Vol. 10, #10 – July 12, 2018 – ALLAN GOLD’S BLOG
Fourth blog post of series on Elder Law for seniors and their families, particularly spouses, adult children, caregivers, etc.
BLOG ALERT! We have interrupted the business series to bring you in this space another series, this one on Elder Law, another area of specialization of Attorney Gold.
OPEN LETTER TO READERS FROM A. J. GOLD:
You may or may not know that Elder Law is another area of specialization of mine. Today, I am addressing a big area of concern to everyone, notably money, or as otherwise known, in the parlance of those 50+, Pensions (& Retirement Income). If you’re approaching ‘senior hood’ or already a retiree, I have a few questions for you. 1. “Do you think about your retirement?” 2. “Do you stress over your pensions, be it to be government, company, etc.?” or 3. “Are you concerned about the revenue of an elderly loved one?” If so, you’re in luck. I have written a two part blog on topic, the first today about company plans and this, with particular emphasis on the problem of pension deficits. The next one will deal with governmental plans, particularly about the rules that may limit your monthly intake. So if money is important to you, I invite you to continue reading below.
Note. A.J. Gold is the author of the following books:
“Elder Law in Canada*ELIC*” It’s a ground breaking (2,500+ page) legal text, acquired by legal libraries, Bar Associations, and Law Schools. (For testimonials, excerpts etc, please visit www.practitionerspress.com)
“Estate Document Professor* EDP* (Part of the www.45pluslifehandbook.com* series), informing Canadians everywhere about greater estate preparedness, covering: Last will and testament (will); Power of attorney (POA); Advance medical directive (living will); Trust; Organ donation consent; Estate Inventory and Distribution Survey(For testimonials, excerpts etc, please visit www.practitionerspress.com)
A. TOPIC & PROPOSITION: “Pensions & Retirement Income (Part #1): Company plans-Pay Attention & Be Vigilant **
In our twenties, many people joke about retirement and getting their pensions. In our thirties and forties, we only half think about pensions, since they’re so far off and we have other issues, then more pressing. But as we near the end of middle age, we start to think about them a lot. But even then, it’s usually only at most, a very superficial consideration of the topic. You see, most of us think that pensions are just too complex, way beyond us – in any event, somebody else’s responsibility. Or in the alternative, on seeing retirement income studies, reports, opinions, we find them boring and put them aside. But once we retire, we not only think about retirement income, we worry about it. While recognizing that pensions are the life blood of a good retirement, many of us think: “I’m sure that my company pension is fine. I’m confident that people smarter than me have been put in charge and they know what they are doing. And although there may be some issues, they’re just\low-grade problems. In any event, I’m certain that the administrators have everything under control and they will see to the fix and look after it all for me. And that’s why it’s OK to watch my golf score instead.”
Well, if you see yourself in the above description, think again- you’re wrong First, the subject of pensions are not as dry as all that. Of course, there’s a delightful side to them. You see, pensions deliver money and you can buy the things that you want, which can, in turn, bring you pleasure. But there are more important reasons. It merits your time because pensions are critical to your well-being in your senior years. And pensioners are repeatedly ‘thrown under the bus’. If you want examples, consider if you will, the cases of Dominion Stores, Nortel Networks and most recently, Sears Canada. So you can consider this topic sooner or later, but sooner is best. And finally, Pensions are NOT way over your pay grade- you’re smarter than you think.
This said, let me be more precise. Company plans should be an area of primary focus. Of course, you should NOT take mailed statements and reports and file them away, unopened and unseen, never to see the top of your desk until you die. Instead, this means that you should review these mailings carefully, monitoring your pension status, looking for signs of underfunding or other negative trends. Indeed, you should keep this file at the top of the pile in your in basket. And if and when, there are issues, be vocal, taking it up with the powers that be. It’s your money- don’t rely on others to see to your welfare. And if that doesn’t drive you to be vigilant, then do it for your spouse!
A.1 QUOTE(S) OF THE DAY:
* “You don’t have to talk to me about pensions. I won’t be around long enough to collect one. “ Mickey Mantle
* “Death is the next step after the pension-it’s perpetual retirement without pay.” Jean Giraudoux * “The trouble with retirement is that you never get a day off. “Abe Lemons
(And yes, he/she really did say that!)
B. WHY IS THIS IMPORTANT …TO ME (YOU)?
First, we were introduced to money in childhood. We are told that it’s something of value and to be saved – indeed, we all heard the phrase, “Money doesn’t grow on trees, you know.” We are also taught early about work and we are expected to do our part. It started with our chores and it went from there. We then learned about paid work. In our teen years, we got our first job, usually part time and then, full time possibly during the summer break. We were instructed to work hard and always do our best. Indeed, we are told that if there is something to do, it’s worth doing well! We were also encouraged to become good little savers, banking our pay checks, earning interest in our savings accounts. And we were directed to spend wisely… buying things only of value that we really want. The merry-go-round of “Easy Come, Easy Go“ was definitely not for us. You see, we soon realized that when we wait, work and save in order to get something, we usually appreciate it much more.
Second, everyone knows that you cannot live on love alone. Indeed, you need money to buy the necessities of life. As per Wikipedia, “A traditional list of immediate “basic needs” is food (including water), shelter and clothing. Many modern lists emphasize the minimum level of consumption of ‘basic needs’ of not just food, water, clothing and shelter, but also sanitation, education, and healthcare. Source: https://en.wikipedia.org/wiki/Basic_needs) Indeed, everybody needs food and most people like three squares every day. This doesn’t change for those 60 plus.
