Nortel’s Pension Woes

By Mark Evans | Published: November 2, 2008

The Globe & Mail’s Derek DeCloet has an interesting story looking at the growing pension deficits facing a growing number of companies, including Nortel.

DeCloet reports that one of the problems facing Canadian companies is there’s no incentive to over-fund pension funds to protect themselves from market volatility. According to the Income Tax Act, once you reach a 10% surplus, you can’t make any more contributions. This apparently encourages Canadian companies to carry deficits rather than surpluses.

In any event, Nortel’s pension fund (which had $1.2-billion deficit going into 2008) is getting hammered because 53% of its assets were in stock. Mind you, many companies were probably sitting in the exact same boat.

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  • yes4aapl

    $1.2 bill in deficit is not important number here as you may know
    Important number is total pension fund which lost about 50% from the half of it's fund value invested in stocks
    haha
    I know I would be a bad math teacher…
    so I use in the other words explanations!
    in other words, tell me total pension plan fund value and I will calculate the total current deficit… I just guess it's huge now!
    Huge…
    First estimation
    Was total pension plan fund value $8 bill?
    total deficit would be more than $3 bill now
    second estimation
    was total pension plan fund value $10 bill?
    total deficit would be $3.7 bill now
    You get the idea, don't you?
    from the link Duncan S has posted here few weeks before about pension plans it's no compromise issue.
    Pay or go BK!
    I still don't know how to navigate in your blog format to find that link…

  • seeker

    So the solution is to extend to 10 years instead of 5 the time companies will have to fill the shortfalls they got in their pension plans. Wow ! We pay politicians for great ideas like this !!!

  • Pingback: Canadian Personal Finance Blog » Blog Archive » Pensions and Severance

  • exnt2

    lot of money even if its 10 years. what happens if a company goes bankrupt? does it owe pension? does it get extended time? do pensioners get compensated by government?

    this is serious for long term employees. somebody who worked for 25 years is at risk. whereas Z works for 5 years, does nothing and gets a nice ;bailout' package.

  • seeker

    Yeah ! It's easy to push the problem away and I agree with you, if the company goes under with billions in the hole in their pension plan, will the pensioners automatically get hit ?

  • http://nortelinsider.wordpress.com/ Desk Jockey

    Hard to say. Likely even if they get any money, it will be after a long legal battle and won't be close to 100% of what they deserve.

  • yes4aapl

    Don't worry too much about that
    There are rules and regulations in place and they have not changed yet.
    Nortel's required to fix the financial problem, control the deficit, or face BK.
    in other words
    Nortel has to come up with the plan of preventing the PP fund collapse.
    The articles I have read are talking about 50% fund invested in stocks
    So the fund shank only 25% but the deficit tripled. /just my rough estimations/
    Duncan has posted a link to the recent article about that; about rules …/

  • duncan

    Hi Guys,

    As a long time CFA, let me throw my two cents worth in.

    The potential increase in the unfunded/underfunded amount of NT's pension is important in two ways: (this is assuming the accounting rules don't change)

    1) As the pension deficit increases, under current rules Nortel would need to throw some more cash into the kitty. It wouldn't be REALLY huge, but assuming the numbers above it might mean Nortel would need to commit an additional $200-$400 million in cash (all figures in US$) over the next year to the pension plan. That will not tip the company into insolvency — they ought to have about $1.6B in cash at the end of Q3. That being said, they have way less cash than most of their peers, they have better uses for cash than pension deficits, and every time they spend cash they make the bondholders worried. There are no covenants on the NT debt, so they can't be forced into bankruptcy, but irritating your bondholders is seldom a good idea and it can also upset customers.

    2) One of the possible endgames for Nortel is that it might get bought. But an acquirer looks at ALL the long term assets and debts of the target company. So although NT has a market cap of $620 million and cash of roughly $1.6B, they also have debt of about $4.5B AND a pension deficit of (let's say) $2.5B.

    The higher the pension deficit, the less cash an acquirer would pay to Nortel common shareholders.

    If that is unclear please post and I will try to explain anything I was confusing on.

    Duncan

  • Tongue.In.Cheek

    Duncan, I don't understand how you came to the number of $1.6 Billion in Cash at the end of Q3. On Sept. 17th Nortel stated they would have between $2.6 Billion and $2.9 Billion in Cash at the end of the 3rd and 4th quarters. In your analysis, where did the other $1 Billion go?

  • duncan

    Profound apologies — my fat fingers made a typo. Nortel net debt of around $2B is the right figure — $4.5B LT Debt minus $2.6B of cash (est) at the end of Q3 (but cash should go up in Q4 mgmt suggests.)

  • less

    Americans are fat so they have fat fingers. Suddenly I smell a secular global corporate shill beholden to big oil.

    ;P

  • Mary Box

    As a senior drawing a Nortel (Northern Telecom Ltd.) pension since 1992 I am concerned how NT's problems will affect my pension. I worked at head office in Mississauga.

