and increasing the cost of capital for businesses. The greater the amount of claims subject to a super-priority in bankruptcy, the less likely that secured creditors will receive the entire amount of what they are owed. Janis Sarra argues that the super-priority for contribution arrears could "add further uncertainty generally for operating and term lenders in valuing their collateral". Sarra, Rescue!, supra note 47 at 216. As the super-priority is relatively new, the effects it may have on lending and interest rates remain to be seen. It can, however, safely be said that the super-priority alone is not a satisfactory fix for either plan members or creditors.

(64) See Re CF&I Fabricators of Utah, Inc. v. PBGC, 150 F.3d 1293 (10th Cir., 1998) at 1300.

(65) Andrew J.F. Kent, Jeff Rogers and Wael Rostom, "Insolvency Reform and the Asset-Based Lender" McMillan Binch Mendelsohn LLP, online: McMillan LLP <http://www.mcmillan.ca/Upload/Publication/AKent_JRogers _WRostom_InsolvencyReform_and_the_Asset-BasedLender_1006.pdf>.

(66) PBA, supra note 8, s. 85.

(67) Kaplan, supra note 4 at 548.

(68) Ibid. at 547.

(69) Ibid.

(70) PBA Reg., supra note 28, s. 36.

(71) PBA, supra note 8, s. 86.

(72) Stewart, supra note 25 at 8.

(73) Ibid. at 7-8.

(74) George W. Adams, Canadian Labour Law, 2nd ed. supp. (Aurora, Ont.: Canada Law Book) at 1.10.

(75) Art. I, [section] 8.

(76) 29 U.S.C. [section][section] 1001 et seq. [ERISA].

(77) Ibid., [section] 1082(b)(2) and I.R.C. [section] 412. ERISA [section] 1082(a)(2) calls a plan's unfunded liability its "accumulated funding deficiency". For consistency's sake, I call it "unfunded liability".

(78) Mark Daniels, "Pensions in Peril: Single Employer Pension Plan Terminations in the Context of Corporate Bankruptcies" (1991) 9 Hofstra Lab. L.J. 25 at 31.

(79) 11 U.S.C. [section] 507. Despite codification, many still debate where the limits of the American priority should lie. Stewart, supra note 25 at 24.

(80) Supra note 76, [section] 1302.

(81) T. Leigh Anenson & Karen Eilers Lahey, "The Crisis in Corporate America: Private Pension Liability and Proposals for Reform" (2007) 9 U. Pa. J. Lab. & Employment L. 495 at 505.

(82) "Maximum Monthly Guarantee Tables", online: PBGC <http://www.pbgc.gov/workersretirees/benefits-information/ content/page789.html>.

(83) Ibid.

(84) For a discussion of "vesting" in pension law, which refers to the entitlement to receive a pension upon retirement, see Kaplan, supra note 4 at 217-23.

(85) Simon Kwan, "The Present and Future of Pension Insurance" (2003) 25 FRBSF Economic Letter at 1, online: FRBSF <http://www.frbsf.org/publications/economics/letter/2003/e1200325.html>.

(86) Sarah D. Burt, "Pension Protection? A Comparative Analysis of Pension Reform in the United States and the United Kingdom" (2008) 18 Ind. Int'l & Comp. L. Rev. 189 at 215. The premium differs for multi-employer plans, which are beyond the scope of this paper. Note that the PBGC guarantees shortfalls in multi-employer plans while the PBGF does not.

(87) Pub. L. No. 109-280 (2006).

(88) Burt, supra note 86 at 215.

(89) Ibid.

(90) Pesando, "Containment of Risk", supra note 15 at 4.

(91) Daniel Keating, "Chapter 11's New Ten-Ton Monster: The PBGC in Bankruptcy" (1993) 77 Minn. L. Rev. 803 at 814.

(92) United Steelworkers of America v. United Engineering, Inc., 52 F.3d 1386 (6th Cir., 1995) at 1393.

(93) Re Barley Corp., 163 F.3d 1205 (10th Cir., 1998) at 1210.