Third, we learnt soon enough that you must work to live. But when no longer a “spring chicken”, or a little past our prime, it’s harder to make a living. And on getting into the senior years, chances are that we will face one or more health issues, from minor to serious and all the way up to severe and fatal. That’s why, we need to start early, paying into pensions and building registered savings, such to deliver a steady, passive income, providing a good retirement.
Fourth, we’re all getting older. We all want our golden years to be healthy and happy, but also comfortable, this with enough money coming in. Indeed, most of us aspire to have the good life way beyond the bare necessities. But here’s the hard truth. If you want not only to live, but live well, it takes even more retirement income and lots of it. And to do this, you probably need to pay and save much more than you can easily afford.
Fifth, we’re all aware of what’s going on. It’s obvious that pension benefits are seemingly under fierce pressure and many retirees must struggle with fixed income tightening.
In view of the foregoing, if you have a company-sponsored pension plan, you probably ask yourself: “Am I going to be OK?”
C. ARGUMENT: FACTS, FIGURES, LEGALITIES & COMMENTARY
Here are the straight facts.
1. First, we’ll start with definitions. It’s not enough to have a general idea of key words – it’s important to know what they mean …precisely. Here are the essentials.
• “Investments”: “1. an investing or being invested; 2. an outer covering; 3. same as investiture (sense 1); 4. a) the investing of money b) the amount invested c) anything in which money is or may be invested.”(Source: Webster’s New World Dictionary)
• “Investment fund”: “a trust or corporation that invests in securities the funds obtained from the sale of its own shares and distributes a return to its shareholders from the income on the securities.” .” (Source: Webster’s New World Dictionary)
• “Pension”: “noun: pension; plural noun: pensions 1. a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.”(Source: https://www.google.com/search?q=pension+definition&ie=utf-8&oe=utf-8&client=firefox-b-1)
• “Supplemental pension plan”: “A supplemental pension plan is a written contract by which an employer acting alone or an employer and its employees who are members of the plan are required to contribute to the plan. The contributions are intended to provide the plan’s members with retirement income. The income from a pension plan tops off the income received from public plans.” (Source: https://www.rrq.gouv.qc.ca/en/programmes/rcr/Pages/regimes_complementaires.aspx)
• “Employer-Sponsored pension plan”: It’s also called a private pension plan or a company pension fund, but more accurately referred to as an employer-sponsored supplemental pension plan. It is considered a key part of a worker’s compensation package. In addition, it is a vital part of retirement planning for Canadians. In essence, it is essentially a group RRSP for workers of the same company. Here are the two big sub-categories:
o “Defined Benefit (DB) pension plan”: This defined benefit plan, most often known as a pension, is a retirement account for which your employer is to make all of the contribution payments and promises you a set payout when you retire. (N.B. Employee’s pension payments are calculated according to length of service and the salary they earned at the time of retirement.
o “Defined Contribution (DC) pension plan”: It means “A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. … In defined contribution plans, future benefits fluctuate on the basis of investment earnings.”(Source: https://www.google.com/search?client=firefox-b-1&ei=G3UzW6m5CuWb5wLthK7ICA&q=defined+contribution+%28DC%29+pension+plan+definition&oq=defined+contribution+%28DC%29+pension+plan+definition&gs_l=psy-ab.12…521728.521728.0.5246220.127.116.11.0.0.0.204.204.2-1.1.0….0…1c..64.psy-ab..0.0.0….0.4WZ5VRcYkkI)
o (Commentary: While the word, “defined” is found in both instances, confusion may abound. Indeed, there is a big distinction between them. In the instance of DB, it’s the benefit that pensioners will receive, which is pre-set and certain. But in the instance of DC, (whilst the benefit receivable by future pensioners is just uncertain, dependent upon circumstances), it’s the contributions that pensioners will pay, which is pre-set and certain. In other words, the DB promises you a set payout while with a DC, the payout will fluctuate on the basis of investment earnings.)
• Pension Administrative Terms :
o “Accounting”: “1. the principles or practice of systematically recording, presenting, and interpreting financial accounts; 2. a statement of debits and credits; 3. a settling or balancing of accounts.” (Source: Webster’s New World Dictionary)
o “Administration”: “1. The act of administering; management; specif., the management of governmental or institutional affairs; 2. administrators collectively.” .” (Source: Webster’s New World Dictionary)
o “Settlement”: “n. 1. a settling or being settled (in various senses); 4. an agreement, arrangement, or adjustment; 5. a) the conveyance or disposition of property for the benefit of a person b) the property thus conveyed.” .” (Source: Webster’s New World Dictionary)
2. Second, I’m sad to inform you that pension plans aren’t a guaranteed retirement income. Indeed, Corporate Canada has had its share of pension debacles. For all of you doubters out there, let’s take a walk down memory lane to the “Canadian Co. Pension Hall of Infamy”.
