Workers' Pensions Get Top Priority in Bankruptcies

Summary#

This bill changes Canada’s bankruptcy and restructuring laws to put workers’ pensions and some benefits ahead of other debts when a company fails. It adds priority for unpaid amounts needed to fix pension plan shortfalls and creates a preferred claim if an employer stops its group insurance plan during insolvency. It also gives a priority for unpaid severance.

• Makes employers’ unpaid “special payments” and other amounts needed to fix pension plan gaps top‑priority claims in bankruptcy and receivership (BIA ss. 81.5, 81.6 as amended).
• Requires court‑approved restructurings to fully cover pension plan shortfalls and certain employee claims, including group insurance amounts (CCAA s. 6(5), s. 6(6) as amended).
• Creates a preferred claim for an amount to indemnify employees and retirees if an employer stops participating in a group insurance plan (life, disability, health, dental) (BIA s. 136(1)(d.001)).
• Adds a preferred claim for unpaid severance or pay in lieu of notice (BIA s. 136(1)(d.002)).
• Phases in parts of the bill over 3 years, with special transition rules for employers that already had a prescribed pension plan (Transitional; Coming into Force).

What it means for you#

• Households and retirees with defined benefit pensions

  • If your employer goes bankrupt, unpaid amounts needed to fix your pension plan’s “unfunded liability” (gap between promised benefits and plan assets) or “solvency deficiency” (shortfall if the plan ended today) must be paid ahead of other creditors, including most secured creditors, because they are covered by a deemed trust (BIA ss. 81.5, 81.6 as amended).
  • In a restructuring (not a full bankruptcy), the court cannot approve a plan unless it pays the full pension shortfall amounts listed in the bill (CCAA s. 6(6) as amended).
  • Timing: For employers already in a prescribed pension plan before the law takes effect, these pension‑priority changes apply after a 3‑year transition; for new plans after that date, they apply upon coming into force (Transitional s. 1–3).

• Employees and retirees with employer group insurance (life, disability, health, dental)

  • If your employer stops participating in a group insurance plan during bankruptcy, an amount to indemnify beneficiaries becomes a preferred claim under the bankruptcy distribution rules (BIA s. 136(1)(d.001)). Preferred claims are paid before general unsecured creditors but after secured creditors.
  • In a restructuring, the plan must pay at least what you would receive under that preferred claim if the company had gone bankrupt (CCAA s. 6(5)(a)(i) as amended).
  • Timing: This group insurance priority and the linked restructuring rule start 3 years after royal assent (Coming into Force s. 4; s. 5(1)).

• Workers owed severance or pay in lieu of notice

  • Any unpaid severance or pay in lieu of notice becomes a preferred claim in bankruptcy for the difference not already paid by the trustee (BIA s. 136(1)(d.002)).
  • This strengthens your position versus general unsecured creditors.

• Businesses with defined benefit pension plans

  • In insolvency, you must cover any special payments and other amounts needed to eliminate pension plan deficits before most other debts, due to the deemed trust priority (BIA ss. 81.5, 81.6 as amended).
  • In CCAA proceedings, you cannot obtain court approval of a compromise unless it fully pays the pension shortfall amounts identified in the bill (CCAA s. 6(6) as amended).
  • Existing plan sponsors get a 3‑year transition period before these pension priorities apply, if they were in a prescribed plan the day before the law comes into force (Transitional s. 1–3).

• Lenders, bondholders, suppliers, and other creditors

  • Pension deficit amounts will rank ahead of secured claims under the deemed trust provisions in bankruptcy and receivership (BIA ss. 81.5, 81.6 as amended).
  • Group insurance indemnity and unpaid severance are added to the list of preferred claims, which rank ahead of general unsecured claims but after secured creditors (BIA s. 136(1)(d.001), (d.002)).

• Insolvency professionals and courts

  • You must calculate pension shortfall amounts “as determined” at filing and include “special payments” required by pension regulations (BIA s. 60(1.5) amendments; PBSA Regulations s. 9 referenced).
  • You must determine the group insurance indemnity “in the prescribed manner,” which will require regulations to define the calculation (BIA s. 136(1)(d.001)).

Expenses#

Estimated net cost: Data unavailable (the bill authorizes no direct federal spending or revenue changes).

• No appropriations, transfers, or new federal fees appear in the bill text (Bill, all clauses).
• Any indirect fiscal effects (for example, changed recoveries under federal claims) are not quantified. Data unavailable.
• Administrative or regulatory costs to implement the “prescribed manner” for group insurance indemnity are not provided. Data unavailable.

Proponents' View#

• Protects pensions by putting all pension deficit amounts first in line in bankruptcy and requiring full payment in restructurings, reducing the risk of benefit cuts for retirees (BIA ss. 81.5, 81.6; CCAA s. 6(6)).
• Closes gaps by covering both “special payments” and any other amounts needed to eliminate unfunded liabilities and solvency deficiencies calculated at filing (BIA s. 60(1.5); ss. 81.5, 81.6).
• Shields employees and retirees when employers drop group insurance during insolvency by creating a preferred claim and mirroring it in restructurings (BIA s. 136(1)(d.001); CCAA s. 6(5)(a)(i)).
• Improves fairness for workers by adding a preferred claim for unpaid severance or pay in lieu of notice, ahead of general unsecured creditors (BIA s. 136(1)(d.002)).
• Gives businesses time to adjust through a 3‑year transition for existing pension plans and delayed start for the group insurance priority (Transitional; Coming into Force).

Opponents' View#

• Raises financing risk: secured lenders and bondholders face higher loss risk because pension deficits will outrank their security in bankruptcy and receivership, which could increase borrowing costs for sponsors of defined benefit plans (BIA ss. 81.5, 81.6 as amended).
• May reduce successful restructurings: requiring full payment of pension deficits to approve a CCAA plan could push more firms to liquidate instead of reorganize (CCAA s. 6(6) as amended).
• Could hasten DB plan closures or conversions, as employers may try to avoid higher priority exposure; the bill does not address potential plan design changes. Data unavailable.
• Creates valuation and litigation risk: shortfalls are determined “at the time of filing,” and methods for calculating group insurance indemnity are left to future regulations, which may be disputed (BIA s. 60(1.5); s. 136(1)(d.001)).
• Priority shifts can reduce recoveries for unsecured creditors and some secured creditors, including small suppliers, which could have knock‑on effects in creditor chains. Data unavailable.