An analysis of the treatment of employee pension and wage claims in insolvency and under guarantee schemes in OECD countries: comparative law lessons for Detroit and the United States.

• Author: Secunda, Paul M.
• Position: Organization for Economic Cooperation and Development - III. Presentation of the results of OECD Comparative Analysis of Employment Claim Treatment in Insolvency and Guarantee Schemes through Appendix 8. Finland, p. 909-953

3. PRESENTATION OF THE RESULTS OF OECD COMPARATIVE ANALYSIS OF EMPLOYMENT CLAIM TREATMENT IN INSOLVENCY AND GUARANTEE SCHEMES

This Part is divided into two major subparts. Part III.A seeks to identify trends among the OECD countries as far as treatment of pension and wage claims in insolvency, whether as part of the insolvency process and/or as part of a guarantee fund or scheme. Part III.B, drawing upon the Appendix of OECD country treatment of employment claims in insolvency, seeks to use tables created by the author to categorize the treatment of these employee claims in insolvency to show how the United States and Canada's approach to these issues aligns with other OECD countries.

1. Trends in Treatment of Pensions and Employee Benefits Claims In Insolvency Proceedings Across OECD Countries

   In discussing trends in the treatment of pension and employee benefit claims in insolvency proceedings among OECD Countries, a couple of findings are clear. Most OECD countries (and this might be because a majority of OECD countries are EU countries covered by the employee insolvency Directive) have a system that provides some priorities to pensions and wages in bankruptcy (256) and also provides guarantee schemes for pensions and/or wages in employer insolvency scenarios (though more commonly just wage guarantees). (257) The devil is in the details, and distinctions between country treatments of employment claims in insolvency often relate to the way various benefit systems are established or structured. This sub-Part is further broken down into seven preliminary findings based on the OECD analysis, each of which is discussed in turn.

   1. State-Run Pension Schemes vs. Statutory Pensions vs. Employer Operated Pensions

      This section primarily discusses different approaches adopted by countries to the provisions of pensions and how the choice of approach impacts employees when their companies become insolvent. This Section concludes by also considering different approaches to the provision of other employee benefits and how those choices impact employees during employer insolvency.

      1. Pensions

         With regard to pension benefits, there is an important distinction between countries with regard to the provision of occupational pension benefits. First, a number of countries have little or no occupational pension scheme, relying instead on state-run social security schemes or voluntary, employee-based contributory schemes. (258) The seven countries in this first category include: Chile, Czech Republic, Estonia, Greece, Hungary, Slovakia, and Turkey. (259) Countries that rely primarily on non-occupational pension systems have little need for priorities in insolvency for employee claims or for pension guarantee schemes, as employer insolvency has little impact on the provision of pensions. (260) Not surprisingly, there are few pension priorities in insolvency and no pension guarantee schemes in these countries. (261)

         Second, a large group of mostly EU countries follows a statutory-based occupational pension model, under which the pension fund is established as separate and independent from the company. (262) Employers make contributions to these pension funds (or insurance companies) in most cases, but that is the extent of their funding obligation. (263) The twenty countries that fall into this second category include: Australia, Belgium, Denmark, Finland, France, Iceland, Israel, Italy, Japan, Republic of Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovenia, Spain, and Switzerland. (264) Similar to the first category discussed above, there is little impact on these companies when the employer becomes insolvent, except perhaps for outstanding pension contributions due these external pension funds. (265) As a result, bankruptcy priorities only at most concern outstanding contributions (not unfunded pension liability) and there are few pension guarantee schemes. (266) Indeed, pensions are only guaranteed to the extent they are treated like wages. (267)

