Among the many injustices surrounding Nortel’s bankruptcy — and there are many — the one that is the most heart-wrenching is the uncertainty faced by former employees who are currently disabled and are receiving benefits from the company’s long-term disability (LTD) plan. These unfortunate people made regular contributions to Nortel’s LTD plan — in fact, some employees even made optional contributions to top up their benefits — to secure their financial future in the unlikely event that were to become disabled. Now, they are finding that instead of insuring the LTD plan through a third-party, Nortel decided to “self-insure” and fund the liability through its general revenues. With the company in bankruptcy proceedings, Nortel’s disabled former employees face the prospect of being left with nothing.

It is too easy to simply blame Nortel’s past management for cutting corners with disability benefits. The fact remains that regulations do not require private companies to either set aside funds to meet their LTD plan obligations or pay a third-party to assume these liabilities. It is also shocking to read that governments have been asleep at the wheel despite the same situation playing out at Eaton’s in the 1990s and Massey Combines in the 1980s. Instead of displaying indifference to the fate of Nortel’s disabled employees, our governments have a moral obligation to (a) introduce legislation to protect employees who are members of current LTD plans and (b) ensure that the financial benefits due to disabled employees are paid in full. It is simply the right thing to do.

PS: Check your LTD plan to see if the coverage is provided by a third-party insurance provider. If you can’t find this information, ask your HR department how the plan liabilities are met.

Later: Check out “Are your employee benefits in jeopardy?” for Thicken My Wallet’s take on this issue.

This article has 43 comments

  1. CC, why do you think that the government has a moral obligation to pay out benefits? This was an agreement between a private company and its employees; the private company welched on the deal which don’t get me wrong, is not right, but I don’t see why it’s fair that my tax dollars go to support them directly.

  2. Very unfortunate – I wrote a post for tomorrow in response to this post.

    As bad as I feel for some of these people – I don’t think it’s the government’s obligation to help them. They made a private contract with a company and unfortunately lost out which is a point that Novice already made.

  3. Canadian Capitalist

    Novice: I think Government has a moral obligation here because it has utterly failed to legislate protection of LTD benefits. Government could have introduced legislation in the wake of Eaton’s bankruptcy requiring companies to fund LTD benefits through arms-length arrangements. Providing a proper framework is the function of Government and since it failed to do so, it is responsible for making good those affected.

    There is no moral hazard here. Employees who paid into the LTD benefits programs did so in good faith assuming that the benefits will be there when they need it. They are disabled now, they need the financial support and it may not be there.

    I don’t think affordability is an issue here. We are talking about 400 odd people. That is not likely to cost taxpayers anything more than spare change.

    Meanwhile, I hope Governments hasten to fix this. Reports indicate 1 million Canadians are covered through these self-insured LTD programs.

  4. I don’t think that LTD plans fall under the “framework of government”.

    What about all the people who participate in self-insured LTD plans with their employer – is there no responsibility for them to realize they are taking more of a risk than if they go for an external plan with a regular insurance company. Is it possible they are accepting this risk in exchange for lower premiums and greater convenience?

    • Canadian Capitalist

      @Mike: If you purchase LTD from an insurance company, government regulations specify how much should be set aside as reserves etc. These regulations are in place so that if an insurance company were to become bankrupt, policy holders won’t be left holding the bag. It should be exactly the same for private companies self-insuring LTD benefits for their employees. If they want to be in the insurance business to save money, they should be regulated exactly like insurance companies.

      Employees don’t always have a choice. They are enrolled automatically in a LTD plan through work and mandatory contributions deducted from the paycheque. You can’t decline this coverage and purchase LTD through an insurance company. Naturally, employees tend to assume that this works just like any insurance: you pay premiums and you can expect benefits if are unfortunate enough to need it.

      Let’s do a straw poll: Do you have LTD coverage through work? Without checking, do you know if your employer self-insures it?

  5. CC: You do realize that what you are talking about (arms length transactions) are currently required by law. All medical plans, including self-insured plans, are required to be an arms length transaction.

    I am currently in the process of setting up my own medical plans (I own a small business) and I will be setting up a self-insured plan. The costs are between 40 & 60% less than traditional insurance because they don’t carry the burden of profit that a traditional insurance plan must. Even with self-insurance I am required by law to set up these plans through a third party registered with the government (basically an insurance company).

