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Goodbye pensions, hello DIY savings
RRSPs replacing traditional pensions for workers
PAUL LIMA
In 1991, the technology company Allied Signal Canada Inc. changed its pension plan from one that paid employees a specific monthly benefit upon retirement to a defined contribution plan (DCP) that provided each participant with an individual retirement investment account.
In 2000, all new unionized employees of Saskatchewan Wheat Pool Inc. were told they had enroll in a DCP rather than the defined benefit plan of existing staff.
These are just two examples of a growing trend across industrialized countries that suggests the golden era of the company pension plan-for-life is becoming a thing of the past.
The value of a DCP is dependent on the investments made by the company administering it on behalf of the employees. In other words, if DCP investments do well, the pensions are secure. If the investments tank, so do the pensions.
That is why financial advisers are suggesting that anyone with a DCP consider protecting his or her pension with an RRSP.
"My best advice is to max out your RRSP until there is no longer a tax benefit," said Colin Montgomery, a certified financial planner and investment representative with Edward Jones Investments in Regina.
Mr. Montgomery advises people who are 15 to 25 years away from retirement to invest about 60 per cent of their RRSP in equity and about 40 per cent in such fixed-income vehicles as GICs, government bonds and corporate bonds. As people get closer to retirement, they can shift investments into more secure fixed-income assets.
Large companies say the cost of defined benefits makes it difficult to compete with rivals that offer DCPs or, in many cases, no pension plans at all.
Allied Signal Canada, since purchased by Honeywell Limited, and the Saskatchewan Wheat Pool were ahead of a global trend that has seen companies attempting to hold the line on or opt out of defined benefits plans and replace them with riskier DCPs.
In January, International Business Machines Corp. announced it would freeze its $48-billion (U.S.) pension plan in 2008 and instead enhance its contributions to a DCP, known as a 401(k) benefit plan, for its 125,000 U.S. workers.
"Employers generally prefer them because it means they're not responsible for funding benefits when pension fund investments perform poorly," said Ken Kivenko, who is a former chief executive officer of Allied Signal Canada, chairman of the advisory committee of the Small Investor Protection Association and the founder of Canadian Fund Watch (www.canadianfundwatch.com), a mutual-fund investor education and protection website.
Most government agencies, school boards and large financial institutions in Canada continue to offer defined benefit plans.
Hydro One professional employees in Ontario went on strike last June over the corporation's plan to lower wages and pension benefits for new workers. Currently, a senior engineer with 30 years of service could receive an annual lifetime pension, indexed against inflation, worth more than $74,000 annually - a price tag that Hydro One claims it cannot afford to carry. The strike came to an end in September without a settlement on the pension issue, which is now before an arbitrator.
"The trend is to go to a defined contribution approach and have employees take investment control over their programs," says Bruce Tomkins, vice-president and managing director of group pensions and benefits for BMO Nesbitt Burns.
Even if DCP contributions are matched by employers - and that is not always the case - if the plan does not perform as well as expected, or if it loses money, the employees are faced with pensions that do meet expectations, he said.
How bad can it get? In the U.S., it can lead to financial disaster.
Enron Corp. sponsored a DCP for its employees. The plan permitted workers to contribute up to 15 per cent of their salary, and Enron made a matching contribution of half of what employees contributed. Employees could choose to invest in a menu of options, including diversified mutual funds or Enron stock. Enron's contribution was entirely in Enron stock.
When the company went bust, at least half - and in some instances 100 per cent - of employee pension funds vanished.
In Canada, regulations are in place to prevent similar debacles. In addition, the Joint Forum of Financial Market Regulators - made up of the Canadian Securities Administrators, the Canadian Association of Pension Supervisory Authorities and the Canadian Council of Insurance Regulators - has issued guidelines for employers that offer DCP programs. However, they are only guidelines, Mr. Kivenko points out, and they do not safeguard pensions.
DCP pension plans are not as secure as defined benefit plans, and companies are not on the hook for any shortfall, said Mr. Montgomery of Edward Jones Investments. In most instances, companies are still contributing to employee pensions but they are "shifting some long term risk to the employee."
With that in mind, employees should educate themselves about their company pension plans and consider investing money in RRSPs outside company plans, Mr. Montgomery said.
Employees have to learn how to make retirement investment decisions based on how long they have before retirement, how much money they require upon retirement and the kind of risk they are comfortable with.
In most instances, unless the employee is investment-savvy, that requires the assistance of a financial planner or adviser, Mr. Montgomery added.
Linda Knight, vice president of BMO Mutual Funds in Toronto, concurs.
"There is not the same level of [pension] certainty. Employees have to manage what they put into their retirement fund to make it grow," she said.
Because there are so many investment options, employees should work with financial advisers, who can establish balanced investment plans that include mutual funds, stocks and fixed income investments such as GICs and bonds.
"During the dot-com boom, people took stock tips from their dentist and we know how that story ended," she said.
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