So another defined benefit pension plan officially kicked the bucket just recently. Air Canada’s pilots have agreed to switch any new employees over to a defined contribution plan (ie: shift the risk from the employer to the employee for market returns). While this would be interesting if it were a unique problem, but it isn’t. For example, the City of Regina’s pension plan currently facing a $238 million shortfall and was recently denied a request to raise rates to 14% (each, 14% employee and 14% employer for a total of 28% – YIKES). So you have to wonder what solution will happen there?
In general there are several defined benefit pension plans that are facing some serious problems because a combination of factors. Some of the more common factors are:
- Poor Investment Returns – 2008 knocked around a lot of plans, just when they needed to start paying out to more retirees.
- Poor Retiree to Worker Ratios – With the boomers now leaving the workforce and the pressure almost everywhere to rein in spending is resulting in a higher number of retirees compared to current workers. What is also pushing this ratio down is the fact retirees are living longer.
- Too Generous Perks – While the core of these plans might have been sustainable often they were adjusted over the years to slowly turn them unsustainable. Some common examples include allowing overtime pay to count towards the pension or a bridging benefit for early retirees to make up what they will collect in CPP.
This isn’t to say all plans are screwed, but the pressure is growing to either shut them down or adjust the bad plans to make them sustainable over the long haul. Also depending on what sector you work in they are getting hard to find, while public sector often still has them, the private sector is turning a defined benefit plans into an endangered species. For example, in my career I’ve only ever had one employer in the private sector offer a defined benefit plan. I currently work for a Crown corporation (which is almost public sector) and even it doesn’t offer a defined benefit plan anymore and hasn’t for decades.
So perhaps the lesson for today is don’t get too dependent on your defined benefit pension plan with your retirement planning (especially if you are in the private sector). While the plan is a good place to start and you will likely get most of your benefits you would be wise to have some of your own savings around if your spending projects are very close to the amount you expect to get out of the plan. For example, if you plan to spend about $3000/month in retirement and you are planning on getting $2800 of that from your pension plan you might want to consider a backup plan like not depending on your CPP or OAS income so that can back fill your pension if it gets a cut back. While that scenario might have been a remote one previously, now a days it is starting to look a little bit more likely.
Do you have a defined benefit pension plan? If so, are you worried about it being able to provide for you?