    Back to the issue:

    I don’t believe that the government has a responsibility to these people. Gold plated DB pensions, LTD plans that survive the companies failure and other excesses are really just a failure to plan for individuals. We rely far to much on everyone else to do our work for us and then cry foul when things fall apart. This falls under financial literacy. Should companies offer self-insured LTD, no, likely not. Why can they, quite frankly its because insurance companies are unable to offer insurance at a reasonable price, with self-insuring as competition it at least helps to keep premiums down a bit. For these 1 million Canadians the options are really to have some LTD through self-insurance or not have anything at all, I do like having the option of some instead of none. How about you?

  6. @CC: Yes insurance companies are regulated to put money away in case of failure. How well did that work in the case of AIG?

    In Canada, we have yet to have a test of the Canadian insurance company “insurance” since at this point Manulife is content with purchasing all the failed insurance companies. If Manulife were to crash, I expect we would see an AIG situation occur in Canada because quite frankly otherwise everyone would be without insurance benefits.

  7. To say this is the fault of the insured person is naive and I think crass. They entered into a good faith agreement to protect their future, their employer decided to save money, by assuming the risk themselves. Yes the employee could easily buy Disability Insurace privately, however, how is it their fault that their employer defaults?

    I am not sure the government should be on the hook for this, but I do think there needs to be a better way to regulate this.

  8. CC: I have previously written on this topic before.

    What is important to differentiate is that self insured plans are administered by insurance companies but are not insurance. Its a semantic argument with large implications. People should review their policy to see whether it is administered by an insurance company or an actual insurance policy. Most HR departments will not be able to answer this question. Your better place for information may be in the notes to the financial statements.

  9. Al (different Al)

    The people who should be receiving LTD benefits from Nortel should be high on the creditor pecking order. Government’s only involvement would be passing such a law if required.

  10. CC – good point. I find it silly that companies can make up their own rules for self-insuring and for that matter – pension funding which they seem to change for their short term benefit (the companies benefit that is).

    I have LTD through work and I know it is not run by my company.

  11. Canadian Capitalist

    @Cam: Which province do you live in? My understanding from news reports is that Alberta and BC (?) have introduced regulation in this area. Not Ontario though, AFAIK.

    AIG’s bankruptcy wiped out common stock holders but insurance policy holders were not affected. I wrote about it here:

    That’s the entire point of regulation. You don’t want a wild, wild, west, anything goes Capitalism in which companies can screw over employees, customers and clients.

  12. CC – your heart is in the right place but i think a dangerous precedent is set when the government is called upon to fix things like this.

    How things should be fixed is other non-Nortel workers being scared out of their wits by this post and asking questions about their own LTD plan at work (if they have one) and demanding changes if it isn’t good, changing jobs if the employee is unresponsive, or they should spend the money to buy private LTD coverage.

    I feel bad for these people and the position they have got themselves in, but their complacency is the result of always feeling someone else (be it Nortel, their union, or the government) will make sure they are okay.

    To ask the government bail these people out is a bad idea, as it will simply delay any real change.

    Should government not bail out those Nortel employees who had all their retirement savings in Nortel stock? A little different, sure, but also kind of the same thing.

  13. That’s the entire point of regulation. You don’t want a wild, wild, west, anything goes Capitalism in which companies can screw over employees, customers and clients

    Cc- you also don’t want a world where we live in a nanny state, free markets aren’t so free, and nobody feels they have to think and take care of themselves.

    It is a penjulem for sure, but I think we have seen the effect of ever increasing regualtion, and other than well-paid cushy jobs for regulators, it isn’t like they are all that effective. (ie. Enron, Madoff, AIG, sub-prime, etc, etc, etc)

    • Canadian Capitalist

      @Rob: Yes, I don’t want government regulating which side of the bed I should sleep in either. It is a question of balance and IMO, employee LTD benefits should be covered by legislation, at least going forward. It seems some provinces already have some legislation and it definitely makes sense for the Federal Government to step in here, legislation-wise. We can reasonably differ on whether Government should help out current LTD beneficiaries. I personally feel there isn’t much harm in doing so.