(94) Re U.S. Airways Group, Inc., 296 B.R. 734 (Bkrtcy. E.D. Va. 2003) at 739.

(95) Ibid. at 741.

(96) Ibid.

(97) Supra note 64.

(98) Ibid. at 1296.

(99) Ibid. at 1300.

(100) Pension Benefit Guaranty Corp. v. LTV Corp. (1990), 110 S. Ct. 2668 [LTV].

(101) Randy Clerihue & Jeffrey Speicher, PBGC No. 03-09, "PBGC to Protect Pensions of 95,000 at Bethlehem Steel" (16 December 2002), online: PBGC <http://www.pbgc.gov/media/newsarchive/news-releases/2002/pr03-09.html>.

(102) See e.g. Yermo & Salou, supra note 32 at 6.

(103) Sam Mamudi, "Lehman folds with record $613 billion debt" MarketWatch (15 September 2008), online: MarketWatch <http://www.marketwatch.com/news/story/story.aspx?guid= {2FE5AC05-597A-4E71-A2DS-gB9FCC290520}&siteid=rss>.

(104) PBGC Public Affairs, PBGC No. 09-39, "PBGC Assumes Pensions at Lehman Brothers Holdings Inc" (19 June 2009), online: PBGC <http://www.pbgc.gov/media/news-archive/news-releases/2009/pr09-39.html>.

(105) PBGC Public Affairs, PBGC No. 09-23, "Statement of PBGC Acting Director Vince Snowbarger on Chrysler Bankruptcy" (30 April 2009), online: PBGC <http://www.pbgc.gov/media/news-archive/news-releases/2009/pr09-23.html>; PBGC Public Affairs, PBGC No. 09-11, "PBGC Negotiates $55 Million in Pension Protection with Visteon Corp." (5 January 2009), online: PBGC <http://www.pbgc.gov/media/news-archive/news-releases/2009/pr0911.html>.

(106) See Daniel J. Morse, "Distress Termination of Pension Plans in Ch. 11" (2006) 25-MAR Am. Bankr. Inst. J. 32 at 32.

(107) Stewart, supra note 25 at 10.

(108) Joint Expert Panel On Pension Standards, Getting our Acts Together: Pension Reform in Alberta and British Columbia (Edmonton & Victoria, 2008) at 174, online: Joint Expert Panel on Pension Standards <http://www.ab-bc-pensionreview.ca/2008_1125_jepps_final_report.pdf> [Alta./B.C. Report].

(109) [Ontario] Expert Commission on Pensions, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules (Toronto: Queen's Printer for Ontario, 2008) at 119, online: Expert Commission on Pensions <http://www.pensionreview.on.ca/english/report/ Pensions_Report_Eng_web.pdf> [Arthurs Report]; Alta./B.C. Report, ibid.

(110) Daniel Keating, "Pension Insurance, Bankruptcy and Moral Hazard" (1991) Wis. L. Rev. 65 at 68 [Keating, "Moral Hazard"].

(111) Angela Marion Lee, "Canadian Government Looks at Pension Guarantee Fund" Pensions & Investments (5 September 2005) at 28.

(112) Keating, "Moral Hazard", supra note 110 at 76.

(113) Stewart, supra note 25 at 6.

(114) Keating, "Moral Hazard", supra note 110 at 82.

(115) ERISA, supra note 76, [section] 4047; LTV, supra note 110 at 2675-76.

(116) "Private Pensions and Government Guarantees: Clues from Canada" (2007) 6:1 J. Pension Econ. and Fin. PEF 45.

(117) Ibid. at 61.

(118) "Insurance against Plan and Sponsor Failure: Examining Alternative Systems to Guarantee Private Pension Payments" (Toronto: Queen's Printer for Ontario, 2007) at 50 [Nielson, "Insurance"].

(119) Arthurs Report, supra note 109 at 119.