2.1 “D” DOMINION STORES: $56 MILLION PENSION DISPUTE
Here’s a capsule. “In 1984, the Dominion Stores Board of which Montegu Black was the chairman, with the prior consent of the Ontario Pension Commission, withdrew over $56 million from the Dominion workers’ pension plan surplus which the management had generated. The company said it considered the surplus the rightful property of the employer (Dominion Stores Ltd.), as the shareholders would have to pay for any shortfall if the assets had been less successfully invested. The Dominion Union complained, a public outcry ensued, and the case went to court. The Supreme Court of Ontario ruled against the company, and ordered the company to return the money to the pension fund, claiming that though the most recent language in the plan suggested the employer had ownership of the surplus, the original intention was to keep the surplus in the plan to increase members’ benefits. Eventually, the pension dispute was settled in equal shares between the shareholders and the plan members.” (Source: https://en.wikipedia.org/wiki/Conrad_Black)
2.2 JEFFREY MINE: $21 MILLION PENSION CLASS ACTION
Here’s a capsule. The Jeffrey Mine opened in 1879, less than 50 miles south of Thetford Mines. It was in the world’s largest asbestos-producing regions. But the mother lode may not be its claim to fame. Instead, it might be the $21 million class action brought by the members of two pension plans against the pension committee members (acting as plan administrators). The cause of action arose on the 2002 bankruptcy filing by the mining company and the winding up of the pension plans and the 35% reduction of benefits due to the $35 million deficit. The members alleged that the deficit was attributable to the imprudent investment practices of the plan administrator and its advisors (specifically, investing too heavily in equities).In the end, a $7.5 million class action settlement was reached.
2.3 AIR CANADA: $2.85 BILLION PENSION SHORTFALL
Here’s a capsule. In the 2003 bankruptcy, there was a huge pension problem. “The airline stated that its $2.85 billion pension shortfall (which grew from $1.2 billion in 2007) was a “liquidity risk” in its first-quarter report, and it required new financing and pension “relief” to conserve cash for 2010 operations. The company was obligated to pay $650 million into the pension fund but it suffered a 2009 Q1 loss of $400 million, so it requested a moratorium on its pension payments in 2009. The unions had insisted on financial guarantees before agreeing on a deal….” (Source: https://en.wikipedia.org/wiki/Air_Canada). What a headache for pensioners!
2.4 NORTEL NETWORKS: Some pensioner lost up to 45¢ on $1
Here’s a capsule. Nortel Networks first filed for bankruptcy protection in 2009. As per court proceedings in Canada and the U.S., assets of approximately $7.3 (US) billion were to be apportioned between Canadian, U.S. and European creditors, inclusive of the 20,000 Canadian pensioners. Estimates had put legal and advisory costs at more than $1.9 (US) billion. Pensioners suffered cuts in their pensions which varied according to the province in which they resided. At one point, Canadian pensioners were to receive in the range of 55-70 cents on the dollar, with those in Ontario doing better by virtue of Pension Benefits Guarantee Fund, only suffering a 30% reduction. (Source: https://business.financialpost.com/personal-finance/retirement/the-big-lesson-from-nortel-networks-pension-plans-arent-a-guarantee)
2.5 SEARS CANADA: 16,000 pensioners losing 29%?
You may have heard about the recent case of Sears Canada, its insolvency and closure, but you may have missed the part about the pension plan. Indeed, the signs seem to suggest that the pension story will have an unhappy ending. Here’s a capsule. There were about 18,000 Sears retirees, of which approximately 16,000 were enrolled in the company’s defined benefit pension plan. But the plan was underfunded. The lump sum payments to Sears Canada pensioners in the defined benefit plan are to be determined by the underfunded assets in the plan. The estimate by February 2018 was that “..:the plan could sustain payments at a so-called funded ratio of 71 per cent….” It is noteworthy that critics complained that this state of affairs was brought about in whole or in part by the billions of dollars in “dividend distributions — “unconscionable . . . massive asset stripping.”
(N.B. Other worker-retirees were invested in the company’s defined contribution (DC) pension plan, which effectively functions as a matched RSP and will pay out at 100 per cent.) (Source: https://www.thestar.com/business/opinion/2018/02/20/treatment-of-sears-canada-pensioners-a-travesty-that-demands-action.html)
Now that I walked you through this lacklustre corridor, I’m sure you’re disheartened. Accordingly, when it comes to company pension plans. I want to alert you to the experience of these workers. Indeed, this is a warning bell to employees of all major corporations and even those not so major. It’s about dollars, on which you are counting and your good sense to pay attention as to what is happening.
Here’s the world situation.
• As per the IPE, “OECD: Funded and private pension assets hit record high of $38trn” It wrote:
“Pension funds and other private pension plans in OECD countries held $38trn (€32trn) of assets at the end of 2016, the highest level ever, according to the think tank for the world’s developed economies.
Around two-thirds of these assets were in the US, although funded and private pension arrangements continued to expand in countries such as Australia, Canada, Denmark and the Netherlands, the OECD said in a report.
In the latter four countries pension assets exceeded the size of the domestic economy, reflecting a trend over the last decade of pension asset growth outpacing that of GDP in most countries.
Pension assets also exceeded total GDP in Iceland, South Africa and Switzerland.” (Source: https://www.ipe.com/news/pensions/oecd-funded-and-private-pension-assets-hit-record-high-of-38trn/www.ipe.com/news/pensions/oecd-funded-and-private-pension-assets-hit-record-high-of-38trn/10021203.fullarticle)
• In addition, Bloomberg reported:
“People who rely on their company pension plans to fund their retirement may be in for a shock: Of the 200 biggest defined-benefit plans in the S&P 500 based on assets, 186 aren’t fully funded. Simply put, they don’t have enough money to fund current and future retirees. The situation worsened for more than half of these funds from fiscal 2015 to 2016. A big part of the reason is the poor returns they got from their assets in the superlow interest-rate environment that followed the financial crisis. It’s left a hole of $382 billion for the top 200 plans.” (Source: https://www.bloomberg.com/graphics/2017-corporate-pensions)
Figures. Here’s the Canadian situation.