  14. Two Questions – if the insurance is handed off to a third party insurer by a business/employer, what happens if/when that insurer becomes bankrupt? Are the regulations, directed to funding and to what happens with that funding in the event of bankruptcy, different for such insurers compared to a self-administered scheme such as at Nortel?

  15. Canadian Capitalist

    @Lynn: Check out this post:

    The quick answer is regulations are in place to protect policy holders with insurance companies. No such regulations exist for self-insurance.

  16. Insurance companies benefits would be guaranteed to specified limits by Assuris.

  17. Finance Matters is correct, if an insurance company goes bankrupt the policy holders are “protected” by a company that the Government has setup and forced insurance companies to pay into for that reason. The problem is there are limits to the protected (much like CDIC) and there has never been a test of this system. So far all failed insurance companies have been purchased by Manulife or another big insurer.

    AIG was bailed out by the US government partly because they discovered that their regulated protections would not cover the insurance that AIG had issued. Chances are very strong in Canada that if Manulife (our largest insurer) went under we would suddenly discover that the insurance-insurance was not enough or the Canadian government would have to bail them out.

    So, the truth is yes protections have been setup (except for these self-insurance options). They are OK, but not likely to be as good as we have been led to believe. For myself personally I am glad that the government doesn’t have bunches of self-insurance regulations (since it’ll cost me less money then). Honestly though, gambling type insurance like LTD, and Life Insurance really shouldn’t be self done by companies.

    If companies were able to offer self-done insurance with Assuris backed policies, that would be cool, unlikely, but cool. Then private companies could offer their employee’s cheap guaranteed insurance without insurance company profit margins built in.

  18. This is no brainier. The government should require that companies adequately fund LTDs.

    To those people who think otherwise, how would you feel if the bank you deal tell you that they don’t have your money anymore? Should we say too bad your contract is between you and the company and the government should do nothing for you?

  19. Canadian Capitalist

    @Cam: In the *worst case scenario*, Assuris pays out 85% of benefits promised. It is incorrect that there has never been a test of the system. Assuris says that it has dealt with 3 insurance company insolvencies in the past:!OpenDocument&audience=financial

    True, I’m assuming Assuris would actually be able to pay out. But that’s better than these self-insured plans that companies are allowed to run.

  20. I agree that government should regulate LTDs to ensure that funds are set aside to cover the potential payouts.

    However, I do not think that the government should take on the responsibility of paying out benefits to those whose plans have failed them. There are many disabled Canadians right now who live on provincial and/or CPP disability benefits. How can the government support some disabled people while leaving others with incomes well below the poverty line?

    I think to those living on 12k a year, hearing that a former Nortel employee is going to be supported by the Government to the tune of 40k will feel like a kick in the teeth.

  21. @CC – of the 3 insolvencies only 1 was actually covered by Assuris. Sovereign Life was assumed by Standard Life. Confederation Life was purchased by Maritime Life (who was purchased by Manulife). They only have $124 million in assets. Actually I was more certain of Assuris before I looked at their balance sheets :(.

    I don’t believe we need more regulation from the government in requiring full insurance backing on these programs. I would like to see some transparency in these programs though so you are at least relying upon facts rather than “trust”.

    We are seeing the (hopefully) final few nails put in the coffin of trusting our employer to always protect us. Huge retirement plans, disability plans, numerious other wasteful and excessive plans are busy crumbling under their own weight. I am very sad for those who where banking on these “benefits”, but its not the government’s job to fix bad coorporate policy. Sad to say but if the government decides to step in and introduce some new rules I would absolutely bet that everyone will pay at least 10% more on every different type of insurance product, and there will still be foolish loopholes for badly run companies like Nortel to jump through.

    Truth is, if you want to bank on something you better do your research to make sure it is bankable. If you are not researching your sources of money you are much more likely to get screwed. We have seen alot of money failures recently, Ponsi Schemes, bank bankruptcies, insurance bankruptcies, you name it. Your money is never really safe, its just a matter of how much risk you are willing to handle.

    Just out of interest if Assuris had the ability to handle a collapse of a company like Manulife I had a look at their obligations and reserves. Assuris states that they have the ability to handle $5.3 billion in liabilities. Manulife currently holds over $300 billion in its reserve fund to cover liability shortfalls. So if Manulife pulled a Nortel and started spending its reserves and hiding things they would need a bailout to protect the policy holders.

    The whole thing is pretty scary. Its also the reason I hold my own insurance for items I’m worried about and self-insure for the rest. Saving/Investing to build a cushin of comfort. Expecting someone else to always take care of you is pure foolishness. We live in a Capitalist country, if you want Solicialism you really need to move.

  22. Forget about private companies … what will happen when the government itself is no longer able to meet its obligations? Forecasts in the US are to the tune of 60 trillion dollars for total future obligations (health care, servicing the debt, pension liabilities, etc…) and for Canada around 2.5 trillion dollars and – this is the kicker – neither the US or Canadian government is setting aside adequate funds to service these obligations.

    Having the government setting up regulations for private companies when they themselves would be in violation of the regulations is a bit Pot/Kettle.

    See for more.

  23. @CC – can you make the comment box bigger, man is it hard to fit these comments in this tiny little box.

    @Everyone else – if my information seems a little bit screwed up, blam it on these small comment boxes that make it impossible to easily fact check my whole post.

  24. That is exactly what we should do.

    Hey Joseph, I appreciate your compassion along with CCs but to use your example,….. people are made well aware that bank deposits are insured by CDIC up to $100K. If someone didn’t bother to learn these deposit insurance rules, or chose to place more than $100K with one institution, then they should be on the hook for their losses and not the taxpayers. If they went to a bank where the deposits were not insured, then again that is their problem and NOT the taxpayers. Your analogy doesn’t hold up for these reasons.

    I know it sounds heartless, but you have to look beyond these particular sad cases and think what a bail out like this Nortel thing would do systemically to causing these types of problems. For example, why should anyone bother to think for themselves, or ever learn rules if they know the government will cover their mistakes. Why would any company go with anything other than self insurance if they know the government will step in if there is a problem. Why should taxes be higher, causing us to less competitive and job losses to others because government is trying to win favour by acting that it is costless to solve problems like this.

    There are already government provided social safety nets (i.e. CPP disability pensions, a myriad of disability related tax credits, welfare, EI sickness benefits) for everybody that finds them selves poorer as a result. That is what they should get and nothing else. It isn’t fair that these 400 people would get more simply because they worked at Nortel.

    It may sound heartless, but it isn’t much different from deciding not to discipline a child for bad behaviour. The child never learns to behave properly if not punished. They learn quickly if disciplined effectively. Ask any parent of a teenager who decided never to discipline their child, or force them to learn a few things the hard way if they are happy with that decision.

    The same is, or will be true here – that is the no-brainer in my opinion.

  25. hey how about applauding CC for a post that has really stirred up some emotion

  26. Thanks for the link CC. Just a comments to the other comments.

    If you have contributed to a self-insurance pool, the argument is that your money is held in trust. Under general bankruptcy laws, property held in trust for others are exempt from the bankrupt estate. For example, everything in a safety deposit box continues to belong to you if your bank is bankrupt.

    Thus, if you have not used the money you contributed, why does it suddenly become part of the bankrupt estate to be paid out to creditors?

    I am not crazy about a bail-out.

    Rather, I do think this is a loophole in the law that no one had the political will to plug up in Canada. As the linked article indicated, other countries have already recognized this issue. The crux of this issue is why would third parties benefit from money that is not part of the company’s assets?

    The fix is pretty straightforward- amend the Bankruptcy and Insolvency Act to include employee contributions to self-insurance plans as exempt assets from creditors and grandfather the act to include the approximately 400 from Nortel so at least they get their contributions back. Employer contributions continue to form part of the bankrupt estate. After all, it was their money and this is not exactly a novel point of law from a comparative perspective.

    This is the real downside of minority government, all parties are too busy trying to get elected to undertake any detailed policy analysis.

  27. No more bailouts please – no matter how worthy the cause. The only people who should be bailed out are the taxpayers.

    The real way to prevent these situations from continuing to arise is to:

    1. ban defined benefit plans
    2. only allow defined contribution plans
    3. require all contributions to be paid when due (by employer and employee alike) to an independent trustee
    4. where a benefit arises as a result of a claimable event (e.g. disability due to a work place accident) require an actuary to do a lump sum calculation and have that amount paid to the trustee within (say) 60 days as a final settlement
    5. prohibit charging, lending etc of plan assets.

