SSPO Membership Meeting
This meeting was held to bring the membership up to date on Committee activities and the implications of the Stelco capital raising and asset sale process.
Paul Wendling hosted the meeting and in his introduction reminded members of the importance of paying their $50. He also acknowledged the excellent support that the Committee was getting from Murray Gold and Koskie Minsky. A presentation from Murray was to be followed by questions from the floor.
Presentation by
Murray Gold, Koskie Minsky
This presentation will review where we are at now, where we are going and what we have done so far.
The first thing we did when Stelco entered CCAA was to bring a motion to change the initial order. As a result, Stelco was not permitted to change any retirement pension or non-pension benefits without coming back to the court. As a result, nothing has changed. Stelco’s economic situation has improved to the point where we don’t see any prospect that these benefits are in any imminent danger.
The second thing we had to do was to sign confidentiality agreements with Stelco. We had to fight over many months before we could sign an agreement where we had some freedom to report back to Stelco’s salaried pensioners. Although there is still a lot we can’t say we can take disputed confidentiality issues to an arbitrator and we can also take a dispute over confidentiality to the court. We can also file confidential materials with the court, none of which were on offer when we started.
The third thing we did was with respect to Stelco’s subsidiaries. Stelco has said that they plan to sell these subsidiaries but the terms of the sales are not clear. We believe that the subsidiary pensioners should not be left out on a limb. They should be treated like all other Stelco pensioners and not exposed to any additional jeopardy or risk. We brought the motion that Stelco is the common employer but the court won’t make a final determination until there is an actual deal. We wanted to make it clear to buyers and sellers that all salaried retirees should be treated in the same way. If a bidder does not want to treat all retirees the same way we will be back in court and take that as far as it needs to go.
Stelco is now in a very profitable position. It has recorded a profit of about $100 million in the last two quarters and its working capital has skyrocketed by about $300 million. This company has turned, which is a very unusual situation in an insolvency. The normal pressure on the stakeholders in an insolvency, to take massive cuts, has evaporated. The Company is now doing well and can pay all its debts and that includes its obligations to pensioners. When Stelco went into CCAA they pointed a big finger at the problem of excessive pension and benefit costs and indicated that these needed to be cut, off-loaded onto government, in order to survive. They pointed to the US steel companies who had done exactly that. So we find ourselves in a very fortunate position now with the high steel industry profitability and we don’t want to go back where we were at the start of the year. So it is important to take the pension underfunding issue seriously and fix it. At this stage of the restructuring, which will last at least through the end of April, our priority has to be to address the pension deficit. If we don’t there is a significant risk that we’ll be back in this room when the next downturn hits. If it does happen again it will be in different circumstances, which I will explain later.
The total pension underfunding is about $1.2 billion, measured in the event of a wind-up where the plans are terminated. We asked our financial advisors, RSM Richter, to give us an analysis of Stelco, looking forward to 2010, as to what they can afford. We didn’t want to ask for something that could be easily turned down on the basis that it was unrealistic. If we are advocating more money into the pension plan we want to be sure that the money is there, based on a middle-of-the-road forecast. This analysis, the details of which are confidential, showed that Stelco has the ability to make a contribution into the pension plans.
We also had to elaborate a strategy, that involves all the members, as to how we are going to address this problem. Many other stakeholders are not interested in our problem; investors, suppliers, etc, are concerned about their returns. While the salaried pensioners are one of the biggest stakeholders, in some ways we are not one of the strongest. We are no longer a “commercial player” and that puts us into a very different and unique position – it puts us into a position of considerable political sympathy but also into a position of commercial weakness. Beneath the judicial supervision of CCAA there are very active dealings. Between court meetings there are countless meetings between prospective investors, creditors, bankers, lenders, all trying to restructure Stelco in a way that makes sense generally and, in particular, of course, for them. So when we analyze the pension underfunding problem we break it down into a few pieces, each one of which we develop a strategy for.
The big reason we are in this hole is Section 5.1 of the Pension Benefits Act Regulation, which in 1996 let Stelco out of its obligation to fund its pension plans on a solvency basis. It is because of that regulation that today we have a $1.2 billion solvency hole in the pension funds.
