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Is my Defined Benefit Pension Safe?

Defined benefit pensions (DB) – call them what you want: pyramid schemes or retirement safe haven. Some are skeptical of their long-term sustainability, while others are thankful to have an employer that offers one. With tough economic times upon us, it’s not uncommon for large multinational firms like General Motors or Canadian Pacific Railway to have large pension deficits, as it’s the employer who bears all the investment risk. Negative publicity aside, your company can’t simply make your pension vanish overnight – there are a lot of safety nets in place to ensure your pension is protected. Let’s take a look at ways to tell if you pension is in good standing.

Pension Valuations

Just like human beings, pensions require regular checkups too. Registered pension plans are required to perform actuarial valuations at a minimum of every 3 years (once a year if your plan is severely underfunded). Actuaries look at the plan’s assets and liabilities and the required funding level to see how much is required to sustain the plan.

Plan members have a right to see their plan’s valuation report – simply request a copy from your plan administrator. It’s not uncommon for pension plans to file valuation reports yearly during bear markets, but if your plan is severely underfunded and valuations reports have been filed every year regardless of market conditions, it may be a sign that your pension is in trouble.

Pension Custodian

Your pension funds are kept in a trust account separate from your company. This ensures that your pension plan is protected and makes it more difficult for creditors to go after the pension funds if your employer were to go under. Although your pension plan can be wound up, you are unlikely to lose your entire pension. There will be a list of priority of payouts – current retirees are usually given priority.

Company Mergers and Takeovers

In a global economy, it’s not uncommon for company mergers to take place. The good news for employees is that your pension accrued before the merger is relatively safe – your new employer cannot retroactively go back and change your accrued pension. However, your employer can close the pension plan to new entrants or freeze service and start a new pension plan. The new pension plan may be similar to your old plan or it may be totally different, however, the fact remains that are your accrued benefits should remain intact.

Big Brother is Watching

Unfortunately your pension plan most likely isn’t guaranteed by your employer, but there’s a silver lining: in certain provinces employers are required to pay yearly fees to protect their employees’ pension. For example in Ontario, employers pay yearly premiums to the Pensions Benefits Guarantee Fund. This fund will pay certain benefits if a company were to shut down or be unable to pay the pension as promised.

Plan Amendments

Employers are proactive in protecting the pension plan. That’s why certain plan amendments are made, to ensure the longevity of the pension plan. For example, the commuted value may only be offered to non-retirement eligible members and there may be a percentage hold-back amount on payouts. This is to ensure the pension plan’s funding remains sustainable and doesn’t get in even rough shape if members get worried and terminate their employment to transfer their commuted value.

Final Thoughts

As you can see there are a lot of safety nets in place by employers and the government. The last thing your employer wants is a severely underfunded pension. With the knowledge in hand, hopefully you can rest easier knowing your pension plan is better protected than you thought.

About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University.

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About the author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

{ 22 comments… add one }
  • Sustainable PF December 8, 2011, 10:23 am

    Thanks for the insight Sean. I have a DBP w/ the ON government but I am not due to retire for, boy, 21 more years.

  • Slacker December 8, 2011, 2:26 pm

    Pension liabilities is last in line under Canadian bankruptcy laws. True or False?

  • Al December 8, 2011, 4:45 pm

    @ Slacker

    It’s complicated, but generally they are unsecured claims and technically neither first nor last in line. In practice, if the company is insolvent all sorts of expenses and creditors rank ahead, and some will rank behind, but I wouldn’t count on getting much recovery. The situation that Nortel pensioners find themselves in today is quite telling.

  • onemillionby35 December 8, 2011, 7:15 pm

    Has Frugal post his Nov networth update yet????

    • FT FrugalTrader December 8, 2011, 8:07 pm

      Sorry guys, got a little sidetracked with the giveaways. I’ll be posting the Nov update on Monday, stay tuned!

  • Sad December 8, 2011, 7:53 pm

    No he has not! :(

  • Saveddijon December 8, 2011, 9:21 pm

    “Your pension funds are kept in a trust account separate from your company. This ensures that your pension plan is protected and makes it more difficult for creditors to go after the pension funds if your employer were to go under.”

    Is this always the case? If so, then what happened at Nortel?

  • Andrew December 9, 2011, 7:56 am

    Great to see 5 years of Million Dollar Journey – been reading for all of them.

    But to be honest I come to this blog to read thoughts from someone who has expert-level knowledge a on subject. This Defined Benefit post, and many other guest posts as of late, are just not cutting it. They make me regret visiting the site.

  • Sean Cooper December 9, 2011, 10:35 am

    Hi Andrew,
    Is there something about my post you did not like? With my posts I am trying to give a general overview of pensions from a high-level. I don’t want to go into too great of detail because a lot of readers will not want to read it.

    Do you have any suggestions for my articles or what kind of articles you would like to see? I want to ensure you continue to visit this website. A lot of my articles are targeted to younger investors (20-30 age range).

