All contributions made to a defined benefit (DB) plan (both yours and your employer’s) are held in trust for the benefit of all plan members. So when you contribute to a DB plan, your contributions are safe.
If an employer goes bankrupt
If an employer goes bankrupt, it can’t continue making contributions and the pension plan may not have enough money to pay for the promised benefits (called an “underfunded” plan).
Underfunding is often related to the investment performance of plan contributions. For example, a fully funded plan can quickly become underfunded when its investments decline sharply in value, such as during an economic crisis or recession.
Because of the high cost that’s involved, employers are allowed to take several years to restore their plans to full funding. If they go bankrupt before this is completed, the plan will remain underfunded. Plan members and retirees may receive less than 100% of their promised pension.
If an employer becomes insolvent prior to 2012, lump-sum payments received by former employees and retirees in lieu of rights to health and dental coverage by an insolvent employer will not be treated as income for tax purposes.
Pension protection fund
Ontario is the only jurisdiction in Canada with a pension protection fund that can help when an employer goes bankrupt. The fund guarantees specified benefits up to $1,000 per month for members who meet certain age and service criteria (with some exclusions). Learn more about this fund and your pension rights.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca