Days after a patent sale generated $4.5 billion (U.S.) for creditors of insolvent Nortel Networks, its retirees are facing a huge cut in pension income, along with a clawback of benefits paid out over the past 10 months.
“This is hitting our family very hard,” said Jayne Price, whose 89-year-old father, John Price, supervised a staff of 300 Nortel engineers in Quebec until he retired in 1980.
John Price and the other 12,000 or so Nortel pensioners in Canada began receiving individual letters Wednesday from pension administrator Morneau Shepell announcing “interim” cutbacks in benefits starting with the Aug. 25 pension cheques.
Ontario estimates an average Nortel non-union employee who worked in this province faces an 18 per cent reduction in benefits. Workers who spent their careers outside of the province, and were entitled to indexed pensions, will see average cuts of 31 per cent for non-union staff and 25 per cent for unionized employees.
The cuts are deemed interim because benefits will be recalculated higher to reflect Nortel's liquidation sale that yielded total proceeds of more than $7.6 billion, far greater than the company had forecast.
Cash from the auction, plus an estimated $1 billion Nortel still has on hand after seeking creditor protection in 2009, will be split among bondholders, suppliers and former employees in a global process that involves conflicting and overlapping claims.
Nortel sought creditor protection under the strain of more than
$4 billion in bondholder debt, a legacy of its acquisition binge during the tech bubble of the late 1990s.
A group called Nortel Retirees and Former Employees Protection Canada has urged a forestalling of the benefit cut until the liquidation sale proceeds could be distributed, at least for the most vulnerable retirees.
But a spokesman for the pension administrator said it will be the end of the year at the earliest before the windup process is complete.
“We can't wait forever,” said Hamish Dunlop, a principal at Morneau in Toronto. “This could take years.”
The Morneau letter cites “insufficient assets to fully satisfy benefit requirements,” indicating that retirees on average will be paid 70 per cent of their full pension entitlement in Ontario, and 59 per cent outside of Ontario, where most Nortel pensions are indexed.
“We regret that such action is necessary in light of the pension plan underfunding,” the letter said.
And since Nortel retirees had been receiving full pension benefits since last October when the windup of the $5 billion Nortel pension plan began, they must return overpayments.
For John Price, the cut in pension amounts to $600 monthly, while he owes another $52 per month to cover the benefit overpayment.
“We read about unbelievable amounts of money for sales of Nortel patents. . . . Where is the money for us? The frustration is overwhelming,” he said.
His daughter added: “My mum is 81 (in long-term care in Toronto) so he's going to have to sell his car so he can take the bus to see her every day.”
Anne Clark-Stewart, a Nortel retiree representative, said many Nortel pensioners will struggle with the immediate loss of income, while gains from the asset sales won't appear until much later.
The Nortel Retirees group says the average age of Nortel pensioners is 74, and 80 for their survivors. About 350 pensioners were older than 85 and two were past the century mark at the most recent count in 2006.
The retirees include more than 1,200 widows and widowers whose pensions have averaged $9,800 per year, before the benefit cut.
Conversely, the robust interest in the auction of Nortel wireless patent that wrapped up July 1 means Nortel bondholders will be paid at least 100 cents on the dollar, and could even turn a profit on their investments.
“It's just not fair,” said Clark-Stewart. “Our pension laws are archaic; they put corporations before people.”
Ontario Finance Minister Dwight Duncan said this month that the Nortel pensioners will have the choice of opting out of the Nortel plan and investing their reduced pensions in annuities, a choice retiree advocates have lobbied for over many months.
“Nortel pensioners asked for greater flexibility with their retirement funds, and the McGuinty government has delivered,” Duncan said.
Clark-Stewart, a former Nortel executive, noted that Ontario provides a pension top-up to Nortel retirees' benefits up to $12,000 per year, but said the provision through the Ontario Pension Benefit Guarantee Fund will be paid back from Nortel assets in Canada before any money goes into pension funds.
Paul Miller, the Ontario NDP's critic for seniors' issues and pensions, said the Nortel episode points to the need for pension reform in the province.
Former Nortel staff whose careers included work in the United States and Britain may fare better because those countries have pension insurance plans that cover up to $60,000 of annual pension income.
It's amazing how much damage Nortel continues to inflict on the lives of Canadians. Not only did most Canadian investors, including our largest pension funds that were loaded up to the hilt on Nortel stock, experience a huge haircut after this company crashed during the tech meltdown, now we have the aftereffects of bankruptcy hitting Nortel's pensioners and especially Nortel's disabled which recently got screwed over by the Supreme Court of Canada.
Of course, don't worry about Nortel bondholders, they're sporting big smiles:
Even Nortel’s investment bankers have admitted that the $4.5-billion (U.S.) Canada's one-time star reaped in its patent auction “was higher than any of us would have expected.”
Because there has been so much surprise on the upside, bondholders now not only expect to get their full value, but also what is known as post-petition interest, or the interest that they would have earned since the bankruptcy filing.
With so much hope, the bonds have rallied significantly. According to Debtwire, some of Nortel’s bondholders believe the company’s U.S. subsidiary, Nortel Networks Inc., is solvent, which means they could get post-petition interest on three U.S. dollar debt issues and up a recovery value of up to 135 per cent.
At this point that’s still viewed as egregious, but current trading levels do imply that recovery plus some interest is expected. At the moment the 10.125 per cent bonds and the 10.75 per cent bonds are trading around $108, up from around 80 cents on the dollar a year ago.
While Nortel’s patents were always expected to fetch some cash, the bonds have rallied so much since the July 1 auction decision because few observer expected them to be worth more than $2-billion. And on Monday the big deal officially became a reality after U.S. and Canadian judges approved the deal.
In total, Nortel has earned about $7.7-billion from asset sales. Theoretically, that should spell good news for pensioners as well, who have been locked in a big legal battle with Nortel and its creditors. But now that bondholders are hoping for post-petition interest, who knows what the workers will end up getting.
Finally, don't forget about who's sporting the biggest smile of them all, Nortel's former CEO, John Roth. He made off like a bandit, selling all his shares at the top before retiring (talk about great timing!).
I remember because at the time I was making money buying out-of-the-money Nortel call options, listening to my Nortel analyst at the National Bank Financial who was touting this company as the "next best thing." I thought I was going to retire rich; instead I learned the most valuable lesson of all, the value of losing money. Never trust what the weasels at the top say; always pay attention at what they're actually doing.