PensionReforms' summary and comments
 
When an employer disappears following receivership or liquidation, the wages due to employees often have a priority claim over other creditors; even sometimes ahead of the tax collector.  Should amounts owed to workplace retirement saving schemes be added to priority claims for pay?  What about unfunded Defined Benefit "promises"?

There is no doubt that the plan's governing documents should spell out what should happen, as between beneficiaries, when the sponsoring employer disappears but what about as between the plan and others to whom the employer owed money?  This report looks at the current (and any proposed) arrangements for 12 OECD countries.

"Underfunded pension funds are in the same position as other creditors when their sponsoring firm becomes insolvent, having to join the queue claiming the remaining assets of the firm. Arguments for granting pension fund priority rights over other creditors are the same as for introducing pension benefit guarantee schemes - i.e. market failure and diversification.  Arguments against such a priority position focus around the impact on other creditors and potential disruptions to capital markets."

The suggestion that plan members deserve extra protection seems derived from the employees' apparently unequal bargaining position.  They may be giving up wages today in favour of a future benefit promise but don't really understand the credit risk.  Alternatively, because employees depend on the employer's continued existence for pay, they suffer a double blow if the employer disappears.  Other creditors may understand the concentration and credit risks better.

PensionReforms doesn't think much of either of these arguments except, perhaps, where institutional arrangements (such as external entities like the Pension Benefit Guarantee Corporation in the US) allow for what the report calls "strategic bankruptcies", "work-out negotiations" or terminations of a gaming nature.  PensionReforms has looked at guarantee arrangements here

"The OECD's report on priority pension claims within bankruptcy found that pension claims (unlike wages) rarely receive priority over other creditors. More concerning, it can be difficult for pension fund creditors (being a diverse group without strong financing) to get their voice heard properly within insolvency procedures. Difficulties with providing such priority status to pension creditors stem from problems with changing bankruptcy laws and the strength of other financial creditors. The OECD's report concludes that priority rights should be given to unpaid and due contributions from the plan sponsor and that care should be taken that pension beneficiaries be treated at least as well as other creditors in any bankruptcy or restructuring process (e.g. ensuring their representation on creditor committees)."

PensionReforms thinks there is something in both of those recommendations, but wonders whether the plan's fiduciaries were really doing their job to allow contributions to be in the "due but unpaid" category other than, perhaps in the month or so before the bankruptcy.  

Arguments for special treatment based on the collapse of Enron (not used in this Report) and the losses associated with the 401(k) scheme also do not appeal to PensionReforms.  Most of those losses were associated with the members' direct investment in the shares of the sponsoring employer.  There, employees really were concentrating their investment risk in what was really an employee share purchase scheme.

Amounts representing an unfunded liability in a Defined Benefit plan also seem to PensionReforms to be in a different category.  They are not even really amounts owed.  While fiduciaries have a role to ensure members know about this and what the sponsor is doing about it, PensionReforms suggests that other creditors should not really help pay for the deficit on the employer's disappearance.

It does seem difficult to distinguish between the small trade creditor that may be just as affected by the employer's disappearance as the out-of-work employee whose contributions were due but unpaid.  Both are creditors and both should be represented but neither should be preferred over the other. (file size 158 KB)  155