When it comes to Canadian workers aged 25 to 54 who are covered by defined benefit registered pension plans (RPPs) as well as those covered by defined contribution RPPs or hybrid plans. Stats Can reported: “Between 1977 and 2011, the proportion of the overall employed population covered by RPPs declined from 52% to 37% among men, mainly because of a drop in defined benefit (DB) plan coverage. Among women, RPP coverage increased from 36% to 40% over the same period.” (Source: https://www150.statcan.gc.ca/n1/pub/75-006-x/2014001/article/14120-eng.htm#a1)
More recently, OECD reported: “…Canada is among eight OECD countries where more than 40% of people of working age have a voluntary pension plan. Contributing to a voluntary pension could increase replacement rates significantly. …Earnings-related pension schemes are flexible in Canada. Within CPP, individuals in Canada can retire, with a reduced benefit, with their mandatory earnings -related pension from the age of 60. Deferring pensions pays a 7.2% basic pension bonus for each year of deferral in Canada, on top of higher earned entitlements when working. However, the bonus can be partially offset as the income-tested GIS benefit is withdrawn….” (Source: http://www.oecd.org/canada/PAG2017-CAN.pdf):
When it comes to pension deficits; here are some pertinent numbers.
• Statistics Canada reported about Canadian pension plans as of January 1, 2016 as follows:
“Total employer and employee contributions to RPPs rose 5.9% from 2014 to $67.2 billion in 2015. Employer contributions for unfunded liabilities accounted for $11.4 billion of the total compared with $10.2 billion in 2014. When payments for unfunded liabilities are excluded, employers contributed 60.0% of the total, while employee contributions accounted for the remaining 40.0%.”(Source: https://www150.statcan.gc.ca/n1/daily-quotidien/170721/dq170721d-eng.htm)
• As per Hewitt’s Pension Plan Solvency Survey (2016), “…only eight per cent of the 449 DB pensions it administers were fully funded. The median solvency ratio was only 81 per cent at that time, meaning a 19 per cent shortfall in assets relative to estimated pension benefits payable. Persistent low interest rates have hampered the ability of pensions to generate solid returns and magnified deficiencies in recent years. (Source: https://business.financialpost.com/personal-finance/retirement/the-big-lesson-from-nortel-networks-pension-plans-arent-a-guarantee)
Legalities. Respecting company pensions, here is a quick overview
• Canada (Federal): Pooled Registered Pension Plans Act S.C. 2012, c. 16 Assented to 2012-06-28 – This is the PRPP legislation that applies in respect of employees and self-employed persons within the legislative authority of the Parliament of Canada.
• Since 2015, five Provinces including Ontario implemented the Pooled Registered Pension Plans (PRPP) Act, providing a legal framework for creating and operating voluntary, low -cost, defined contribution pension plans for employed and self-employed persons who do not have access to a workplace pension. The law largely follows the framework of the federal PRPP legislation that was passed in 2012.
• Quebec: It enacted a law, addressing the funding of defined benefit pension plans and other measures. It was titled, “Act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans” (S.Q. 2015, chapter 29), which came into force on 1 January 2016. The main objectives of the Act are to:
• establish a new method for funding defined benefit pension plans that includes:
o replacing the solvency method by one based on funding
o establishing a stabilization provision
• give plans a funding policy
• modify the rules for appropriating and allocating surplus assets
• eliminate the obligation of including the additional pension benefit
• allow defined contribution plans to pay variable benefits.”(The Regulation to amend the Regulation respecting supplemental pension plans, which was published in the Gazette officielle du Québec of 13 July 2016, contains the scale that must be used to determine the target level of a pension plan’s stabilization provision and the information that must be provided to Retraite Québec with regard to the plan’s financial situation.)
• Ontario: It enacted a law, titled, “Pooled Registered Pension Plans Act”, (2015, S.O. 2015, c. 9) Bill 57)). Pooled registered pension plans offer Ontario employees and the self-employed a voluntary, low-cost, tax-assisted option to increase retirement savings.
Commentary. Here’s my point of view on this subject of company-sponsored deficits.
Many pension plans are in serious financial difficulty. Here are several root causes.
• Declining investment income. Investments are cyclical. In a bear market, they generally do worse; and pension plans, with their giant portfolios, usually bear a big brunt of the pain.
• Falling interest rate: Another concern is when interest rates fall. Such a decline may accompany the market drop, which actually pushes up the size of a fund’s obligation.
• Poor investing policy, practices and choices: Perhaps the real problem is not merely the passive reaction to the market, but, more importantly, investing policy, practices and choices. In this regard, Stephen Jarislowsky/Jarislowsky Fraser, an expert investment counsellor, has been quoted as saying: “Some of the assumptions of returns of these pension plans have not been realistic…What these funds have to do is return to reasonable assumptions of inflation and earning ability over a period of time.”
• Underfunding. Sometimes it’s very simple – if you don’t put in enough, there will be a deficit.
• Insufficient assets. Pension plans typically have had between 50% and 60% of their assets in stocks. And if and when their value drops significantly, many plans have an asset value inferior to the cost of meeting their liabilities to actual and future retirees.
