On April 27, 2023, Bill C-228, the Pension Protection Act (PPA),
received royal assent and was proclaimed into force in Canada.
Because the PPA fundamentally changes how pension obligations are
addressed in insolvency proceedings, it is important for lenders to
understand the nature and impact of the legislation.
Below are five key considerations about the impact and application of the PPA.
- Background. There are approximately 9,000 defined benefit pension plans (DB Plans) in Canada with approximately 4.5 million members. Between 2009 and 2022, only 10 insolvency proceedings resulted in a reduction to pension benefits. These proceedings affected approximately 50,000 people or 1% of all current members of DB Plans.
- Federal and Provincial Application. Insolvency proceedings in Canada are primarily governed by two federal statutes: the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA). Because the PPA has amended both statutes, all federally or provincially registered pension plans are potentially subject to the PPA in the event of a formal insolvency of the employer and may be impacted by the restructuring.
- New Super-Priority Rights. The PPA has significantly expanded the super-priority protections that the BIA and the CCAA provide for pensions in the insolvency of a debtor employer. These protections now include amounts required to fund any unfunded liability or solvency deficiency of federally or provincially registered DB Plans.
- Unintended Consequences. While the market's reaction to the PPA has been mixed, there appears to be a broad consensus that the PPA may actually trigger many negative and unintended consequences. Its effects may include the restriction or increased cost of credit for employers with DB Plans, or even the termination or conversion of DB Plans. In 2022, the Association of Canadian Pension Management estimated the PPA could "lead to a loss of pension coverage for up to a million Canadians."
- Planning for the Future. The PPA contains a four-year transition period for employers that had prescribed pension plans in place before the PPA came into force. Given the PPA's significant impact on the priority of secured creditor rights, lenders should carefully consider whether the PPA changes the risk profile of their borrowers and determine what steps, if any, could be taken to help mitigate that risk.
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