Pensions: General and Nortel Specific Topics

Pensions:  General and Nortel Specific Topics
1. Pension outcomes in case of bankruptcy/restructuring/asset sales

You may have heard of a well-known telecommunications equipment supplier, a global player which prospered for decades and then fell on hard times lost billions of dollars, laid off thousands of workers, had over $1B under-funded pension obligations, had Pavi Binning as its CFO.

No I am not talking about Nortel; I am talking about Marconi (U.K.). So you may be interested on how that situation worked out for the pensioners.

The circumstances are different, Marconi was not under bankruptcy protection (it did that in 2002) but when it wasn’t awarded any of the action in BT’s 21st century network equipment build out announced in spring of 2005, this left Marconi with few options. It started looking at potential buyers of for sellable parts of the company in an effort to dismantle itself.

As far as the Marconi pension plan was concerned, to make a long story short, there was a £109M shortfall on FRS17 basis (appears to be going concern basis).  However, for an insurance company to take over the pensions it would have required £3.7B compared to the available £2.4B assets thus, £1.3B pension plan ‘solvency’ deficit. The matter was settled by “Ericsson acquiring about three quarters of the current Marconi business for £1.2 billion, but is not taking on the UK pension fund liabilities. The pensions risks will be retained by Telent, the rump of a business that was only a fraction of the size of the pension fund even before this transaction. Marconi paid £185M into the pension plan and put a further £490M into an escrow fund. All of part of this escrow could be returned to Telent, if an insurance company was prepared to assume pension obligations for less at some future date. Note that only about half of the pension plan shortfall was protected in this transaction still leaving about £600M (16%) plan shortfall. The shareholders were also getting £577M (even though pensioners were not yet made whole!!! Mr. Binning left the company in 2006 after the deal was completed and shortly after a failed attempt to then sell Telent to private equity firm Fortress.) See Marconi Corporation PLC- Disposal and Marconi Pensions Deal- blueprint or special case

In 2007 Telent, with the attached pension plan or more appropriately, the pension plan with the attached Telent) was sold to Pension Corporation for £398M according to Telent, what’s left of Marconi, has agreed a takeover from specialist pension fund manager Co-Investment No.5 LP Incorporated worth £398m or 600p per share. In October 2007 the regulator appoints 3 independent trustees to Telent Pension Regulator uses powers to appoint independent trustees to Telent pension scheme The union was concerned that Telent was acquired by an offshore (Guernsey) private equity firm Pension Corporation which now may be looking to sell Telent and hold on to the pension plan! Union fears for future of Telent’s pension scheme

Note the regulator had to step in at least twice (once to get about half the pension plan shortfall replaced before approving the Ericsson transaction and then again to impose three independent trustees when to the pension plan when Telent was bought by a private equity firm. (I wonder if the FSCO the Ontario regulator could and/or would flex its muscles to protect pensioners-unlikely based on what I have seen it do in much less contentious matters.)

WOW, quite a pension plan story! How would you like to have your pension plan owned by a hedge fund or a private equity firm, especially knowing that in Canada we don’t have anywhere the level of pension insurance that the U.K. offers, nor the robustness of regulatory action that protects pensioners there? The details that I was able to find are quite sketchy (though hopefully mostly correct) and messy, and they sure won’t make Nortel pensioners comfortable that the outcome of restructuring and/or liquidation will end well for them. (If you know some Marconi pensioners, you may be able to verify the above and let me know of any errors.)

2. Nortel pensioners’ life insurance

A few weeks before Nortel went into bankruptcy protection, pensioners received a letter notifying them of a change in the way the taxable value of the (decreasing) life insurance coverage, which is part of the retirement benefits, will be calculated. Specifically, instead of using an average rate for the entire group (which presumably included younger still working employees), now will be calculated based on the insured’s age. My taxable benefit now increased almost four-fold! It is becoming an expensive benefit that not everyone needs or wants (as no doubt the clever Nortel accountants figured). If we didn’t want/need the insurance we are required to specifically instruct Nortel to that effect. To determine whether you need the insurance you may wish to read up it at How much Life Insurance Do You Need?Some of you may conclude that you don’t really need life insurance at your stage in life or that you don’t need such expensive life insurance (While I haven’t investigated it, I wouldn’t be surprised if a healthy individuals who would qualify for life insurance couldn’t get it for less than the “tax cost” of the ‘free’ Nortel insurance.) It is certainly worth exploring if you need the insurance. For those who don’t need the insurance and are planning to cancel it, you may still want to stick with it until the end of the CCAA proceedings since a $1,500 annual insurance premium benefit may be worth about $20,000 of lifetime benefit that as a creditor you should be entitled to include in your claim against the company; even at 25¢ to the dollar, that could be significant value.