• Corporate earnings under pressure. With companies forced to fund pension plans year after year, the reality is that corporate earnings/profits ebb and flow. Here is an explanation. The global business world is fiercely competitive. Over time, the core business of a company might become too mature, inefficient and non-competitive. In some instances, an old player just falls behind like a rock; or if looking to change, a long-standing firm might still flounder due to extra delays, fail after burning through too much cash, etc. And disruptors newly coming onto the scene, can heighten the tension. In the alternative, corporations might lose sales through excessive cost cutting. And of course, the world trade-tariff environment surely doesn’t help. All of this to say, a weaker company usually means an underfunded company plan.
• Over-sized company pension obligation. A bloated pension bill is a severe drag on a company going forward; and it’s a vicious circle since the greater the need to service pensioners, the less money there is to reinvest in the business, thusly lessening the probability of the firm’s survival. General Motors is a good example.
• Employer’s financial health/bankruptcies: The financial health of employers often has a dire ct bearing upon the health of the pension plan. Less sales and more debt is a toxic mix, which could have the effect of increasing the pension deficit. A marginal company will be hard- pressed to meet its full pension obligations to retirees. The situation will be more dire in the event of a bankruptcy or closing.
• Response to surpluses (so-called over-contributions). Over-contribution to the pension plans is usually inadvertent, having been caused by the plan sponsor’s inability to foresee bull markets before they occurred. A good illustration is in the 1970s and early 1980s, when many employers over-contributed once pension funds performed poorly and inflation drove up liabilities..But by the late 1980s and throughout the 1990s, things changed dramatically as interest rates fell and inflation dropped. And given the extra contributions, and the stock markets soaring, many plans were running far ahead of anticipated obligations. This then created surpluses, which in turn, gave rise to:
– “Contribution holidays”. The surplus prompted many companies to assume that they could stop contributing until the excess was used up.
– Member claims to surpluses: Pensioners wanted the companies to use the windfall to improve their benefits.
– Reluctance of companies to adequately address deficits. Corporations now realize that if they contribute too much, as can easily happen where unpredictable stock markets are involved, they may well end up giving the money away.
The reasons for pension deficiencies are many and inter-related. And pension plans are now much larger than they were, both in absolute terms and relative to the organizations sponsoring them. And since bigger makes the numbers more material, it’s even riskier. And when looking for the correct solution, it’s not easily identifiable nor straight –forward to put it into effect. This is because the issue of pension deficits is complex with many moving parts and cross-interests of various stakeholders. But what is patently clear, is that pensioners who do little or nothing, will likely lose out.
D. TIPS & RECOMMENDATIONS: Company Pension – Top-10
Retirees and their families (and even workers (as future pensioners) should:
1. KNOW that the welfare of the elderly is not only the job of family- it bears upon all of us. To be human, walking the right path, we must never be onlookers, not getting involved. Instead, we must intervene for seniors and protect them.
2. START by recognizing: (a) That due to an aging population and other factors, there has been a global pension crisis; and its effects are still being felt; (b) That this overall hostile environment is made worse for private company pensions, due to profit pressures, the risks of market crashes, bad investment decisions, etc., all contributing as of late, to high-profile corporate bankruptcies and pensioner losses arising out of a stakeholder tug-of-war; (c) That just like all Canadian workers, you want to make the most of the money made and saved; and to do this , you must be well-informed!
3. REMEMBER that the first step to becoming informed about company pensions and being able to make an informed decision thereon, is to understand pension terms. To this end,
3.1 INFORM yourself as to what is meant by a “Defined Benefit (DB) pension plan”, “Defined Contribution (DC) pension plan” or a group “Registered Retirement Savings Plan (RRSP)”.
3.2 BE aware of the risks relative to defined pension plans. This means that when it comes to retirement income, you must SAVE on your own personally. THINK of it as an insurance policy for your company pension.
3.3 RECOGNIZE the following: (a) Dilemma of moving up the corporate ladder and transferring from the DB plan currently held, to a management DC pension plan and then suffering a loss of value therein; (b) Conundrum relative to the value of the defined benefit DB pension, and the real risks associated with a defined contribution DC or group RRSP. Indeed, a hybrid plan might protect you from some of the downside – but not all.
3.4 KNOW that the purpose behind a defined benefit (DB) plan is the certainty around the adequacy of income in retirement, but this certainty, in itself, creates risk, by driving companies to end such plans. Whilst a target pension plan re-model may be a solution, it is essential that there be adequate study and input from members.
4. COMPREHEND that during your working years, when choosing an employer and on reviewing an offer of employment, CONSIDER the quality of its pension plan. In this regard,
4.1 NOTE that many employer-sponsored pension plans are in peril and retirees and near-retirees are at risk.
4.2 UNDERSTAND that this state of affairs doesn’t just happen. It could be explained by a market shift, when money wasn’t being earned on stocks or other investments. Sometimes, investment returns were negative – this means that the plan suffered losses and value declined. This could have led to plan infusions; and these plan enhancements, in turn, could have brought on pension plan surpluses, which then might result in ‘contribution holidays’ and as they say, does it go….and so it went …
4.3 ASK plenty of questions about company pension plan. Of course, you want to become knowledgeable about its status and condition, but also, individual member rights and recourses.
4.4 CHECK it out at the Office of the Superintendent of Financial Institutions (OSFI). It’s an independent federal government agency, which regulates and supervises more than 400 federally regulated financial institutions and 1,200 pension plans to determine whether they are sound financially, meeting their requirements, etc. Its coordinates are as follows: TEL.: 1-800-385-8647; FAX: (613) 990-5591; WEB SITE: www.osfi-bsif.gc.ca ; EMAIL: email@example.com ; OFFICES:Ottawa (Head Office):255 Albert Street, 12th Floor, Ottawa, Ontario, K1A 0H2, Tel.: (613) 990-7788; Toronto: Suite 1900, 121 King Street West, Toronto, Ontario, M5H 3T9, Tel.: (416) 973-6662;Montreal: 105 McGill Street, Suite 650, Montreal, Quebec
H2Y 2E7, Tel.: 283-4836; Vancouver: P.O. Box 11, 1095 West Pender Street
Vancouver, British Columbia, V6E 2M6.
