Defined benefit pensions (DB) – call them what you want: pyramid schemes or retirement safe haven. Some are skeptical of their long-term sustainability, while others are thankful to have an employer that offers one. With tough economic times upon us, it’s not uncommon for large multinational firms like General Motors or Canadian Pacific Railway to have large pension deficits, as it’s the employer who bears all the investment risk. Negative publicity aside, your company can’t simply make your pension vanish overnight – there are a lot of safety nets in place to ensure your pension is protected. Let’s take a look at ways to tell if you pension is in good standing.
Just like human beings, pensions require regular checkups too. Registered pension plans are required to perform actuarial valuations at a minimum of every 3 years (once a year if your plan is severely underfunded). Actuaries look at the plan’s assets and liabilities and the required funding level to see how much is required to sustain the plan.
Plan members have a right to see their plan’s valuation report – simply request a copy from your plan administrator. It’s not uncommon for pension plans to file valuation reports yearly during bear markets, but if your plan is severely underfunded and valuations reports have been filed every year regardless of market conditions, it may be a sign that your pension is in trouble.
Your pension funds are kept in a trust account separate from your company. This ensures that your pension plan is protected and makes it more difficult for creditors to go after the pension funds if your employer were to go under. Although your pension plan can be wound up, you are unlikely to lose your entire pension. There will be a list of priority of payouts – current retirees are usually given priority.
Company Mergers and Takeovers
In a global economy, it’s not uncommon for company mergers to take place. The good news for employees is that your pension accrued before the merger is relatively safe – your new employer cannot retroactively go back and change your accrued pension. However, your employer can close the pension plan to new entrants or freeze service and start a new pension plan. The new pension plan may be similar to your old plan or it may be totally different, however, the fact remains that are your accrued benefits should remain intact.
Big Brother is Watching
Unfortunately your pension plan most likely isn’t guaranteed by your employer, but there’s a silver lining: in certain provinces employers are required to pay yearly fees to protect their employees’ pension. For example in Ontario, employers pay yearly premiums to the Pensions Benefits Guarantee Fund. This fund will pay certain benefits if a company were to shut down or be unable to pay the pension as promised.
Employers are proactive in protecting the pension plan. That’s why certain plan amendments are made, to ensure the longevity of the pension plan. For example, the commuted value may only be offered to non-retirement eligible members and there may be a percentage hold-back amount on payouts. This is to ensure the pension plan’s funding remains sustainable and doesn’t get in even rough shape if members get worried and terminate their employment to transfer their commuted value.
As you can see there are a lot of safety nets in place by employers and the government. The last thing your employer wants is a severely underfunded pension. With the knowledge in hand, hopefully you can rest easier knowing your pension plan is better protected than you thought.
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.