(120) The manufacturing industry in Ontario contributes more to the province's GDP than all other goods-producing industries combined. See Bill McGee, "Ontario Gross Domestic Product (GDP) for Selected Industries, 2007 ($ million)" (9 March 2009), online: Ministry of Agriculture Food & Rural Affairs <http://www/omafra.gov.on.ca/English/stats/food/gdp_select.htm>.

(121) Nielson, "Insurance", supra note 118 at 45. Nielson herself indicates that the one per cent of plans in Ontario with the highest dollar value difference between their PBGF liabilities and assets is dominated by the steel and auto industries.

(122) The Federal Investment Rules ("FIR"), effective July 1st, 1993, require federally-regulated pension plans to make investments according to the rules set out in sections 6, 7, 7.1 & 7.2 and Schedule III to the PBSA Reg., supra note 31. Ontario-regulated plans must adopt a statement of investment policies and procedures ("SIP&P") pursuant to PBA Reg., supra note 28, s. 7.1(1). Pursuant to PBA Reg., s. 78(1), the FIR apply to the SIP&P. Among other things, the FIR place limits on the quantities of certain investments that a plan may hold. For example, the FIR prohibit more than 10% of the book value of plan assets to be invested in any one entity (Schedule III to the PBSA Reg., s. 9(1)(a)).

(123) Communications, Energy and Paperworkers Union of Canada v. Superintendent of Pensions and CWA/ITU Pension Plan (Canada) Board of Trustees (7 June 1999), PCO Index No. XDEC-45 (PCO).

(124) For example, in a recent case, plan members of the Participating Co-operatives of Ontario Trusteed Revised Pension Plan reached a settlement in a class proceeding against the Plan's trustees and its former investment consultant and asset manager for improper investment and management of plan funds. The settlement required the trustees to pay almost $14 million into the Plan. Gay Lea Foods Co-operative Limited v. Superintendent of Financial Services (27 March 2008), FST Decision No. P0275-2006-2 (FST).

(125) Such liability exists in the U.S. in the context of transfers of plans in an effort to avoid funding obligations. See ERISA, supra note 81, [section][section] 1362 & 1369; Pension Benefit Guaranty Corporation v. White Consolidated Industries Inc., 1999 U.S. Dis. LEXIS 11564 (Penn. D.C.) at 112-13. It is feasible to extend this rule to strategic bankruptcies when the public insurer or regulator can show that the principal purpose of a sponsor's bankruptcy filing was to avoid pension obligations.

(126) William Robson, "Off the Hook, For Now: Taxpayers Should Hope that Talk of Federal Pensions Guarantees Ends With the Minority Government" C.D. Howe Institute e-brief (17 November 2005), online: C.D. Howe Institute <http://www.cdhowe.org/pdf/ebrief_19.pdf>; Arthurs Report, supra note 109 at 119; Alta./B.C. Report, supra note 108 at 174.

(127) Pesando, "Containment of Risk", supra note 15 at 4-5; Anenson & Lahey, supra note 81 at 529.

(128) PBGC Public Affairs, PBGC No. 09-30, "PBGC Deficit Climbs to $33.5 Billion at Mid-Year, Snowbarger to Tell Senate Panel" (20 May 2009), online: PBGC <http://www.pbgc.gov/ media/news-archive/news-releases/2009/pr09-30.html> [PBGC Public Affairs, "PBGC Deficit"].

(129) Interview of Bradley Belt by Nanette Byrnes (19 July 2004) in Business Week, online: BusinessWeek <http://www.businessweek.com/magazine/content/04_29/b3892020_mz001.htm>.

(130) Amy Lassiter, "Mayday! Mayday!: How the Current Bankruptcy Code Fails to Protect the Pensions of Employees" (2004-05) 93 Ky. L.J. 939 at 939.

(131) Nielson, "Insurance", supra note 118 at 41.

(132) See e.g. Pesando, "Containment of Risk", supra note 15; Vineeta Anand, "Ready to Work: New PBGC Head Set to Fix System; Belt Wants To End Contradictions In Pension Regulations" Pensions & Investments (17 May 2004) at 2.