4.4.1 CONTACT the offices of your provincial regulator, for example: (a) ONTARIO- Financial Services Commission of Ontario (FSCO)/Financial Services Regulatory Authority (FSRA). Its coordinates are as follows: 5160 Yonge Street, 16th Floor, Toronto, Ontario, M2N 6L9; Tel.: 416-250-7250; Toll free: 1-800-668-0128; Fax: (416) 590-7070; Email: firstname.lastname@example.org ; (b) QUEBEC -Retraite Québec , (Ref. Pension plans in the private, municipal and university sectors, VRSPs, LIRAs or LIFs), Its coordinates are as follows: Case postale 5300, Québec (Québec) G1K 0G4; In Quebec, it’s the Régie des rentes (Tel.: 418-643-5185);
5. NEED to understand the employer-sponsored pension system. Here are a few major aspects:
5.1 KNOW: (a) That employers are required to fully fund their pension promises. The legal issue is really the length of time that the company is allowed to under-fund. (b) That besides becoming known as a great employer, the primary incentive for a company to provide and fund a pension plan is the tax relief – indeed, a wage-like benefit offered to employees is on a tax-favourable basis to the corporation; (c) That the federal government is NOT liable to pay a retiree unless he-she was an employee thereof and he/she was a member of a plan.
5.2 BE cognizant of the possibility that should a company make additional contributions to make up for pension shortfalls and then interest rates go up, and if the shortfall turns into a surplus, the company may try to withdraw or reverse any of their contributions. Indeed, this could be a roller coaster ride of pension surpluses and deficits, when and where a company raids the account and pulls out the surplus or stops funding, which might ultimately thusly create a company-induced deficit. (N.B. As to the use of surplus assets to pay Employer contribution obligations and the payment of administrative expenses from the pension fund, the Kerry decision by the Supreme Court (Nolan v. Kerry (Canada) Inc. 2009 SCC 39) favoured the company over pensioners. But the counter balance is to have legislation or regulations requiring the surplus to be “trapped” in the plan to safeguard as against adverse experience. For example, if the surplus level is capped at 10%, then the plan is funded at 110% of its liabilities.)
5.3 INQUIRE as to whether there is a provision specifying that in the event of a surplus, it’s only the employees, who are legally entitled thereto. If it’s there, that’s good! But if not, or the plan is ambiguous and there is no clear entitlement to surplus, the company may have the advantage.
6. ACT in your self-interest, by staying current about your company pension plan, once you’re hired and you become an individual member. To this end,
6.1 BE advised: (a) That a pension plan sponsor or administrator is required to send a member the following: (i). Statement annually with certain information about accrued benefits and, in a defined benefit plan, that would indicate a pension amount at retirement (amongst other options, etc.). (ii). Other information (at certain times), such as termination options, options at retirement, or the effects of changes to the plan(s); (b) That if the company is federally-regulated, there are rules in the federal legislation; or if registered provincially, there are provincial rules. (N.B. As for example in Ontario, sponsors (i.e., employers, etc.) and administrators of pension plans are required to file reports (e.g., funding reports, inclusive of actuarial valuations) with the regulator, the Financial Services Commission of Ontario (FSCO). And these can be reviewed by members (i.e. employees and retirees). (c) That public companies (listed on an exchange) must disclose financial information and they are required to disclose pension liabilities thereon; (d) That if unionized, your union office may be another source of information.
6.2 OPEN a pension file (& START a binder); indeed, the means to remaining current is being organized.
6.3 READ statements and notices carefully. Of course, it’s important to STAY updated on the plan.
6.4 ATTEND annual meetings of the pension committee and ASK questions. Of course, as a member, paying into the fund and as a future retiree-pensioner, you have an interest in knowing what\s going on with your pension plan.
6.5 INQUIRE into the performance of the plan, and particularly, the EBITDA, (i.e. earnings before interest, taxes, depreciation and amortization) or annual earnings. Jean Bergeron, an actuary at Morneau Sobeco believes that workers at companies in financial difficulty should be the most concerned about their pension plan because those firms will not have money to inject into the fund in order to cover a shortfall. Indeed, he said: “People should be looking at what’s happening with their pension plan…They can ask questions of their employer to see what is being done to manage (market) risk. They can also attend annual meetings of the pension committee and ask questions. Where there is a union, the union has to be very much involved.”
6.5 KEEP notes when you have a conversation with a plan employee, marking down the date and time, the name of the person with whom you conversed plus his or her co-ordinates. In addition, ASK questions by letter or e-mail seeking answers in writing. Here are several good ones: (a) “How does a plan determine what a worker’s pension will be?” (b) “How can I ascertain whether I’m getting the proper amount?” (N.B. You would ultimately need to hire an actuary to figure it out, but adequate information is also needed for this to be a fruitful exercise.); (c) “How does the plan calculate a deferred pension amount?”(d) “What are the plan solvency risks to the worker?”