    This makes life simple and certain as far as credit risk is concerned and puts the investment performance risk with the employees (where it should be).

    @Thicken My Wallet – I’m not sure how the changes to the Bankruptcy and Insolvency Act would help with regard to the employee’s contributions since they should not belong to the company in the first place and would not therefore be available to creditors generally anyway. Am I missing something?

  28. traineeinvestor is 100% right – but finding a politician willing to ban DB pension plans when the government has the best one on the planet will sadly be impossible

  29. ‘impossible’ is a dangerous word so let me say things will have to get pretty dire before such a thing could ever occur

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  31. NOrtel currently have 6-8 Billion in cash but unless there is government legislation to put pressure on to pay disabled people they stand to loose 90% of their benefits . This is not a BAIL-OUT as people think. There is nothing to be paid by tax payers. In fact by putting in legislation tax payers will save millions because all of these people who will be cut from Nortel/sunlife disability plan will end up transferred to gov’t plans ( ie , cpp disability, ODSP, Trillium, Welfare). Nortel knows this and is using the CCAA laws to transfer its obligation to you the tax payer. The 6-8 Billion will end up mostly paying for Lawyers, Accounts and consultants and you the tax payer will pay the bill for all medical and benefits for 409 disabled people. Just think of the cost –I would say on average just medical costs will be 10k x 409 x 30 years = 122 million, CPP disability benefits ( we will all get as cut off from nortel plan) 12k x 409 x 30= 147 Million. Add to this welfare and other misc cost and a whopping 1/2 billion will be transferred to you the tax payer of Canada.I hope that sheds some light on this issue which could impact every canadian. If your company goes bankrupt you can kiss your severance, good chuck of your pension and if you are on disability of any sort –good bye.

    we are trying to change this and if you want to read more you can check here. This is not bail-out but justice to make Nortel live up to its obligations to its employee’s .The same should be done for every company so they cannot hide behind misinformation and use CCAA laws to get away. They tax payers in fact save billions by pushing for this legistlation.

  32. HEre is good article to :


    JUst to inform people as well you company could add a small print tomorrow about ASO on a 100 page benefit manual and then file for Bankruptcy. How your benefits are not insured. East as that if you can belive it.

    You cannot sue them for misinformation as they are protected by CCAA rules.

  33. I certainly do not have an issue of Nortel disabled having a priority claim on Nortel’s cash, over say other creditors – bondholders for example have to accept the risk and can’t claim ignorance

    but the comments by CC was that the government should make good on Nortel’s debt in this regard – and that started the 30 odd comments

    thanks for clarifying – it is an interesting issue that I am afraid will happen more in the future

  34. What is even more frustration is the fact the fact that EVEN if your
    company misrepresents your benefits you cannot take legal action
    as the company under bankruptcy is insolvent and protected by court order.
    The fact also is employees paid in benefits plan and were told if you are
    disabled your benefits are guaranteed untill 65 ( as long as you prove medically
    you are disabled). This is the reason why we did not get supplementary health insurance outside
    of company. We are trying to change this by pressing on Gov’t to change the bankruptcy laws
    so that people who were “misrepresented” should be first in line and not bonus to
    CEO’s . So far all parties are on our side except the conservative government. If you are in private plan ( ie non-gov’t) you should be aware of bankruptcy laws and realize that :

    1. Your pension will be reduced by hugh amount, you are now part of a creditor pool
    2. Your benefits if you are disabled might be cut off ( even if there are misrepresentation) as
    company is insolvent and protected by court order. Your Health and welfare fund is now part of creditor pool
    3. The is no government legislation provincial or Federally to protect you in bankrupcy (
    U.K, US.A have protection)

