Defined Benefit Pension Plans and the Pension Protection Act: Lenders Beware


Authors: Justin Reiter and Nicolas Brochu

Publication ǀ May 10, 2023

Lenders, investors, and insolvency professionals are well-versed in the risks associated with defined benefit (“DB”) pension plans in Canada.[1] While the popularity of DB plans has declined – over the last 20 years, the percentage of such plans among employers has dropped from 21.3% in 2000 to 9.6% today[2] – several Canadian companies are still bound by them.

DB plans pose certain risks for corporate lenders. In contrast to defined contribution plans, they can be adversely affected by underfunding since the employer shoulders investment and demographic risks.

Underfunding occurs when a pension fund’s assets are insufficient to cover current and future pension benefits. Underfunding creates a liability, as the employer must contribute cash or other assets to ensure that the fund can meet benefit commitments as they become due. Actuarial sciences help paint a clearer picture of pension assets and liabilities, but these remain subject to economic and life expectancy risks. An example to illustrate: a single year jump in Canadian life expectancy can substantially increase a company’s DB plan obligations.

Currently, the Bankruptcy and Insolvency Act (the “BIA”) ranks most pension liabilities as unsecured claims – i.e., at the bottom of the distribution chain. At present, common understanding is that the only pension liability amounts on the date of bankruptcy that benefit from a priority are:[3]

  • amounts deducted from employees’ remuneration for payment to the pension fund;
  • unpaid normal costs[4] related to DB plans and defined contributions required to be paid by the employer; and
  • amounts payable to the administrator of a pooled registered pension plan, where applicable.

Consequently, pensioners have, in the past, seen their benefits diminished when their employer became insolvent or bankrupt. Nortel and Sears Canada provide examples of such cases.

The Pension Protection Act (the “Act”), changes this. According to the Honourable David M. Wells, the Act’s sponsor in the Senate, its purpose is clear: “people holding defined benefit pension plans [will] move up the line of priority for payout if a company goes bankrupt”.[5]

The Act protects DB plan benefits in two ways. First, it preserves DB plan liabilities in arrangements and reorganization plans by making full payment a condition precedent to the approval of any plan of compromise, arrangement, or proposal. Second, it gives DB plan liabilities super-priority in the event of liquidation.

It does this by amending the BIA, the Companies’ Creditors Arrangement Act (the “CCAA”) and, on a related note, the Pension Benefits Standards Act, 1985 (the “PBSA”).

Proposals and Plans of Arrangement

The Act provides that no restructuring – by way of a proposal, compromise, or arrangement – may be approved by a court unless the following amounts are provided for:[6]

  • an amount equal to the sum of all special payments, determined in accordance with section 9 of the Pension Benefits Standards Regulations,[7] that would have been required to be paid by the employer to the fund to liquidate an unfunded liability or solvency deficiency; and
  • any other amount required to liquidate any other unfunded liability or solvency deficiency of the fund as determined at the time of the filing of the notice of intention or of the proposal, if no such notice was filed, under the BIA, or of the day proceedings were commenced under the CCAA.

(Collectively, the “Fund Deficiency Amounts”)

The Fund Deficiency Amounts extend much further than what was expressly protected under existing insolvency legislation. Most notably, they cover and apply to any actuarial deficit in a DB plan. That is to say, any amount required to cover the extent to which an actuarial assessment shows that the plan is insufficiently funded either (i) to pay the benefits that will become due if the plan continues as a going concern indefinitely or (ii) to meet the obligations that would be due if the plan is wound up.


In the event that a company does not attempt – or does not successfully complete – a restructuring, the Act provides that the Fund Deficiency Amounts will obtain super-priority in the context of the sale and distribution of a company’s assets or of receivership.

Specifically, the Fund Deficiency Amounts will be secured on all the assets of the company, and this security will rank above every other claim, right, charge, or security against the company’s assets, regardless of when that other claim, right, charge, or security arose, except for:

  • the rights of unpaid suppliers to repossess goods;[8]
  • the special rights of farmers, fishermen, and aquaculturists;[9]
  • certain amounts deemed to be held in trust, comprised mainly of unremitted source deductions owed to fiscal authorities;[10] and
  • the security for unpaid wages or other compensation for services rendered during the 6 months prior to bankruptcy or receivership – up to $2,000 per claimant.[11]

Going from the back of the line to the front, these Fund Deficiency Amounts increase exposure for secured lenders, who will effectively see their claim leapfrogged by any actuarial deficit in the pension fund.


Most of the DB plans prescribed by Canadian employers are well capitalized. According to a recent report, as much as 79% of DB plans were in a surplus position on a solvency basis at the end of 2022.[12]

Nonetheless, DB plan obligations can be significant – ranging from millions of dollars to potentially billions. Consequently, a potential deficiency may represent additional risk to a secured lender’s security position.

These pension liabilities may be disclosed in a company’s consolidated financial statements and expanded in the notes thereto. With the enactment of the Act, secured lenders will need to review their loan portfolio and assess the potential pension plan liabilities of their clients. In doing so, they should bear in mind that the evaluation of benefit obligations and fair values of DB plan assets are always subject to change. As highlighted prior, market conditions, economic returns, investment decisions, and life expectancy risks may all impact a company’s DB plan obligations.

In such a context, secured creditors would be well advised to ensure that borrower disclosure obligations are adequate and to conduct detailed periodic reviews on a case by case basis to assess their exposure to potential unfunded pension liabilities and adjust their security, interest rate, and credit limits as may be required.

Final Notes

The Act obtained royal assent on April 27, 2023.

The Act provides for a transitional period of 4 years before it applies to existing DB plans.[13]

In a bid to ensure transparency related to DB plan funding, the Act also requires that the Superintendent of Financial Institutions report, at the end of each fiscal year, on the operations of the PBSA, the state of funding requirements of pension plans, and on any applicable corrective measures taken or directed.[14] This report will be provided to the Minister of Finance, who will subsequently table it in Parliament. The report will also be transmitted to the relevant provincial ministers.

Disclaimer: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such.

[1] According to Statistics Canada, DB plan membership is dominated by the public sector, standing at 72.5% in 2020 (

[2] Speech of the Hon. David M. Wells, Debates of the Senate, 1st Session, 44th Parliament, Volume 153, Issue 92 (Wednesday, December 14, 2022).

[3] BIA, s 81.5.

[4] The cost of benefits, excluding special payments required by law, that are to accrue during a plan year, as determined on the basis of a going concern valuation.

[5] Supra note 2.

[6] The Act, ss 2 and 5.

[7] SOR/87-19.

[8] BIA, s 81.1.

[9] BIA, s 81.2.

[10] BIA, s 67(3).

[11] BIA, s 81.3.

[12] DB pension plans begin 2023 in better financial health than they began: Mercer, Mercer Canada, Toronto (January 3, 2023),

[13] The Act, s 7.

[14] The Act, s 6.