  • Clint

    I have to say that is a real stupid question.
    If You have been drawing a pension since 92 you are filthy rich.
    Times did not even get bad at NT till 2000, and I personally know people who retired or were so close to retirement after 2k that the company just gave them a golden parachute, much like the one you got.
    The people that are really affected by the NT of today are the young people and the ones who are near retirement.
    With all due respect this is the wrong place and the wrong time to pose a question like that. Kind of like King Henry Eighth wondering why he was only served 10 chicken breasts rather than 11.
    Get serious.
    Just to retire today with a pension is a bonus let alone somebody who has been drawing one for 16 years.

  • http://nortelinsider.wordpress.com/ Desk Jockey

    Heaven forbid anyone should ask a question and upset you on your toy throne. Give me a break. She was just concerned about money she had worked hard to earn and money that pays the bills. Just because these are things you'd never have to worry about doesn't mean they are of no concern to everyone

  • yes4aapl

    My understanding is that you get your pension checks from the Pension Plan.
    NT Pension Plan has a deficit.
    Nortel has to address the deficit each and every year.
    It's a fact that the deficit doubled or maybe even tripled lately. Who knows?
    In the worst case scenario you will still get 80 cents or more on a dollar.
    Nortel is still loaded with cash and the law is on your side.
    Nortel has to pay even if it would be the last $1 bill of cash Nortel has.
    that article deals with the subjecy
    http://www.theglobeandmail.com/servlet/Page/doc…
    Duncan posted his view about PP deficit.
    Hi Guys,

    As a long time CFA, let me throw my two cents worth in.

    The potential increase in the unfunded/underfunded amount of NT's pension is important in two ways: (this is assuming the accounting rules don't change)

    1) As the pension deficit increases, under current rules Nortel would need to throw some more cash into the kitty. It wouldn't be REALLY huge, but assuming the numbers above it might mean Nortel would need to commit an additional $200-$400 million in cash (all figures in US$) over the next year to the pension plan. That will not tip the company into insolvency — they ought to have about $1.6B in cash at the end of Q3. That being said, they have way less cash than most of their peers, they have better uses for cash than pension deficits, and every time they spend cash they make the bondholders worried. There are no covenants on the NT debt, so they can't be forced into bankruptcy, but irritating your bondholders is seldom a good idea and it can also upset customers.

    2) One of the possible endgames for Nortel is that it might get bought. But an acquirer looks at ALL the long term assets and debts of the target company. So although NT has a market cap of $620 million and cash of roughly $1.6B, they also have debt of about $4.5B AND a pension deficit of (let's say) $2.5B.

    The higher the pension deficit, the less cash an acquirer would pay to Nortel common shareholders.

    If that is unclear please post and I will try to explain anything I was confusing on.

    Duncan
    His correction of numbers
    Profound apologies — my fat fingers made a typo. Nortel net debt of around $2B is the right figure — $4.5B LT Debt minus $2.6B of cash (est) at the end of Q3 (but cash should go up in Q4 mgmt suggests.)

    Duncan
    Link
    http://www.allaboutnortel.com/2008/11/02/nortel…
    and my update
    Nortel expects cash at $2.4bill on Dec 31 2008
    Analysts expect $1 bill cash burn in next 12 months
    More important question is
    How big is NT Pension Fund? $8 bill? 10bill?
    12 bill?

    I said I would not look for that number. If the most important things are neglectable here, so be it.

  • Clint

    Look Dick Jockey.
    Bail out, pull the rip cord and let's all hope an ez bake oven flies out.

  • Dawn

    You are way off the mark here if you think that anyone on pension is filthy rich. I've been on pension since 2002 and am struggling to make ends meet after working at Nortel for 25 years. I think that anyone on a Nortel pension should be concerned about their future given the current state of Nortel and the current downturn in the global economy.

  • Jim

    I am a 26 year veteran of Nortel and am faced with a decision to leave the company now with a severance package that will compensate me thru 3Q09 at which time I would elect to receive a lump sum pension. I am considering this because there are no assurances that a severance package would exist if I waited another year. The risk, of course, is would that pension still be avaialble. Even if I do elect to leave now and collect my pension in 3Q09 what assurances do I have that it will be there then?

  • alixs

    I've worked at Nortel for 21 years, but went on LTD 6 years ago. I'm still on it, as it brings in more money than a pension would. What should I do??

  • nortelsucks

    Just got word that the “non-qualfied” pension payments are going to stop. 18 years there and this is the resolution of the gross mis-mangement.

  • ltd_sleeper

    We have a yahoo group for ltd people from Nortel…

    http://finance.groups.yahoo.com/group/NNLTDS

  • ltd_sleeper

    We have a yahoo group for ltd people from Nortel…

    http://finance.groups.yahoo.com/group/NNLTDS

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