         Third, a smaller group of countries, of which the United States and Canada are a part, have employer-operated occupational pension plans based either on a book reserve model (like Germany and Austria) or defined benefit plan funding model (though a number of these countries are witnessing a dramatic shift to defined contribution plan schemes like the United States). (268) In a number of these countries (like the United States, Canada, and the United Kingdom), such pension assets are held in trust or ring-fenced so that they are not subject to other creditor claims. (269) Nevertheless, in these schemes an employer's insolvency has the biggest impact on employee pension claims because of employer funding responsibilities. (270) Not only do pension contributions have to be addressed, but there also might exist unfunded or underfunded pension liability on employer insolvency. (271) There are seven countries in this third category: Austria, Canada, Germany, Ireland, Sweden, the United Kingdom, and the United States. (272) These countries tend to have both priorities for pension claims (with Germany being a notable counter-example) (273) within the insolvency processes, as well as some form of pension guarantee scheme (at least for pensions that are funded on a defined benefit basis). (274)

         It should be pointed out that these three categories of pension plans (illustrated in Table HIT) are not as well defined as they first appear. A number of countries straddle the lines between two different pension categories. For instance, both Austria and Sweden use a combination of externally funded pension funds and direct pension promises based on the book reserve method. (275) Similarly, Mexico has some externally funded pensions, but most employees appear to rely solely on the state-run pension system. (276) And other examples abound. Nevertheless, viewing countries' pension plans through this lens explains why there is either more or less insolvency and guarantee fund protection for employee pension claims in some countries versus others. It can be said with some confidence that most countries in this study have statutory models with external pension funds established separate and apart from the employer, and this has an impact on how insolvency priorities and guarantee schemes (to the extent that they exist) operate in those countries. Where external pension funds exist, employees are less exposed to pension losses when their employers become insolvent and consequently, there exists less need for bankruptcy priorities and guarantee schemes. (277)

      2. Other Employee Benefits

         Wage-related benefits, unlike pensions, are not usually funded and/or sponsored by employers. Thus, similar distinctions between statutory and employer-operated benefit schemes tend to matter much less. (278) The United States is one example of a country, however, that primarily relies on employer-sponsored welfare plans (279) to provide a number of wage-related benefits, such as health insurance, long-term disability insurance, life insurance, and retiree health benefits. (280)

   2. The Uncomfortable Place of Employee Creditors in the Insolvency System

      The literature makes much about providing employee pension and wage claims some form of priority in the insolvency system. (281) Scholars fear that unless the pension or wage claims receive a superpriority or preferred priority, no recovery will be made. (282) Certainly there is truth to this observation, and technically the provision of such priority should permit employees to recover a good portion of their claims during the insolvency process (although perhaps not in the timeliest of manners). (283)

      As a practical matter, whether talking about pension or wage claims, the problems associated with employees recovering sums from their employers through priorities in the insolvency process are related to insufficient information and lack of voice. (284) This is true even where unions represent employees. Indeed, unions often do not have defined roles within the insolvency process as far as claim-filing. (285) Employees are less likely, given the amount of money involved, the complexity of the process, and their lack of knowledge, to take advantage of whatever priority they receive for their employment claims. (286) Not only that, but even if employees do manage to negotiate the process, file a timely claim, and receive a fairly large portion of what they are owed, they will likely not receive it for many years given how long it takes the bankruptcy process to be completed. (287) Thus, if the aim of the social protection system is to protect already-earned employees' pension, wages, and other employee benefits when their employer becomes insolvent in a more timely and efficient manner, the granting of a priority alone may not be the best method for doing so.

      This circumstance is why the existence of guarantee funds, both for pensions and wages, is so important for providing employees the social protection they need when their employer becomes insolvent. Employees would appear to receive much better protection through the ability to file claims with pension and wage guarantee funds, without the worry of having to negotiate the insolvency process and compete for limited funds with better-financed and better-informed company creditors. (288) Although the payments available under such guarantee funds are limited to certain amounts for specified time periods prior to the insolvency filing, (289) they do provide a timelier and surer method for protecting the already-earned pension and wage claims of employees. (290)

   3. Growing Prominence of Guarantee Funds

      Given the reality of insolvency systems in most countries, perhaps the growing use of guarantee schemes to provide some protection for pensions, wages, and other employee benefits when an employer becomes insolvent is unsurprising. Although EU countries where some form of guarantee...