So, the first thing that needs to be fixed is Regulation 5.1. We don’t say repeal Section 5.1 because that would require Stelco to make payments quite quickly, over a period of five years, beginning immediately. We don’t rule that out, depending on how well Stelco does, but, more to the point we say Section 5.1 must be reviewed and changed. It is no longer acceptable to completely relieve Stelco of its obligation to fund its pensions on a solvency basis. We need to replace 5.1 with a payment schedule that meets their ability to pay (and we’ve analyzed their ability to pay and believe it’s there) that allows them to pay off this deficiency in a relatively short period of time, just like every other company in the country is required to do. Fixing this problem is a political issue and we engaged the politics of it on December 1 when we wrote the Premier and asked him to meet with us and review the application of Section 5.1 to Stelco. A meeting has been agreed to by the Premier’s office, who recognize that the pension funding problem should be addressed in CCAA and not left until later. In order to keep this political process moving we need everyone’s help because government will be responsive to the will of the community. They can not be allowed to think that people don’t care. There are letters, meetings, phone calls, emails – you do whatever you can to get the government’s attention.
The second thing we have done is that we have looked at the way Stelco has funded its pension plans, even under Section 5.1, because there is some discretion. Stelco still has to fund the pensions on what is called a “going concern” basis. This funding is based on a number of assumptions about the future – how much are all the pensions of the pensioners and the actives going to cost today and in the future, and then compute the amount of money you have to set aside this year, next year, etc. to pay those pensions. We have found that Stelco has consistently chosen the lowest cost assumptions. That may be understandable when Stelco was losing money but now that they are profitable Stelco can afford to fund the pensions on a more costly and proper basis. That is a fight that we have before the Financial Services Commission of Ontario (FSCO).
The third area being addressed is the payment by Stelco of the Pension Benefit Guarantee Fund (PBGF) premiums. Pensions in Ontario are insured up to a certain level by PBGF. This insurance requires companies to pay premiums. When we looked at how Stelco had paid the premiums we found that it had been paid from the pension fund. We have written to FSCO, who allowed this to happen, and argued that this was improper and contrary to the Regulation and we are pushing to not only have this changed in the future, so that the Company pays the premium, which is easily affordable, but also that past premiums should be paid by the Company.
The fourth area is the bidding war, which has begun to unfold, for Stelco. The bidding war opened with a period of exclusivity for the bondholders. The people that held Stelco’s bonds were given thirty days to come up with the first offer. No one else was invited to make an offer in that period. The only bondholder that made an offer was Deutsche Bank (DB) and, not surprisingly, that offer works really well for the bondholders. What it says is that no one has to cut anything. They put in about $900 million of which $400 million is immediately used to buy up the unsecured bonds giving DB $400 million of secured bonds. $200 million are left for capital improvement with the approximately $200 million remaining cost of capital improvement coming from the Company’s cash flow.
The problem with the DB offer for us is not an immediate problem. The problem is if, in two or three years, Stelco finds itself in another insolvency we will be in a very different position to where we are now. Currently, the pension and bondholder debts are both unsecured and rank equally so that if cuts have to be made they are spread evenly. If the DB deal is accepted and Stelco goes into insolvency again then DB would first recover 100% of their $400 million. After that, if any money remains, come the unsecured claims such as pensions. The DB proposal is the floor bid or “stalking horse”.
In the next phase the bidding process has been opened up and anyone can submit a bid. Serious bids will be selected and the those remaining will go through a more detailed analysis of Stelco until the end of January, resulting in one final deal. From our point of view it is important to get the bidders to compete with each other on who best addresses the pension question. This is a difficult objective because, under CCAA, creditors control the process. At the end of the day the terms of the bid are reflected in a plan for the Company and the plan is voted upon by the creditors and then approved by the court. But the pensioners are not creditors; no benefits have been cut and the pensioners have not lost a penny so far – so we don’t get a vote. The people who get a vote are the bondholders, because of the change in their financial position with Stelco. This means that all the bidders will be trying to satisfy the bondholders, which will make it a real challenge to get them to address pension plan funding.
