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Friday, March 31, 2017

The Pension Series – Part II – Pension Collapse and Self Defense

Posted by Dave on December 1, 2009

What would you do if your pension disappeared?  Would this significantly impact your retirement plans?

In recent months there have been many reports of pension plans collapsing or reducing benefits, eroding many retiree’s standards of living.  What triggered the problems being experienced?

  1. The stock market collapse: Pension plans are basically big pools of money that are invested in the stock market on behalf of employees.  When the market dropped 50%, employers were on the hook to make up this difference, which was a problem because of the recession.
  2. Recession: In an economy where many businesses are going bankrupt or barely hanging on, employers who are having trouble paying general operating expenses are not going to be able to make up significant shortfalls in their pension plan caused by the market collapse (or even stay in business).  An obvious example of an underfunded and tanking company is Nortel, which went bankrupt in January and whose pension plan holders can now count on either significantly reduced or no pension.  The company was unable to make enough income to keep itself alive, let alone the retired workers.
  3. Poor regulation: Many employees have no idea whether their pensions are funded adequately or if a shortfall will leave their retirement plans significantly underfunded.  Just months before bankruptcy in 2002, Slater Steel received an excellent report from a actuary, only to find that they were in fact 40% underfunded, leading to significant cuts in benefits (35%) – the actuary examining the fund was fined $15,000 and his organization placed him under supervision for 6 months. Obviously, the people who are supposed to ensure that pensions are properly funded (the actuaries) do not see the massive miscalculation made to be a big deal in this case and the courts threw the case out – leaving little recourse to retirees and workers from the plant.

The first two points are probably more of a factor in the current problems pensions are experiencing, with the third being recognized as a problem after the fact as employees have no recourse once the business is bankrupt – there is no way they are going to get the pension pool funded.

The general aging of Canada’s population will put additional stress on pension plans in coming years.  With an aging population, the pension pool will have less money coming in then going out, leaving a deficit that may cause underfunding when the younger generation retires.  Couple aging with a severe market downturn and the economy at a low-point and it would seem there are bad times ahead for retirees dependent on their company’s plan.

Personally, I am involved in a defined benefit plan administered by a third-party and funded by a crown agency – I’m really not too worried about the fund at all.  Additionally, given that I am planning on retiring 20 years before I would be able to access the pension funds, a collapse would not really cause much change to my retirement funds.

I have mixed feelings for the retirees affected after reading various articles on pension fund (here’s a good one) collapses – on one hand I feel terrible for individuals involved because many of them are at an age where working is the last things on their mind.  On the other hand, most of the reports interview people who worked at the same factory for 40+ years and who are upset because they have lost 35% of their pension income.  I guess it’s foreign to me that these people didn’t have an alternative retirement fund and essentially banked on one source of income to fund them the rest of their lives.  In one case a Nortel employee stated they also owned mainly Nortel stock to go along with their Nortel pension(not exactly diversification at its best).  To me, putting all of my retirement eggs in one basket seems very risky – some foresight would probably have helped many of these people.

My suggestion to anyone involved with a pension plan is to treat it like any other investment in your retirement basket in such a way that if it were taken away, you would not be destitute.  I have a feeling that for readers of blogs such as this one, this may not be an issue, but for someone who does not address their finances on a regular basis, the collapse of a pension would cause significant problems that may not be able to be overcome.

I should  note, I am not overly concerned about the Canada Pension Plan.  After significantly increasing contribution rates in 2008, from all reports this fund will not collapse and should be able to provide the funds it is supposed to, making it one of the few public pension plans worldwide (along with Australia) that are going to be solvent for the foreseeable future.

Are you worried about your pension?  Is it going to be your sole source of income at retirement, or do you have other funds that will provide income after you are done working?

Comments

4 Responses to “The Pension Series – Part II – Pension Collapse and Self Defense”
  1. Bean says:

    I’m a member of a bank DB plan in Canada. We’re very well funded at this point and I’m so far off from retirement that I’m not really concerned. Assuming I stay with my current employer the plan would probably only make up, at best, half of my desired retirement income. I chose the non-contributory option which still gives me a small credit for my years of service but doesn’t kill my RRSP room so I can still save and build up my own nest-egg.

    One view that I like is to look at your DB plan as part of your fixed income component of a portfolio.

  2. Dave says:

    My desired retirement income is pretty low, if my pension is around, it would allow me to live someplace warm for part of the year so I can golf year-round :), if not, I can take a few months off a year.

    I get minimal choice (none) in pension plans at my work, I get about $700 in RRSP room per year.

  3. chad says:

    Good luck with anyone with a DB I had one with canada’s biggest courier company.Not worth a can of beans.I was with them for 10 years and got my pension transfered into a Lira. Yip 33% of what it was suppose to be.Yeah I guess if your with gov’t your okay.Anyone else good luck.
    My Tfsa is my tickett to retireing early

  4. Bean says:

    As I’m a non-contributory member of my DB plan I won’t stand to get any major benefit from it in the future, but it does make up a part of my overall long term plan.

    But then again if I’m not with my current employer in 25 years I’ll be taking it in the form of a LIRA too.

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