  35. Finally, I know my dept most people had E.Eng + MBA so we tend to read documents inside and out and are well educated. I have all of my benefits manuals scanned and on-line and there is NO mention of self insured anywhere. In fact I asked around and most people have no idea what self insured or ASO means? DO people have to consult with benefits lawyers to understand their benefits package? Our pay stubs were from Sunlife insurance, our tax receipts sunlife insurance, our benefits paid by sunlife insurance. We found out after bankruptcy from lawyer that we are not insured? We asked nortel to show where it says that and no response. They don’t have to response as protected by bankruptcy laws. I suggest people contact their Member of Parliament and ask that BIA be amended so that
    “YOUR” benefits , Pensions and severance packages get priority over greedy lawyers,accountants and consults who are eating away at 6- 8 BIllion in case like vultures. Even in bankruptcy nortel was able to pay hits Manages 40 Million in bonus payments, 200-300 in lawyers fee’s and I think another 300 million in consultant fees’. It is basically vultures alley and once eaten the cost of disabilty will be tossed to the tax payer. Thanks and I hope this helps people understand the true situation we are in.

  36. Why are you people making wild assumptions and continuing to rant about a bail-out when;

    It is important to understand that current Nortel LTD and pensioners that are affected are NOT looking for a bailout. The Federal bankruptcy laws need to be amended so that pensioners and those on LTD are not placed down in the long line-up of unsecured creditors but paid first upon liquidation. The public will be happy to note that this will also keep those same people off of welfare and EI

    Also, the argument about punishing children and teenagers is specious at best.

    When are those people who are caught in this on LTD supposed to
    learn this for? They can no-longer ever work and are forever rendered uninsurable due to their condition. Is it re-incarnation being brought into this and that they will now learn a lesson and apply in their next life?

    Some comments literally sound like no-brains. Some sound like no heart either. Very inhumane. Are preople aware of how lucky anyone is to have their health? The saying goes ‘at least you have your health’ well these people can’t say that.

    This comment is worth repeating;
    I certainly do not have an issue of Nortel disabled having a priority claim on Nortel’s cash, over say other creditors – bondholders for example have to accept the risk and can’t claim ignorance

  37. Outragous: you made a very good point and thanks for that. I was very disappointed that somebody said something about disabled should learn their lesson. I guess until you get into other’s shoes you don’t know. I only wish to everybody in this thread making stupid comments about free market to not end up like those unfortunate Notel employees that are on the LTD.

    On another note, I see the problem with free market ideology. Who proved that free markets are self correcting and always work optimally? To the best of my knowledge efficient markets are a theory (and proven wrong as recently as October 2008).

    In the end there must be regulation and I think 2 things came out of this thread:

    1) Goverment is reponsible to regulate markets, banks and insurance industry.

    2) Comanies have no place offering products such as insurance. Moving forward govermnet should regulate this better and in the meantime LTD beneficiaries should be places ahead of all other creditors in Nortel case.

  38. Canadian Capitalist

    Stiffing existing bond holders to benefit DB pensions falls under the category of “robbing Peter to pay Paul”. Imagine you are a Nortel unsecured creditor. You lent money to Nortel with the understanding that you’ll get in line with other unsecured creditors in the event of a Nortel bankruptcy. Now you find that some creditors want to jump the queue by wanting the Government to retroactively change legislation. That doesn’t sound right to me. The ends should not justify the means.

    Thicken My Wallet’s suggestion that LTD assets as exempt from bankruptcy proceedings makes sense. Perhaps that would mean LTD beneficiaries won’t require a bail out.

    I also have no problems with amending legislation such that going forward DB pension shortfalls, employee severance packages etc. will come first after assets are liquidated. Future bond holders will bear the risk of default and demand an appropriate interest rate. That’s fair. Stiffing existing creditors is not.

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  40. Nortel’s demise was not the result of any action of any “Pension Plan” That came after the screwing the investors got, and was an option exercised by the company. Pension Plans are generally part of an employement contract, either that of a personal employment contract or a Union Contract.
    Nortel did not go bk as a result of credible business problems.
    They went tits up because of avarice and misleading the stock holders.
    The feds should enact legislation that any common share investment in public companys be suspended until they can get their heads/hands arond the prolific fraud that is out there, and enact new legislation. The gov’t didn’t leard a dam thing after the 30’s crash.
    The Pukes in the boardroom need to realize that they are not smarter than the average shareholder, but rather overly protected by rules that allow them to exercise their deceptive frauds at the expense of the commons.
    In this business, transparency appears to be the definition of “telling the humps what they want to believe”, and stuffing money in their pockets.