Nortel pensioners’ CCAA claim: How will the final windup ratio be determined?
We just heard from the latest Koskie Minsky report to Nortel pensioners, that the latest ‘estimated’ windup ratio is 64%. This is the lowest number we have heard so far from official sources. The reasons suggested for this low number are because earlier numbers might have excluded windup costs and cost of inflation protection promised by the plan. (Earlier estimates are likely to have also excluded more conservative insurance company actuarial assumptions and their required profit margins, no doubt to be included when an insurance company will calculate the resulting pensioners’ annuities. That’s too bad, since earlier Commuted Value payouts at (100%, 86% and 69%) levels much higher than the ultimate insurance quote (64% or still much lower), have just aggravated the underfunding of the pension plan for remaining beneficiaries. But that’s water under the bridge, and there was lots of it so far.)
So, I suspect that matters may be even more complex than suggested. According to current plans, come September 30, 2010 the FSCO will name a new plan administrator who will run the plan until (according to current law) one or more insurance companies are found to provide annuities to plan beneficiaries (or will continue to run the plan without annuitizing it as the NRPC is trying to persuade the Ontario government). Therefore, it is more than likely that a CCAA claim will have to be submitted to the court, on behalf of the pensioners, before annuity quotes are received from insurance companies.
The important initial question then is: “How will the final windup ratio be determined for the purpose of pensioners’ CCAA claims?”
Nortel’s actuaries might table an ‘estimated’ windup ratio. Koskie Minsky’s actuarial consultants will table one as well on behalf of the NRPC/pensioners. However the operative windup ratio will be determined (later) by the insurance company which ultimately will (or would like to) be providing the annuity!
So, since the claim submission to the court will be done before the annuity quotes are received (and certainly before they are finalized), how will the likely insurance company view be reflected in the claims and what steps are planned to insure that the expected (10-20%) insurance company hit is properly reflected in the claim?
This is where the rubber hits the road. Estimates are cheap. An insurance company quote (from an AAA rated company, if there are any left?) is the one that must determine the claim. This is because insurance companies, which don’t just provide an estimate but have to deliver the annuities, are more conservative (some 2008 and 2009 thoughts on this were discussed in What’s wrong with private-sector DB pension plans? Problems and solutions and Too little, too late!- 50% interim CV payments would be more appropriate ) and they build in a profit margin as well.
So the operative insurance company quote and/or delivered pension may turn out to be 10-20% lower than a Nortel or other actuarial estimate (i.e. in the 50-60% range). The real damage to pensioners and the CCAA claim should be based on the insurance company’s numbers. If this is not done well, more of the pensioners’ water will be flowing under that bridge.