6.6 CONTACT the federal/provincial regulator of private pension plans and inquire about your company plan. For contact information, please see sub-paragraphs 3.4, 3.4.1 here of
6.7 CONSIDER negative news as being telltale warning signs, requiring you to pay close attention. On finding a funding shortfall, you really need to focus. And let me tell you, in such an instance, your silence is not golden. You see, if it’s true that “Money talks”, then it’s talking to you and asking for your help. So SPEAK up! ASK your employer /plan administrators to quickly address plan problem(s). Of course, you want the fix to happen sooner, rather than later.
7. BE aware that you have options. You could:
During your working life.
7.1 START thinking about your retirement income, much earlier, rather than later.
7.2 CONSIDER leaving the plan, commuting your pension and/or otherwise taking a lump-sum payout. (But when reflecting, consider the positive advantage of staying a member of your company plan, such as the automatic deduction, tax deferral aspect and the company matching contribution, etc. Indeed, such may counter-weigh the inclination to leave the plan.
On approaching retirement
7.3 KEEP in mind that you’re entering a new stage. Here are several suggestions for your ‘TO-DO’ list:
7.3.1 ASK plenty of questions. Like most people, you probably want to know what you need to do with your company-sponsored retirement plan.
7.4 DETERMINE when the income is needed and CHOOSE a retirement income product that fits you and your needs.
7.5. KNOW that with an employer-sponsored plan, you have two ways to go- you can:
7.5.1 MAKE a lump-sum commuted value payment, such transferred to a locked-in retirement account (LIRA) or a life income fund (LIF). In this regard,
a) KNOW: (i). That retirement income will depend on investment performance in these accounts.
(ii). That minimum and maximum withdrawals would apply beginning at age 72 at the latest.
(b) REVIEW possible funds and track records.
(c) INQUIRE as to whether a prospective fund has well-qualified trustees and a conservative investment policy and if it’s being inspected and evaluated.
7.5.2 BUY an annuity from an insurance company. It provides a monthly payment for life. But you must remember that annuities are not all the same. That’s why should look up the various financial products on the market and the terms and conditions thereof.
7.6 NOTIFY the human resource department when opting to take one’s pension.
7.7 CONTINUE monitoring your pension fund once you’ve retired.
8. STAY informed about the health of your company- sponsored pension plan, particularly as to whether it’s adequately funded; and ACT correctly on discovering a pension shortfall. Here’s my 4-step approach.
8.1 KEEP it all in perspective and TRY not to panic. Of course, getting stressed and having a heart attack will not improve your situation. In most instances, there shouldn’t be great cause to worry about the regularity of pension checks. Indeed, it should be possible to restore the necessary pension funding over a period of time. The big exception is corporate insolvency and/or an impending bankruptcy, or when a company faces a massive, simultaneous retirement by staff members.
8.2 INQUIRE as to details of the plan status and condition. The first obvious question is “How much damage was done?” And if substantial, the second is “What is being done to address the deficit?”
8.3 GET real once the shock dissipates. RECOGNIZE that the problem of an under-funded employer-sponsored pension plans is serious, but not impossible. There are several approaches. Some carry with pain, while others are much less dramatic. Here are a few examples:
8.3.1 WAIT for (a) Markets to recover: Of course, having some luck in the markets would help. This is the most attractive and the least painful solution. One can hope for a market to recover, but hope is a virtue, not a strategy. In any event, robust returns in the next few years would only put a small dent in the existing fund deficits; (b) Corporate profits to rebound: Indeed, a company turnaround is the classic approach. However, analysts say that a need to make up pension shortfalls, puts severe pressure on the bottom line. It’s far more difficult for a company to function and prosper with a severe pension expense. A greater than average rebound is generally a must
8.3.2 CUT benefits: Another option is for an employer to shift the burden to their employees by cutting pension benefits. But no one wants this. However, management might find that it has no choice. In some instances, employees will be asked to accept less over the next few years. Nevertheless, even when desired, pension legislation makes this route extremely difficult.
8.3.3 INCREASE contributions: Boosting pension contributions is another alternative. The first question is: “Who should make this payment?” The second is “How much?” and the third is “How fast?” In many instances, companies may be forced to increase pension contributions sharply. They will ask contributors to pay higher contributions toward their eventual pensions. An important group that should be exempt from these pressures is made up of those who are already drawing pensions as they have already met their full obligation to contribute. In contrast, many plan sponsors will now choose to contribute no more than the minimum set under the legislation and regulations. Caught between a rock and a hard place, they will argue that there is an important downside to the sponsor, contributing more than is legally required. To do otherwise would be a disservice to their shareholders. This would then mean that today’s deficiencies would be funded slowly. And as a result, plan members can reasonably expect that current shortfalls will linger for years.
8.3.4 CHANGE plan type: Given the problems now faced, some sponsors, (many of whom are corporate giants), want to change their plan from being defined-benefit to defined-contribution. Many economists and financial analysts believe that this is the way to go. However, the question to be asked is: “Is it legal?”
8.4 ENCOURAGE your union (if unionized), to play a role. More particularly, REQUEST it to
8.4.1 MONITOR the company. It should always be on the look out for a company with enormous pension obligations in relation to the value of the company. Of course, this means keeping your eyes open and asking lots of questions.
8.4.2 OPPOSE benefit reductions and argue:
(a) That the worker was serving a cause, which went beyond profit. He/she believed that this was important for many people.
(b) That the labourer had the expectation that at least in old age, he/she would be safe with a “secure” pension. This then prompted his/her accepting inferior wages than those otherwise available in the private sector.
