Wednesday, December 08, 2010

A national disgrace

"Tory-controlled Senate rejects bill to ensure benefits for disabled Nortel workers." What a terrible outcome for these employees:
The Conservative-controlled Senate has killed a bill that would have protected former Nortel employees from losing their long-term disability benefits.

The bill, sponsored by Liberal Sen. Art Eggleton, was defeated by a vote of 47-44.

Liberals and independent senators supported the bill, which sought to ensure 400 disabled Nortel workers would get preferred status among creditors when the once-mighty telecommunications technology giant is finally dissolved.

Most of the company has been sold off since Nortel filed for bankruptcy in January 2009.

Without the bill or some other federal intervention, disability benefits will cease at the end of this month.

Disabled employees have predicted that if denied benefits they'll face a bleak future full of illness, poverty, homelessness and even suicide.
The problem is essentially this:
"Unlike pension plans, employers don't have to fund workplace disability plans," says James Pierlot, an independent Toronto pension expert. "On bankruptcy of an employer, workers can lose part, or even all of their disability benefits. Bill S-216, which increases the priority of disabled workers' claims to assets of an insolvent employer, is a modest, but important first step in improving benefit security for disabled workers."
Nortel's disabled workers thought they were insured and that the company had set aside appropriate reserve assets in the Canada Health and Welfare Trust, which the company had created to fund annual long-term disability wage-replacement benefits. But, Nortel management removed employer contributions for the long-term disability wage-replacement benefits, and borrowed close to one third of the assets in the Canada Health and Welfare Trust, leaving it severely depleted, says Diane Urquhart, a Toronto-based independent financial analyst, who is helping the disabled Nortel group.

Unlike pension plans, which are subject to rigorous funding requirements under federal and provincial pension legislation, there is generally no requirement in Canada to fund or insure long-term disabled benefits.
That latter deficiency is something that should be remedied. In the meantime, it's a hard future for these Nortel workers (and likely others elsewhere in this country to come). Also from the same WSJ report, some research that bears looking into, which suggests the lobbying claims we heard are not well-founded:
Both the Canadian Bankers' Association, a powerful industry lobby group, and the Federally Regulated Employers - Transportation and Communication, or FETCO, voiced their opposition to the bill at last week's hearings. Neither group provided statistics to support their claims.

The CBA said companies offering long-term disability insurance benefits "would find themselves at a competitive disadvantage" to international rivals. It also expressed concern that investors will be more reluctant to buy a company's bonds, depriving it of financing or raising its cost of financing, if disabled workers rank ahead of unsecured bondholders. "Ultimately, this leads to reduced economic growth and job creation," Bill Randle, the CBA's assistant general counsel, said.

FETCO wasn't immediately available to comment.

A 2009 Australian study, however, found that these claims are unfounded. Using modern finance theory techniques, the co-authors Jeannette Anderson and Kevin Davis examined the impact of preferred creditor status to employee entitlements in high-profile Australian corporate liquidations.

The impact on the cost of secured debt for Australian companies was found to be "extremely small for most companies, contrary to conventional wisdom," they said in a paper published in the Australian Journal of Management.

The amount of money the disabled Nortel workers need amounts to less than 2% of the cash that will be disbursed to other creditors when Nortel is finally dissolved, says Urquhart.

She estimates full settlement of the Canadian long-term disabled would cause the average Nortel bond price to fall at most 2.8%, which is the measure of value that "does not rightfully belong to the bondholders in the first place" because of the Canada Health and Welfare Trust account agreements. Since Nortel filed for bankruptcy, its bonds have risen to US$78-US$82, from the US$12-US$14.63 range, she says.

Indeed, the impact of Bill S-216 on an employer's ability to raise capital is expected to be minimal because long-term disabled claimants tend to be a small minority of the total workforce, and the bill isn't intended to affect secured creditor claims, analysts say.
This is a situation that demands a fix. There's no way that in a country as rich as ours, where Nortel management can certainly end up with their own payoffs, that employees in need of disability benefits should be left holding the bag. No way.

Good on Art Eggleton and Judy Sgro and all others who have pushed this issue. Hopefully a future government will indeed make sure this cannot happen again.