Nortel Settlement Agreement- What’s in it for pensioners?

In a nutshell

The Nortel Settlement agreement offers pensioners about a $2,000 value now, while it forces pensioners to forgo a potential of up 5-50 times as much upside later, if a successful fight can mounted to receive claims priority and/or action against Nortel, its Board, Officers and their advisors did not meet their fiduciary and professional responsibilities to ward pensioners. The deadline to object is March 1, 2010.

Details

Unfortunately, I have not seen any quantification of the value offered and the potential value forgone by agreeing to the proposed “deal”.

From my understanding, the only measurable benefit delivered in this deal is the extension of the health and life insurance benefits from an additional nine months to end of 2010, for those already eligible for these benefits. A back of the envelope calculation might suggest a value of the order of $2,000.

What we lose is the ability to pursue a priority claim (based on “deemed trust”, and other arguments) over unsecured creditors and to pursue Nortel, its Board of Directors, Officers, Pension Committee and their advisors for actions or lack thereof, which resulted in a seriously underfunded (the exact level is still TBD) pension plan.

It difficult to get a good handle on what we are forgoing by accepting this ‘deal’ since we still have no idea as to: (1) an accurate picture of the funded status of the plan,(2) the assets in the Canadian estate (or the extent that we’ll have access to the U.S. or other estates), (3) unclear and growing claims against the Canadian estate, including incremental $2B of IRS claims have already been accepted from the U.S. and a further $3.2B claim has just been tabled by the U.K. pension regulators against the Canadian estate, and (4) we still don’t know what the additional downside will be for Ontario pensioners if we end up forced into an annuity. (Quebec based pensioners will not be forced into an annuity, but will be PBGF eligible for any Ontario based service.)

So a back of the envelope calculation based on the very limited information available, accepting the ‘deal’, for non-union plan assuming average pension is $24,000/ year, average pensioner age is 71 and final funded ratio after all (CCAA and PBGF) recoveries in range of 92%-65% (my bet would be closer to 65% than 92%), then:

-if PBGF eligible, the average pensioner forgoes opportunity to try to recover a shortfall in the range of ($1.0-$4.2K per year and expected longevity of 15 years) or a NPV (4% discount rate) ranging from $12K-$47K

-if not PBGF eligible, the average pensioner forgoes opportunity to try to recover ($2.0-$8.4K per year and expected longevity of 15 years) or an NPV ranging from $23K-$97K

-younger pensioners (<71 years old) and pensioners with higher than average (>$24K/yr) pensions will forgo recovery of proportionately higher amounts (e.g. a non-PBGF eligible pensioner in the early 60s with a $36K pension, then at the 65% final funded level might end up forgoing close to $200K)

For the negotiated pension plan, with an average pension of $12,000 per year the PBGF eligible pensioners with pensions of average or lower value, they are protected.

So if this back of the envelope calculation is in the right ballpark, pensioners secure $2,000 individually ($20M for 10,000 pensioners) and give up right to pursue 5-50+ times as much (120M-$1B for 10,000 pensioners) by going after those who individually or collectively failed to meet their fiduciary and/or professional duties toward the pensioners and by trying to get some level of priority from the courts. This of course would have to be weighted by the probability of success in pursuing this approach. If you think that the probability of mustering and winning a class action lawsuit is zero, then $2,000 is a good ‘deal’. Otherwise, depending on your assessment of the final funded status of the pension plan and the probability of a successful class action lawsuit, you might be an unhappy or a very unhappy pensioner who might consider objecting to sections (vii) and (ix) of the Notice Letter.