3. Some of last week’s pension stories

First one is in the Globe and Mail by Keith Ambachtsheer entitled “Wanted: new pension champion for Canada” discusses the disastrous state of Canada’s pension system whereby only 20% of the private sector workforce has an employment based pension. Yet despite studies by numerous provinces, and the C.D. Howe Institute (CSPP proposal) all confirming the urgent need for a coordinated national or regional plan, what is still needed is a Champion. Ambachtsheer asks: Will it be B.C.’s Campbell, or Alberta’s Stelmach, of Liberal leader Ignatieff or Prime Minister Harper? (The proposed individually funded solutions are there to be executed; all that’s needed now is a Champion to drive, urgently as time is running out for a whole generation of Canadians.)

Derek deCloet’s “The future of pensions: Share the risk”writes in the Globe (along the same lines) that not only is private sector coverage with some sort of employment based guaranteed pension limited to just 20% of the workers, but even those who have one can’t count on it! Air Canada, BCE and others have pension underfunded by hundreds of millions of dollars (not to mention Nortel in bankruptcy protection with a likely deficit of about $1B in the Ontario plan alone) due to many years of pension plan malpractice, not just the recent drop in the market. The problems are systemic. One solution is to “water down the guarantees” and replace the fixed pension payments with target pension payments, so that in bad years the pensions would perhaps be somewhat lower and in good years may perhaps be somewhat higher than the target, and remove the risk of the sponsoring company going bankrupt and pensioners having to take a massive pension cut. (Of course pension plan governance would have to change, having the sponsor be the plan administrator is a disaster for pensioners- the sponsors’ numerous pension related sins are both of commission and omission.) So going forward, a shared risk approach is likely the only way out of this mess (but for existing commitments they should be delivered. Pensioners, unlike younger workers, have no means of recovery).

Bloomberg’s Lui and Batino report that “Asia Pensions dump shares for bonds, funding stimulus”. The risk appetite of Asian pension plans is decreasing though many of these funds already had relatively low asset allocations to equities compared to aggressive Canadian and American practices. (U.K. pension funds started the move years ago to much more liability driven investment approach for pension funds, while in Canadian/American companies continued to gamble with the pensioners’ assets (in the hope) for lower pension plan contributions. One unmentionable company, OK it’s Nortel, used the discount rate, for calculating going concern valuation and annual pension contribution, equal to the expected return rates; i.e. the more risk they took, the higher the expected return, but then simultaneously also lowered the liabilities due to the higher discount rate, set equal to the higher return rate expected from a riskier asset mix, so you further minimize the required annual contributions. If some of these companies would have brought the same level of innovation to running their business as they brought to pension plan contribution reductions, the pensions would no doubt be more secure.)

And speaking of pension liabilities, in “Liability driven investment”, the Financial Times has dedicated an entire section with almost a dozen articles looking at the evolving landscape of liability driven investment. (Note that liability driven approach is a given for well run pension plans, the issues discussed here are how to implement the pension portfolio without simply using bonds only to match the bond-like pension plan liabilities.)

The Globe and Mail’s “Major firms push Ottawa for pension reform”describes how a number of major Canadian corporation like Air Canada, BCE and others “are lobbying the government for a permanent change, but without certain conditions such as member consent and letters of credit attached to the temporary measures.” (If they want to get out of their pension plan commitments, they need to first make the plans whole and then hand over the plan assets to a national or regionally run pension administrator, to make sure that their hands are completely removed from the cookie jar and the pension plan is run for the benefit of the pensioners.)

And finally, the believe it or not story of insensitivity and greed of Nortel executives who after having destroyed the company, filed for bankruptcy protection, allowed the pension plan to be only 60% funded, now firing thousands of employees without severance payments, yet they had the nerve to approach the Court for permission to pay themselves bonuses “Nortel may pay executive bonuses during bankruptcy” . (By the way, the Court approved the bonuses!)


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