(133) Currently the ceiling is $4 million per year. Between 1992 & 2002, a special 1992 regulation under the PBA, dubbed "the 'too big to fail' regulation", imposed a special cap of $5 million per year for certain qualifying plans, including that of General Motors.

(134) Arthurs Report, supra note 109 at 120.

(135) Suggested improvements are outlined in Recommendations 6-14 to 6-17 of the Arthurs Report, ibid. at 121-23, and include increased coverage, better risk-based premiums, consistent funding and investment rules and powers to deter moral hazard.

(136) PBGC Public Affairs, "PBGC Deficit", supra note 128. The hearing took place on May 20th, 2009.

(137) Keating, "Moral Hazard", supra note 110 at 65.

(138) See e.g. Lassiter, supra note 130 at 939.

(139) WEPPA, supra note 59, s. 7.

(140) Baird and Davis, supra note 43 at 80.

(141) Pesando, "Containment of Risk", supra note 15 at 3. On the other hand, the OECD argues that a successful pension insurer could be either publicly administered or downloaded to the private sector: "Insolvency guaranty schemes may be privately or publicly managed. In general, it is important that such schemes rely on appropriate pricing of the insurance provided in order to avoid unwarranted incentives for risk-taking (moral hazard)." OECD Insurance and Private Pensions Committee & Working Party on Private Pensions, "OECD Guidelines on Funding and Benefit Security in Occupational Pension Plans: Recommendation of the Council" (Paris: OECD Directorate for Financial and Enterprise Affairs, 2007), online: OECD <www.oecd.org/dataoecd/3/22/38547978.pdf> [OECD on Private Pensions].

(142) OECD on Private Pensions, ibid.

(143) Since the super-priority for unremitted pension contributions is already in place, the creation of a public pension insurer would not need to change the distribution scheme of the BIA. In other words, a public pension insurer would not further increase the cost of credit by imposing any additional super-priority over secured creditors that does not already exist in the BIA.

(144) Baird, supra note 61.

(145) Constitution Act, 1867, supra note 6, s. 91(2A). The amendment was added by the Constitution Act, 1940, 3-4 Geo. VI, c. 36 (U.K.).

(146) The particularities of the legislation creating and governing a Canadian national pension insurer would have to arise from consensus and careful deliberation. This paper does not attempt to sketch what these statutory provisions may ultimately look like. The legislative scheme would not have to be complex. Concerning the PBGF, for example, ss. 82-86 of the PBA, supra note 8, establish the rules and conditions for payments from the guarantee fund. The PBA Reg., supra note 28, sets out specific contribution levels. As a proportion of the PBA and the PBA Reg., the provisions governing the PBGF are not voluminous. New federal legislation could simply provide the base for a national insurer and, beyond the statutory minimums, leave the specifics of implementation to the Department of Finance.

(147) In Canadian constitutional law, the phrase "pith and substance" originated in Union Colliery Company of British Columbia, Limited v. Bryden, [1899] A.C. 580 (P.C.) at 587, Lord Watson (provincial statutory provision prohibiting Chinese from working as underground miners was ultra vires the provincial legislature because its "pith and substance" was to govern aliens and naturalization, a federal head of power). More recently in R. v. Big M Drug Mart Ltd., [1985] 1 S.C.R. 295 at 357, Wilson J. (concurring) defined legislation's "pith and substance" as its "primary legislative purpose with a view to distinguishing the central thrust of the enactment from its merely incidental effects".

(148) Hogg, supra note 51 at 15-7.

(149) Reference re Employment Insurance Act (Can.), ss. 22 and 23, [2005] 2 S.C.R. 669, 2005 SCC 56 at para. 8.

(150) Hogg, supra note 55 at 15-9. See also Bank of Toronto v. Lambe, [1887] 12 A.C. 575 at 586 (P.C.), Lord Hobhouse (provincial laws imposing direct taxes on banks were valid even though banking was an exclusively federal head of power because provinces have the power to make banks "contribute to the public objects of the provinces where they carry on business").

