The federal government said this week it has no plan right now to change the law to protect Canadian pensioners when companies such as Sears file for bankruptcy, despite pension advocates calling for improved protections.

Innovation Minister Navdeep Bains has said he will look at two private members bills on the subject.

The fall of the retail giant has left 16,000 retirees uncertain about their futures amid fears they could lose out on almost 20 per cent of their underfunded defined-benefit pension plan.

Pensioners hold little priority in Canadian law when it comes to dividing up assets during bankruptcy proceedings, so when a pension plan is not fully funded, and an employer goes bust, the future of that pension is thrown into limbo.

Wanda Morris, vice-president of the Canadian Association of Retired Persons, told CBC News earlier this week that 1.3 million Canadians on corporate defined benefit pension plans are potentially at risk.

The current plight of Sears Canada retirees has left many wondering why some pension plans are underfunded, why they are not given priority in the event of a bankruptcy and what could be done to better protect pensioners under the law.

Why are some pension plans underfunded?

For the most part, it's the lower interest rates over the past 10 to 15 years that have caused some pension plans to be underfunded, said Gavin Benjamin, a senior consulting actuary at Willis Towers Watson, a global risk management firm.

"When interest rates go down, your pension liabilities go up," said Benjamin. "The underfunding or deficits in pension plans has been driven by this environment of very low interest rates."

A 2016 report by the Financial Services Commission of Ontario found that roughly 30 per cent of defined benefit pension plans were underfunded in the province, a figure Benjamin said is not surprising.

"It can be quite a volatile figure based on how financial markets evolve both in terms of the level of interest rates and also in terms of how the investments of pension plans perform."

Benjamin said in an ideal world every pension plan would be funded 100 per cent of the time, but that would put an unreasonable burden on employers.

"Both the level of liabilities and the pension plan assets are fluctuating over time," said Benjamin. "At any point in time you will typically have either a surplus or deficit in the pension plan as the contributions are adjusting to reflect what's been happening with respect to the plan assets and liabilities."

Why are pensioners not given priority in bankruptcy proceedings?

Under current law, protections for Canadian pensioners are quite limited when their former employer goes bankrupt, and do not extend to entire wind-up deficits. A wind-up deficit is the difference between the amount of assets the pension fund contains and the total amount needed to pay out all of the benefits promised under the pension plan as of the date of the plan wind up.

So when a pension plan is not fully funded and an employer like Sears goes bust, it's at risk of not being fully paid out.

This reality has led those advocating for improved protections for pensioners, like Morris, to urge the federal government to change the law and grant pensioners a "super-priority" to ensure they receive their money before creditors.

Earlier this week, former Conservative industry minister Tony Clement said providing pensioners priority protection under the law requires striking a difficult balance between safeguarding pensions and ensuring lenders are confident enough they will get their money back should something go wrong. 

Stephanie Kalinowski, partner and chair of the Pension, Benefits and Executive Compensation Group at law firm Hicks Morley, said granting pensioners priority in bankruptcy proceedings is a difficult policy issue.

"Businesses, for all kinds of valid reasons, borrow money from creditors … and if creditors know that should something happen, and the company becomes insolvent, that suddenly their money vanishes, how does that affect their lending decisions?" asked Kalinowski.

What changes could the federal government make?

Morris said the law should be changed to ensure that pensioners are not relegated to the back of the line while a company's assets are sold off and the pension liability is left to twist in the wind.

"If we let companies walk away from their pension obligations, then people turn to public services and we as taxpayers are left on the hook, and that's not fair," said Morris.

But granting pensioners "super-priority" in bankruptcy proceedings could prompt more businesses to get out of providing defined benefit pension plans, which promise specific payouts to retirees, said Kalinowski.

"I wish there was a silver bullet, but nothing specific comes to mind," said Benjamin. "Really, any actions to kind of address this issue from my perspective, should be thought through to ensure that, at the end of the day, it doesn't do more harm than good."