In pension administration this is a question I hear quite often from plan members and with good reason. Private sector defined benefit pension plans are becoming increasingly underfunded. A lot of this can be attributed to external market conditions – low interest rates, changing demographics and rising cost of plan administration to name a few.
In a previous article I looked at metrics you can use to tell if your pension plan could be in trouble. While no pension I’m aware of is fully guaranteed, workers in Ontario with Defined Benefit (DB) pension plans have added protection – the Pension Benefits Guarantee Fund (PBGF). Let’s take a look at the fund’s history and the role it plays in protecting your pension.
What is the Pension Benefits Guarantee Fund (PBGF)?
The PBGF was established by the Ontario government to provide protection to Ontario members of private sector DB pensions plans if their pension were lost due to severe underfunding or employer insolvency. Similar to workers’ compensation, employers are required to pay mandatory premiums to guarantee their members’ pension plans. This fund is exclusive to Ontario – no other province in Canada has a fund like this. Members outside Ontario with DB pension plans unfortunately don’t have their pension guaranteed by the government. The government guaranteeing pensions isn’t exclusive to Canada – G8 countries like the US and the UK have their own government agencies that guarantee pensions: the US Pension Benefit Guarantee and the UK’s Pension Protection Fund.
What does the Pension Benefits Guarantee Fund (PBGF) not cover?
There are certain instances where your pension isn’t fully covered by the fund. The fund only covers the first $1,000 per month of your pension – anything in excess is not covered. While required employer premiums continue to rise, the $1,000 per month guarantee has remained the same since 1988. There are several further instances where you won’t be covered: benefit improvements that came into effect three years prior to the wind up date of your pension plan, pensions from federally-registered pension plans (industries like airlines and transportation) and any pension plan indexing that place plan wind ups. The fund is exclusive to DB pension plans – Defined Contribution (DC) pension plans are not covered.
Is the Pension Benefits Guarantee Fund (PBGF) sufficient to protect my company’s pension plan?
Canadians like their financial investments guaranteed by the government. Canada Deposit Insurance Corporation (CDIC) guarantees the first $100,000 in the event of a bank’s failure – the PBGF plays a similar role. The PBGF, however, has been criticized for its lack of funding. With the exception of 2010, the fund has run a deficit, as high as $274.2 million in 2006, every year. The deficit currently sits at 6.2 million in 2011. While the fund can handle the insolvency of a small pension plan, a large pension plan is a different story.
For example in 2009, after tech giant Nortel filed for bankruptcy, the Ontario government had to transfer $500 million to the fund to cover Nortel’s pension plan. The US Pension Benefit Guarantee Corporation is in far worse shape – it ran a deficit of $26 billion in 2011. The Ontario government has been criticized for being the only province to use taxpayer dollars to fund the PBGF. With the role of DB pension plans continues to fall – only 15% of Canadian in the private sector were covered by a DB pension plan in 2010 – and with the federal government’s proposal to introduce Pooled Registered Pension Plans, it will be interesting to see if the fund will continue to exist in the coming years or will be phased out.
If you’re a pension plan member of a DB pension plan in Ontario you’re most likely covered by the PBGF. Despite the coverage, it’s still a good idea to pay close attention to the financial health of your employer. Although the likelihood of your employer becoming completely insolvent and not able to pay out any pension benefits is very low (your employer is more likely to cut your pension by a certain percentage, such as 30%, in a worst case scenario), it at least provides some peace of mind knowing that at least a portion of your pension is guaranteed by the government.
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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