Nortel sign.
The Ontario government is reversing course and will allow retirees of Nortel Networks Corp. to opt to have their pension money managed by a private sector financial company rather than see it wound up and locked into traditional annuities.
Finance Minister Dwight Duncan told a committee representing retirees that they will be allowed to pursue their proposal to transfer their pension money into an investment fund where it will be invested.
But the government will also allow plan members to choose to stay in the pension plan and have their pensions wound up as part of the company's bankruptcy process. That means those plan members would be eligible to have their pension payments topped up by the province's Pension Benefits Guarantee Fund, which is only available for pension plans in liquidation.
"The government intends to move forward with a solution that will respect pensioner choice while safeguarding benefit security," Mr. Duncan told the Nortel retirees committee in a letter sent Dec. 17.
The solution is a novel approach that has never been used before in Ontario. Typically bankrupt companies such as Nortel have their pension plans automatically wound up and all the money is converted into annuities, which pay a guaranteed rate of return for the rest of their plan members' lives.
Sibson Consulting vice-president Ron Olsen, who has been advising the Nortel retiree committee, said the new model could be used down the road by other pension plans.
"We think of this as groundbreaking in that it now opens up for the Nortel retirees an alternative to conventional windup," Mr. Olsen said Monday. "That is clearly a significant change in the way in which windups have been conducted in the past."
Nortel's pension plan is estimated to have assets equal to about 65 per cent of its liabilities, which means plan members are facing a one-third cut in their retirement benefits.
Mr. Duncan rejected a request from the Nortel retirees committee in September to have their $2.5-billion pension plan transferred to a private-sector financial company for management, saying it carried too much risk for plan members who needed to rely on their pension payments. He said he would not risk making a bad situation even worse.
Retirees mobilized this fall to urge the province's Liberal government to rethink the decision, saying many plan members believed that winding up the pension plan and "locking in" a massive shortfall was an even worse alternative. They also complained about having to convert the pension plan into annuities at a time when interest rates are extremely low and pricing is unattractive in Canada's thin annuity market.
"We're very pleased by the result," said Don Sproule, a Nortel pensioner and national chairman of the retirees' committee. "There's a lot of work to be done, but it will create more options for us -- much more positive options."
In reversing the prior decision, Mr. Duncan said the government will require pensioners to be given full disclosure of the risks of opting to convert their pensions into a new investment fund -- which includes losing the certainty of pension payments that they would receive if the money is immediately converted into an annuity.
The default choice will continue to be wind up and the purchase of annuities unless retirees actively choose the alternative option, Mr. Duncan said.
"The ability to opt out of the current wind up approach would allow pensioners who have a greater risk tolerance to elect to pursue investment strategies that may ultimately lead to higher benefits," he said.
"But it would also ensure that no pensioners have their benefits put at increased risk without making a clear choice."
Mr. Olsen said the Nortel retirees' committee will now seek binding proposals from financial institutions interested in managing the pension money.
He said the goal is to see the money invested using financial instruments to provide a guaranteed income stream similar to that of an annuity. The advantage is that it would have better pricing because there could be a more competitive bidding process than is available in the small annuity market in Canada.
He said security and guaranteed returns are still paramount to the retirees seeking the new alternative. A similar model was introduced in Britain, he said, and the initial pricing was 20 per cent better than the standard annuity market was providing.
"It is an exercise in increasing the competitiveness of the Canadian market," he said.
Some Nortel retirees have opposed the committee's plan, saying they don't want to risk any more of their pensions and also don't want to lose access to assistance provided by the province's pension guarantee fund, which tops up pension shortfalls to a maximum of $1,000 a month when companies go out of business. They argued many retirees had pensions below the $1,000 threshold, so could be almost fully covered by the guarantee fund.
Mr. Olsen said those retirees may still prefer his committee's option because they may be able to get significantly better pricing on their financial instruments.
Nortel filed for bankruptcy protection in January, 2009, and sold off most of its assets in a series of auctions. The pension plan officially faced wind up on Sept. 30, but the process is slow and the money has not been committed to annuities yet.
Janet McFarland