The Ontario government could be on the hook to finance a massive shortfall in pensions for workers at Algoma Steel Inc. if creditors can't agree on a restructuring plan and the steel maker has to be wound up.
The Pension Benefits Guarantee Fund, which amounts to an insurance fund for defined benefit pension plans in the province, has only $230-million, considerably less than Algoma's pension shortfall, which could be as high as $625-million or in the range of $400-million to $500-million.
The $625-million amount is the figure Algoma provided in court on Monday to bolster its case in seeking protection from its creditors. The $400-million to $500-million figure is an estimate from Dave Gordon, director of the pension plans branch of the Financial Services Commission of Ontario, which oversees the Pension Benefits Guarantee Fund.
If the fund had to cover the shortfall, it would need a loan from the Ontario government.
"It's at the government's discretion whether or not to provide a loan," Mr. Gordon said in an interview Tuesday.
Senior executives at Algoma, which is Canada's third-largest steel maker, refused to discuss the issue Tuesday.
"It's premature to talk about any of this," Glen Manchester, Algoma's chief financial officer, said from the company's head office in Sault Ste. Marie, Ont. "Everybody's going to have a vested interest in resolving this thing."
A spokeswoman for Ontario Finance Minister Jim Flaherty agreed. "I think it's a bit early to be talking about that, given that Algoma isn't at [the winding-up]stage," Aynsley Wintrip said.
Nonetheless, the pension issue underlines a difficult decision for Ontario Premier Mike Harris, who has insisted so far that Algoma won't be bailed out, but will come under intense pressure if the largest employer in the city of 80,000 people faces bankruptcy.
Mr. Harris's predecessor government under NDP premier Bob Rae orchestrated a bailout of the steel maker when it was in the same situation in 1991.
The Pension Benefits Guarantee Fund was set up in 1980 and levies an assessment on every defined benefit pension plan in the province.
It provides a backstop in the event a company is unable to finance pension payouts, but it does not guarantee 100 per cent of the benefits.
It doesn't guarantee benefits of more than $1,000 a month, Mr. Gordon said and it does not recognize amendments to plans made during the three years previous to a payout.
Algoma was granted protection from its creditors on Monday amid a North American-wide steel industry crisis and its own financial difficulties arising from more than $500-million in debt taken on to pay for a state-of-the-art mill in Sault Ste. Marie. The junk notes used to finance the mill are denominated in U.S. dollars and carry a high interest rate of 12.375 per cent.
Algoma said in its court filing that the notes are trading at about 20 per cent of their face value.
Algoma has posted a profit in only one quarter since the second quarter of 1998 and projects losses of approximately $196-million this year.
Algoma's largest shareholder, the United Steelworkers of America, pledged Tuesday to work with management and other stakeholders to restructure the company, but said wage concessions probably aren't part of the solution.
There have been no discussions about cutting wages or trading salary increases for an increased equity stake in Algoma, Tom Bonell, president of local 2251 in Sault Ste. Marie, said Tuesday.
"The problem with Algoma is No. 1, the debt, and No. 2, the market," Mr. Bonell said. "Our wages, our benefits, our pensions aren't out of line."
Base wages start at $17 or $18 an hour, he said, while wages for more skilled jobs start at $23 an hour.
The labour cost situation is completely different from the 1991 restructuring, he said.