Ontario’s pension benefits guarantee fund has successfully reclaimed some $200 million from monies allocated to pensioners in Nortel Networks Corp. bankruptcy proceedings.
The silver lining for pensioners is that the decision by the Financial Services Tribunal finally puts an end to the uncertainty they’ve experienced since their benefits were cut off in 2010.
“It would have been a very uphill climb for the pensioners to appeal the FST’s decision further,” says Mark Zigler, senior partner in the pensions and benefits group at Koskie Minsky LLP, which represented the pensioners. “And after so many years, they were tired of the fighting, especially since many had come close to maintaining their pension benefits when all was said and done.”
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The PBGF had advanced nearly $400 million to assist the pensioners during the eight years the insolvency was winding its way through the courts. However, the $859 million recovered by the funds in the insolvency — though far less than the underfunded deficit of about $1.9 billion — substantially exceeded expectations at the time the advances were made, meaning that the PBGF was entitled to a refund.
Morneau Shepell Ltd., which administered Nortel’s pension funds since their windup in 2011, calculated the refund owing as amounting to some $221.2 million, almost 25 per cent of the $850 million recovery and some 58 per cent of the PBGF’s advances. In other words, the firm concluded that, had the PBGF known what the actual recovery from the insolvency would be, it would have paid out some $221 million less than it actually did.
However, the pensioners claimed Morneau Shepell had erred by calculating the refund with reference to the entire $859 million that represented the pensioners’ share of the Nortel estate — a sum that included recovery for indexation benefits. Because the legislation governing the PBGF didn’t apply to such benefits, the pensioners reasoned, the indexing benefits should not have been included in calculating their recovery or the refund claim.
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If the indexing benefits hadn’t been included in the analysis, the refund would have been $100 million less than calculated by Morneau Shepell, or roughly $121.6 million.
“If one treats the indexing benefits separately, then some of the assets recovered from the estate would be available to satisfy the separate claim for indexing benefits, which would also leave more of a shortfall relating to benefits covered by the PBGF, and therefore requiring more PBGF funding and less of a refund,” says Randy Bauslaugh, who leads the pensions, benefits and executive compensation practice at McCarthy Tétrault LLP and headed the legal team representing Morneau Shepell.
Last March, Lester Wong, the Financial Services Regulatory Authority’s deputy superintendent for pensioners, rejected the pensioners’ position, ruling that $221.2 million was owed to the fund.
Zigler responded by filing a request for a hearing before the FST, which upheld Wong’s ruling. In doing so, the FST pointed out that Morneau Shepell’s calculation was based on “the specific terms under which the interim allocation was advanced as agreed to by the parties.”
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That agreement expressly provided that the advances “would be refunded to the extent the final calculations reflected an excess payment had been made, particularly when the interim payment was made in the face of certain known assets [the pensioners’ claim in the insolvency] that were not yet valued and were being actively pursued by Morneau Shepell as the administrator.”
Arguably, the pensioners’ position on the refund was doomed because of the form in which they presented their claim in the insolvency.
“The pensioner’s argument that there were effectively two claims in the bankruptcy — one for benefits covered by the PBGF and a separate claim for indexing which was not — was problematic from the outset because the pensioners made only one undifferentiated claim in the insolvency, and that was for all benefits promised by the plan,” says Bauslaugh.
Zigler disagrees. “The fact that the government claimed money paid in respect of benefits it had no obligation to protect and in respect of which it made no advances is troubling to us.”