Nortel Pensions

The past week was a sad and painful one not just for pensioners, but for all current and past employees of the company. Retired pensioners tend to be older and mostly out of the work-force and would likely be especially hard hit by any reduction to their pensions. For many it would be an irreversible change in retirement standard of living. In Globe and Mail’s “Battle looms over tech giant’s pensions” Middlemiss and George-Cosh report the upcoming battle to protect ex-Nortel employees’ pensions. In the related Globe and Mail article “Quebec promises to guarantee pension plans” Rheal Seguin write that the province of Quebec announced that it “will take over the management of insolvent pension plans and guarantee retirement income for five years to those who are entitled”. (It is not clear from the article if they will top up pension shortfalls for the first five years or will make sure that pensions can be paid for at least five years.) The Star’s James Daw in “Nortel pension fears mount” reports some of the potential implications on the pension plan.

Many of those affected will be feverishly trying to read up on the subject of pensions as I’ve been doing for a while. Here is my understanding of some of the terms used and parameters to watch out for as events unfold in the next few weeks and months.

You will read about valuation of the pension fund, but you’ll have to pay attention to the context in which the valuation is used. There is a difference between going concern (accounting) valuation and solvency (wind-up) valuation of pensions.  When you read about the valuation of the pension plan in the annual report, it refers to ‘going concern valuation’ and usually you are looking at all of Nortel’s pension plans in aggregate. In case of bankruptcy protection, while wind up of the pension plan is not always the outcome, it is the wind-up/solvency valuation that you should pay attention to as it gives you a measure of the gap between assets and liabilities of the pension plan (a separate entity from Nortel the sponsoring corporation) and what is the worst case scenario if no additional contributions are made to the plan.

I suspect, when details are finally released, there will be differences in the funding status of Nortel’s various pension plans. The differences have to do with many factors, the most important of which may turn out to be which of the at least three major jurisdictions (Canada, U.S. and U.K.) the plan is registered. There are also likely multiple plans in each jurisdiction (managerial/non-negotiated, union/negotiated and SERP and others).

The first and main line of protection for pensioners is the result of the due diligence, professionalism, integrity and the exercise of  fiduciary duties of the Directors and Officers, actuaries, investment managers, trustees and administrators of the pension plan. These key players had the duty to ensure that the corporation’s promises to pensioners were managed in a manner appropriate to the needs of retired plan beneficiaries.

Next, different jurisdictions have different pension regulations/regulators and insurance programs to guarantee pensions. The pension plans in jurisdictions which have tougher regulations with more hard-nosed regulators, may be more likely to be in better shape.  So before bankruptcy protection is sought, the funded status is also influenced by the strength of regulations and effectiveness of regulators in each jurisdiction.

During bankruptcy protection and after reorganization or asset sale, level of pensioner protection is a function of circumstances (available cash, assets, competing interests) and the degree to which the Court in each jurisdiction can be persuaded that pensions are nothing but deferred wages and thus should be protected to the same level. The final layer of protection is afforded by the different level of pension guarantees in each jurisdiction.

As far as pension insurance is concerned, Ontario’s PBGF guarantees secure the first $12,000 of pension, while U.S. PBGC guarantees up to a little over $50,000 of pension;In the U.K. current pensioners  appear to have 100% protection, while deferred pensioners have 90% protection with a 28K pound cap (U.K. info updated Feb. 10,2009). That doesn’t bode well for Canadian pensioners.

In regulation/regulator effectiveness, Ontario’s FSCO last required valuation was in December 2006 (an eternity ago when the solvency ratio was 86%); over two years have passed since then and a few things have changed as well, like the funded status of the plan and Nortel’s financial condition. We don’t know the true state of affairs today; my guesstimate of the current solvency funding ratio of the Ontario Managerial plan is as low as 60%. (Repeated expressions of concern and requests for information were stonewalled, since there was “no requirement” to do an annual valuation.) The U.K. regulator seems to have flexed its muscles to protect U.K. pensioners. According to court documents, following a 2005 valuation Nortel agreed to make annual 85M pound payments and in 2007 additional 150M pound guarantee was provided by Nortel for the U.K. pension plan. Now over $700M, or about 1/3 of Nortel’s current cash is stranded in the U.K. to a large extent to protect underfunded pensions there. I have no information of the status of the U.S. plans.

By the way, pensioners’ health and life insurance benefits are also at risk during and after bankruptcy proceedings as these tend to be unfunded liabilities covered from the company’s operating funds.

It appears that recently laid-off employees, who were members of pension plans and requested CV rather than pensions, will now likely have to take the pension route. (They also have their severance packages at risk with the bankruptcy proceedings.)

Ex-Nortel employee pensioners who are members of Nortel’s Ontario Managerial and Non-negotiated Plan will be meeting next Wednesday at 2:00 PM at the Nepean Sportsplex with legal counsel Mark Zigler of the firm Koskie Minsky of Toronto. No doubt similar arrangements are being made by other affected groups (e.g. members of the negotiated/union plan are likely represented by the union.)

Many of the affected pensioners may be wondering what will happen to their standard of living now that their pension is at risk. Last October, as markets hit last year’s bottom, I wrote a blog What Now? (October 13, 2008)  on how I went about roughly estimating my financial state of affairs. You could try to do the same and see when you might need to make major changes in your lifestyle. Most Nortel people, being engineering types, won’t find it too technical. Plug your expected and worst case assumptions into the calculations and it should give you an initial feeling how close you might be to the edge. (You may want to visit your financial planner if you have one.) Let’s hope for the best, but plan for the worst.