Our strongest pressure point is not in the bidding process but at the political level. The government could tell the bidders that Section 5.1 is changed for Stelco. At that point the rules of the bidding process would change and successful bids would have to meet any new pension funding requirements. So it is essential to us that we get a change to Section 5.1. The political angle is the essential one for us in this process. The challenge now is to push, to generate as much pressure to change Section 5.1 as possible.
Most of the answers were provided by Murray Gold although, in some instances, a response was made by a Committee member.
Q Are the unions creditors and do they have a vote on the restructuring plan?
A If the union takes no cuts it is not a creditor but the bidders will include in their bid a condition that there be a satisfactory agreement with the unions. This means that the union is at the table.
Q We have known about the Section 5.1 issue since 1996 and been in CCAA for 10 months. Why have we left it so late before pressuring the government to change 5.1. Have we left it too late?
A When the Company filed for CCAA in January they said they would be out of cash by November. Had we turned to the government at that stage and said “scrap 5.1”, which would have increased Stelco’s pension funding obligations, the government would have probably said “The Company’s in trouble. They can’t afford current payment obligations so how can they afford more”? But this case has changed and now there is a general recognition that the Company is profitable so we think that now is the time to press this point. If we wait much longer the time will have passed. It will be very difficult to push the government in this very short time but that’s what we have to do.
Q What is the best way of pressuring the government?
A Write letters to your MPP and the Premier. More detailed advice will be put on the SSPO website immediately and also mailed to members.
Q When will the pension funds be audited and Stelco begin funding them?
A Stelco is required to file evaluations on its large plans (HW and LES) every year because of the Section 5.1 election. So far, they have not been required to make contributions. There are two ways of calculating the value of the plans. One is by looking at the present market value of the plan assets and the other is by using smoothed asset values (averages over a number of years). Stelco has used smoothing to show that there was a funding surplus which allowed them to take a contribution holiday. So it is difficult to say when Stelco will be required to make plan contributions although it could be as early as 2005.
Q When Stelco went into CCAA they were about 80% funded. Where are they now?
A The latest data we have shows that the funding level is essentially the same, just a little lower.
Q If another company, such as Severstal, takes over Stelco can they continue the 5.1 election?
A The short answer is “yes”. But we can try to put enough doubt about the future of 5.1 in the minds of the bidders that they decide they had better offer less to the creditors and more to the pension funds.
A The 5.1 election may be considered to be discrimination but not on a legal basis. The 5.1 election was restricted to companies with very large pension plans which were considered “too big to fail”. This was clearly wrong and must be changed.
Q Could Stelco back out of CCAA now that financial conditions have changed and avoid the risks associated with a takeover?
Q How will other companies who took the 5.1 election, such as GM, react to our efforts?
Q To what degree are non-pension benefits at risk?
A Non-pension benefits are not covered by legislation in the same way as pension plans. The main implications of this are:
· There is a trust fund supporting the pensions but not the non-pension benefits. These all come from operating revenue and would disappear if the Company is liquidated.
· If the Company continues it has a contractual commitment to pensioners for non-pension benefits. We argue that these benefits are therefore vested in law.
A At the end of the process the creditors vote on the restructuring plan. Then the court approval of the plan is required. The court supervision of the process is an advantage to us because it forces the backroom deals out into the open and exposes them to public scrutiny. It also gives us a chance to say something about them. But the process is essentially a commercial one and Judge Farley will be looking at the big picture, not just us.
Q How could we challenge the Stelco actuarial data?
A We have retained an actuary and analyzed how Stelco did its pension calculations. When we disagree with Stelco’s analysis we push the regulator, FSCO, to make changes. But this is the same regulator that approved Stelco assumptions in the past.
Q Is the life insurance paid up or is Stelco still making premium payments?
A The premiums are still being paid and life insurance would disappear if Stelco disappeared.
Q If you retire after Stelco went into CCAA are you considered an ”active” or a pensioner?
A You are considered to be a pensioner.
Q Is the discontinuance of salaried pension indexing a result of pension underfunding?
A We don’t know the specific reason but we are exploring if there is a contractual obligation on Stelco to reinstate indexing.
January 16, 2005