  • Al December 9, 2011, 10:36 am

    Saveddijon:

    The difference between the assets and liabilities within the pension trust is the deficit, it is this deficit that is considered an unsecured creditor. In the case of Nortel, the deficit was significant due to underfunding of the plan and when the assets of Nortel (the corporation) were sold creditors are paid off according to seniority of claims (this included the pension deficit’s unsecured claim) but the recovery was poor (far less than 100%) – this is why the pensioners had their pensions cut.

  • joe December 9, 2011, 10:53 am

    good luck to all on this. I onced worked for one of the courier companies and there defined pension is so under water it would make any worker there wonder??

    I took the money they had to a LIRA and bought back the shortfall.

    gl to all that have a defined pension

  • J.Visser December 9, 2011, 11:24 am

    I have been retired from the Ontario Govt. with DBP for now 23 years and sofar it has been very good, I just hope that it will continue in that way.

  • Newbie December 9, 2011, 10:39 pm

    Hi,

    Quick question.
    I am relatively young and I am apparently automatically enrolled within TD’s DBPP at no cost if my salary is under 47.1k. I am puzzeled to how it really works.

    First – my RRSP contribution limit drops due to the DBPP, am I correct?

    Second – if I don’t plan to stay with the employer in a couple of years, what happens to my accumulated pension? Am I going to loose it along with my RRSP contribution that was reduced?!

    I would greatly appreciate anyone answering my concern and I can provide a link to TD’s DBPP description.

    http://www.td.com/corporate-responsibility/crr-2009/case-studies/new-defined-pension-plan/index.jsp

    Thanks!

  • Andrew December 10, 2011, 12:01 pm

    Sean, your post is fine, but it does not have the validation of personal experience.

  • mode3sour December 11, 2011, 4:37 pm

    Sounds like Andrew just has a problem with the “about the author” part and learning anything from a 20-something

  • Leroux Jacob January 18, 2012, 6:21 am

    Defined-benefit pension plans were the cornerstone of employer retirement benefits for many years. Recently, however, issues of financial solvency have put the availability of these benefits in question.

  • Mike February 9, 2012, 5:22 pm

    Your statement “Unfortunately your pension plan most likely isn’t guaranteed by your employer” is surely wrong.

    Your pension benefit is a promise made by your employer. The “unfortunate” thing is of course is that most employers are in a weak position to make such a promise (given how long term the liability is). It’s the funds in the pension trust that mitigate this.

  • SST September 19, 2013, 11:22 am

    The people of Poland recently found out just how safe their pensions were: http://www.reuters.com/article/2013/09/04/poland-pensions-idUSL6N0H02UV20130904

    The government essentially stole half the funds (bonds) of all private pensions, with zero compensation*. They did so in order to make the pensions “more safe”. Astounding display of government logic. Oh, almost forgot…they cancelled 20% of government debt with the stolen goods. Thanks tax payers!

    This will probably show up in one form or another on this side of the pond in a decade or so.

    *(At least when the government of Cyprus stole the people’s cash, it traded them shares in bankrupt banks.)

  • SST October 7, 2013, 11:47 am

    And now the people of Russia are finding out just how safe their pensions are:
    http://blogs.wsj.com/emergingeurope/2013/10/03/russia-to-grab-pension-money-temporarily/

    “…the [Russian] government needs to check that the money Russians channel to private pension funds is safe. To do this, it will seize 244 billion rubles ($7.6 billion) from non-state pension funds and put them into the state pension fund [for one year].”

    Looks as though 2013 is the year of governments stealing the citizen’s money, wholesale. Cyprus, Poland, Russia…

    I know, all junk countries and the theft is brazen and crude (think smash-n-grab). Down the road, the G8s might take a different, more sophisticated plan of attack. Or not. Canada already stole two years of your old age.

  • SST November 2, 2013, 11:34 am

    And now the citizens of the EU are seeing shades of Nationalization creep towards their savings:

    http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

    “The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability…a tax rate of about 10 percent on households with positive net wealth.”

    And it’s not just taxation but also, and perhaps even more nefarious, capital controls:

    “There may be a case for taxing different forms of wealth differently according to their mobility…requires enhanced international cooperation to make it harder for the very well-off to evade taxation by placing funds elsewhere.”

    In the span of less than a year, theft of private money by public government has traveled from “Banana” countries to now invade, basically, an entire developed continent.

    Remember, this is being put forth by the IMF, of which Canada is a member. Don’t ever think something can’t happen, the gov’t has the ways and means to do pretty much anything (eg. rumblings of CPP reform are in the air…).

  • SST November 13, 2013, 11:06 am

    An appropriate Money Sense article:

    Is Your Pension Safe?
    http://www.moneysense.ca/retire/pensions/is-your-pension-safe

  • SST November 16, 2013, 10:42 am

    Defined pension reform hits the UK:
    http://www.independent.co.uk/money/pensions/pensions-could-scrap-widows-rights-and-indexlinks-8930131.html

    “…to make the new schemes simpler means scrapping widows’ and widowers’ rights to any pension payouts as well as getting rid of indexation, under which payouts rise in line with inflation.”

    The trending answer would be ‘No, your DBP is not safe”.

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