(c) That the company led the worker into error. Government and company officials reassured workers and lulled them into a false sense of security. Such acts requires them to follow through, failing which, responsibility may attach.
(d) The pension plan is a deemed trust. After years of employees contributing to their pensions, an employer does not have the right to deny the benefits due these workers
(e) That after working long and hard for an employer, it is simply unacceptable for the former employee in their old age, to be faced with the possibility of a considerable reduction in their pension benefits. It is unworthy of a just company and the Canadian system of law and justice.
8.4.3 RENEGOTIATE the terms. It is in the interest of workers to make negotiated changes to the plan as soon as possible. For those in a strong bargaining position, they can hope that the employer will take on this full burden. But for those less so, they will have to contribute more. So, in many respects, larger corporate contributions will likely need to be matched by higher employee ones—perhaps as high as 50%. To move things along, a union could offer to match increased employer contributions with higher employee contributions.
9. KNOW that sometimes when a corporation goes bankrupt, there is a pension plan surplus. But more often, a deficit arises due to under-funding or a financial crisis. In such an eventuality, the pension plan will have a claim on the company, but it would be for the most part, an unsecured claim. And after the company is liquidated and provided the claims of secured creditors (i.e., banks and bondholders) get satisfied, the result would likely be a payout of only some cents on the dollar. (N.B. In bankruptcy court, the rights of pensioners are weak. And there is not much hope that this will change because this would displace other creditors and potentially raise the cost of capital.)
10. COMPREHEND that a worker is not powerless. He or she should be vigilant and do everything possible to make his/her sponsored plan as positive an asset as possible. To this end,
10.1 LOBBY lawmakers to enact stricter laws-rules regarding pension deficiencies and for more provinces to follow Ontario’s lead with pension fund guarantees;
10.2 BUY shares in your company, if it’s publicly traded. Follow company announcements and attend the meetings of shareholders. ASK questions and join with others in order to sway the vote towards doing right for workers and pensioners.
10.3 OPPOSE your company: (a) Delaying the rectification of a pension plan shortfall; (b) Moving to freeze or close out defined benefit (DB) pension plans; and/or converting them to defined contribution (DC) plans (or group RRSPs). (c) Announcing the termination/winding up of a plan; etc.
10.4 KNOW that it may be possible, as a matter of contract law or by the terms of the plan itself, etc., to force the company to stop or reverse under funding;
10.5 SEEK advice if you have doubts. Of course, it’s easier to address a problem earlier, when it’s smaller as opposed to later, when it can be bigger and much harder to resolve.
10.6 CONSIDER court action, much sooner than later…if you want a piece of the action. It’s reasonable to deduce that better outcomes are more likely for those bringing legal cases before management throws in the towel and goes bankrupt.
11. RECOGNIZE that by the end-of-business on the last day before closure, once you’re leaving, “hat in hand”, it’s probably too late to avoid sustaining a loss. This is because bankruptcy is likely not far behind. And the pension plan deficit claim in bankruptcy court is unsecured; and bankruptcy settlements usually spell lost benefits for employer plan pensioners.
E. CLOSING –LEGAL MATTERS!
Pensions are really important. In this day and age, you should never take them for granted. And you must recognize that those of the private kind are not automatic, nor are they guaranteed. When it comes to a company-sponsored plan, your concern is warranted and staying alert is the correct stance. This is because bad stuff happens! On finding things really going awry, and taking a page from history, I encourage you to adopt a battle cry, comparable to “Remember the Alamo!”, and tell everyone: “Remember (take your pick) Dominion Stores, Nortel Networks or Sears Canada!” And if you read this blog, you know that I say that legal matters; and I belive that you should look to the law to oppose company pension shenanigans, enforce your rights, and if need be, bring legal proceedings, seeking to reinforce the viability of the fund or asking for redress, etc.
I close by posing this question: “When and where, will the next big, Canadian employer fail leaving employees and retirees in the lurch?” In response, I say: “Maybe the next, big pensioner travesty will be at your company?” That’s why I end by asking: “If so, what will you do?”**
F. SENIOR LITE SPOT: There’s absolutely nothing funny about getting old (& retirement/retirement income), except…
* “One wife about retirement: “Twice as much husband for half the income.” (Source: www.fun-stuff-to-do.com/retirement-quips.html)
* “The question isn’t at what age I want to retire, it’s at what income. George Foreman … (Source: www.guy-sports.com/jokes/retirement_jokes.htm)
G. PREVIEW OF NEXT IN THE BLOG SERIES: OAS Pensions (& Retirement Income)
Do you think about your retirement? Do you stress over your pensions? Or are you concerned about the revenue of an elderly loved one. If so, you’re in luck. Next week, I will write a blog post on governmental plans, particularly about the rules that may limit your monthly intake. Interested? See you next time.*
H. NOTICE – CAUTION -DISCLAIMER
The material provided herein is of a general nature, strictly for informational purposes. The interpretation and analysis is not to be misapplied to a personal situation with a particular set of facts. Under no circumstances, are the herein suggestions and tips, intended to bring a reader to the point of acting or not acting, but instead, the hope is that they are to be a cause for pause and reflection. It is specifically declared that this content is not to be a replacement of or substitution for legal or any other appropriate advice. To the contrary, for more information on these presents, related subjects or any other questions, it is the express recommendation of the author that everyone seek out and consult a qualified professional or competent adviser.
* ©/TM 2005, 2008 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED
** ©/TM 2015, 2016, 2017, 2018 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED