I collect a defined-benefit pension from a privately held firm. How can I know if my pension is secure? What would happen should the company behind it wind down operations? Does the fact that the pension is administered by a bank-owned trust company suggest that the funds to pay pensioners are already secured, regardless of my previous employer's future?
First, the good news: Defined-benefit (DB) pension plans – which pay a specified monthly benefit based on an employee's years of service, salary and other factors – are in better shape now than during the dark days of the financial crisis. That's largely a reflection of two factors: First, the stock market has risen substantially from its 2009 lows, giving the equity portion of pension funds a boost; and second, many employers were required to make special payments to address funding deficits in their DB plans.
"On the whole, things are a lot better," says Malcolm Hamilton, a retired actuary and senior fellow with the C.D. Howe Institute. Offsetting those positives, however, is the fact that the stock market had a rough year in 2015 and interest rates have plunged to historic lows, which makes it more expensive for pension funds to generate income from their bond holdings.
High-profile blowups such as Nortel notwithstanding, it's actually rare for a private DB plan to reduce benefits, Mr. Hamilton says. "The percentage of Canadian private sector DB plans that don't get fully paid has always been very small. It's sort of like car crashes. People think they are far more common than they are because every time it happens, you read about it," he says.
That said, if you are concerned about your DB plan, there are steps you can take. The health of a private sector DB plan is a function of two things: The financial condition of the company and the funding position of the plan. If your former employer is financially strong, you likely have nothing to worry about because the company can backstop the plan. But if the viability of the company is in question, you'll want to investigate the funding position of the plan itself.
If you are receiving annual pension statements from your former employer, look for something called the "transfer ratio." A ratio of 100 per cent (or higher) indicates that the plan's assets would cover all of the plan's obligations if the plan were terminated (in the event of a bankruptcy, for example). A ratio of less than 100 per cent indicates that there could be a shortfall if the plan were wound up. Keep in mind that the transfer ratio can change over time.
If you don't receive an annual statement, Mr. Hamilton suggests you contact the human resources department of your former employer. Alternatively, depending on whether the plan is provincially or federally regulated, you can contact the appropriate regulator (for example, the Financial Services Commission of Ontario or the federal Office of the Superintendent of Financial Institutions). Pension plans are required to undergo actuarial valuations at least once every three years – more frequently if the plan has a funding deficit – and the regulator can provide this information, he says. The statement should also indicate if the employer is making extra payments to bridge any gaps in the plan's funding.
Unfortunately, if your former employer is in dire financial straits and the pension plan is significantly underfunded, there is not a lot you can do. You could prepare for a potential benefit cut by reducing your spending or by finding a part-time job, but these may not be viable options for a senior on a fixed income. Ideally, your investigations will reveal that the plan is secure and you have nothing to worry about. Mr. Hamilton stresses that, even in rare cases where benefits are cut, pensioners aren't left completely high and dry.
"It's almost never an all-or-nothing thing. If the employer fails and the plan isn't fully funded, it will usually be partially funded. And if it's partially funded, you'll usually be partially paid," he says. Even Nortel employees stand to receive more than 50 per cent of their benefits, he says.
If your former employer goes out of business and the pension plan is wound up, your portion of the pension assets would be used to purchase an annuity that would continue your payments, possibly at a reduced level if the plan wasn't fully funded. Current employees would likely be given a choice between an annuity or taking the lump-sum "commuted value" of their pension. If you worked in Ontario, the Pension Benefits Guarantee Fund may cover up to the first $1,000 a month of your private sector pension. Ontario is the only province that offers such protection.
The fact that your pension is administered by a bank-owned trust company doesn't tell you anything about the health of the plan itself, Mr. Hamilton says. The trust is likely just an intermediary that handles the fund's payments to pensioners.
Retirees depend on pensions to make ends meet, so it's understandable that you would want to make sure your company plan is secure. Your pension is probably safe, but it doesn't hurt to do some research – just to be sure.