(151) Confederation des syndicats nationaux v. Canada (A.-G.), [2008] S.C.J. No. 69, 2008 SCC 68 at para. 33.

(152) Hogg, supra note 55 at 15-13. See also Alberta (A.-G.) v. Canada (A.-G.), [1939] A.C. 117 at 130 (P.C.), Lord Maugham L.C. ("[i]t is not competent either for the Dominion or a Province under the guise, or the pretence, or in the form of an exercise of its own powers, to carry out an object which is beyond its powers and a trespass On the exclusive powers of the other") [Alberta Bank Taxation Reference].

(153) Subsection 69(1) of the PBA, supra note 8, provides for nine situations in which the Superintendent may order a full or partial wind-up of a pension plan. One of those situations, outlined in paragraph (c), is bankruptcy, the focus of this paper. The Superintendent, however, may also order a full or partial wind-up if an employer ceases or suspends contributions; fails to make contributions in the manner that the PBA requires; discontinues all or part of its business, either as a result of a reorganization or otherwise, so that a significant number of members lose their employment; or sells all or part of its assets and the buyer does not provide a plan to the employees that it is assuming. In addition, the Superintendent may order a wind-up if the continued existence of a plan would likely increase substantially the liability of the PBGF; if there is a significant reduction in membership or contributions to a multiemployer pension plan or if other prescribed events occur. Similarly, s. 29(2) of the PBSA, supra note 9, allows the Superintendent to declare a plan terminated if an employer ceases or suspends contributions; discontinues all or part of its business so that a substantial portion of members lose their employment; or, most broadly, if the Superintendent is of the opinion that the plan has failed prescribed tests for solvency, which could encompass, among other situations, an insolvent plan faced with its sponsor's bankruptcy. Provinces would be free to implement as much or as little protection for members as they see fit in these circumstances and would be equally free to do so by means of public guarantee, deemed trusts over employer's assets, director and officer liability for unpaid amounts or other mechanisms.

(154) Alberta Bank Taxation Reference, supra note 152 at 130.

(155) Saumur v. Quebec, [1953] 2 S.C.R. 299, Locke J.; British Columbia (A.-G.) v. McDonald Murphy Lumber, [1930] A.C. 357 at 363 (P.C.), Lord Macmillan (in respect of a provincial tax on timber, the actual practice in administering the tax had the effect of almost nullifying any amounts levied on timber used within the province through rebates but in maintaining the full amount of the tax on timber exported outside the province, which amounted de facto to an export tax ultra vires the province).

(156) Westbank First Nation v. British Columbia Hydro and Power Authority, [1999] 3 S.C.R. 134 at para. 24.

(157) 620 Connaught Ltd. v. Canada (Attorney General), [2008] 1 S.C.R. 131, 2008 SCC 7 at para. 16.

(158) Ibid. at para. 20 [emphasis added].

(159) See Patrick Monahan, Constitutional Law, 2nd ed. (Toronto: Irwin Law, 2002) at 121.

(160) City National Leasing Ltd. v. General Motors of Canada Ltd., [1989] 1 S.C.R. 641 at 670-71.

(161) See e.g. Autorite des marches financiers, "Single Regulator: A Needless Proposal", Brief submitted to the Expert Panel on Securities Regulation, online: Autorite des marches financiers <http://www.lautorite.qc.ca/userfiles/File/ Publications/secteur-financier.Memoire-commissionunique-07-08_ang.pdf>.

(162) "The Economist Commodity Price Index" The Economist (12 March 2009), online: The Economist <http:l/www.economist.com/markets/indicators/ displaystory.cfm?story_id=13278690>.

MARK FIRMAN, B.A. (Hons.) (Queen's), J.D. (Toronto), Student-At-Law, Davies Ward Phillips & Vineberg LLP.
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Title Annotation:The Fourth Annual Conference/La Quatrieme Conference Annuelle
Author:Firman, Mark
Publication:University of Toronto Faculty of Law Review
Date:Mar 22, 2009
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