Defined benefit pension plan | General financial discussion | Discussion forum

I took the LIRA and think it was a stupid decision. I would have been much better off to have left it where it was. This was in 1987. Fortunately, it was not a huge amount of money either way. I can no longer remember my reasoning, but I didn't know as much as I do now. Taxable commuted wasn't an option for me.

As I understand it, the attraction of taking these alternate arrangements is that people think they can do better with investing on their own than can the large pension funds.

I think this is a mistake. We need to recognize that we are not experts in investment, and that most people do not do as well as they think they are going to because they make mistakes that pension funds would never make. It's not that we couldn't, necessarily, but we don't.

I might feel more hesitant about a smaller pension fund, but you are likely talking about a large government one, as that's where most of them are.

The attraction of DIY is the notion that you can maybe outperform the pension fund.
But you are looking at a longish time horizon. The pension fund's time horizon is even longer - forever, in fact. The longer the horizon, the more likely you are to benefit from the markets. This has been attested by endless numbers of writers, and stats I have read in the past appear to back it up.

Also, a well-run pension fund is a very sober instrument. It knows what it has to achieve in order to meet its obligations, and it does not take risks beyond what is necessary to meet them. In other words, it doesn't do the stupid things that amateurs do. Slow and steady gets you there.

I don't know where you are headed, but I believe Saskatchewan has some kind of provincial fund that you can participate in via RSP etc. It's really only for the long term as I understand it. But I don't know much about it. You would have to research it.

Ontario is starting a mandatory provincial pension plan in addition to CPP. This has not been terribly popular with lots of folks and I don't think it's as good as CPP. However, it is a sign that there is recognition that a lot of people are not doing a great job of looking after their own retirements when left to their own devices.

When there is money that you can "get at", there is a risk that you will use it and deplete your retirement savings. I'm not sure if that is what is on the table for you or not. I have been more familiar, in recent years, with people being offered the option of a lump sum when they reach retirement age as opposed to taking the pension.

Another consideration, which looms larger as you get older, is that managing the money yourself becomes more of a challenge as you reach your 70s and 80s etc. - just when you may have finally learned how to do it! Many of us aren't in the best of health, don't want to be bothered any more, may not fully trust our powers of attorney, etc. A pension fund that somebody else manages is a no-brainer. It just keeps ticking along and the cheques keep coming.

In retrospect, if I'd had the option, I would rather have put my RSP money into a large well managed pension plan than having to manage it myself or figure out who to hire to manage it. But that has never been an option, and it's not what I would have done at the time.

I have a defined benefit pension. I was given severance and I rolled into taking payments. A few years later the company changed the rules and removed benefits for future retirees, provincial medical, extended health and dental, and a fully paid life insurance policy. But with the take aways they offered retirees to roll the retirement funds over to the retiree to manage or take the payments from the company.

The company is owned by a hedge fund operator and he continues to tighten expenses within and sell off what ever he can....and pockets 51%, I believe. So we all wonder to know if the fund is topped up when its status is reported every 2 years and we know he has not done any top ups from the money he keeps skimming away. Since then they have tried to buy out our life insurance and benefits twice.....all taxable....and not that attractive unless your spouse has good plans you can rely on. Since then they have froze to pay for dental at the 2014 dental fee guide and will deny claims for any new drugs that become available. But we do have PharmaCare in BC that should help but we would have to pay BC Medical premiums. So if the company goes south the benefits go, although we are not sure about the life insurance. I took the life insurance payout....$4000 for a $14000 policy....don't know what actuary figured that one out!!!!!

So the question is.....how stable are the companies you and your wife work for?? Do you have a crystal ball?? Any decision could be right or wrong

Ps. I belong to a retiree group that is lobbying for a full payout of our pensions and questions why the benefits have been altered as we were promised 100% for lifetime. I also donate regularly for lawyers fees to negotiate with the company.

kanaka is right on, it's vital to consider the future prospects of the plan and its sponsor, as best you can. My comments about defined benefit plans reflected my situation, i.e. government employee plan, where I think all I have to worry about is when is the revolution coming or when will the money printing presses run dry.

Loonie said
I would agree that you need to look at the viability of your pension fund. Wasn't it the Nortel employees (or one of those companies that collapsed a while ago) where the employees lost their pension plan completely?

I saw the same news headlines. That turned out to be just the rhetoric from a Nortel pensioners group.

Assets in pension funds from employee and employer contributions are separate from those of the employer. Should the employer become insolvent or go bankrupt, it doesn't take their pension fund down with them.

Far from having nothing, former Nortel employees will be deciding what each would like to do with their share of the pension fund assets. Each can choose to buy a life annuity or have the money transferred to a LIRA or LIF. See Benefits Canada (February 16, 2016): Nortel pensioners face decision on payment options.

Loonie said

I took the LIRA and think it was a stupid decision. I would have been much better off to have left it where it was. This was in 1987. Fortunately, it was not a huge amount of money either way. I can no longer remember my reasoning, but I didn't know as much as I do now. Taxable commuted wasn't an option for me.

As I understand it, the attraction of taking these alternate arrangements is that people think they can do better with investing on their own than can the large pension funds.

I think this is a mistake. We need to recognize that we are not experts in investment, and that most people do not do as well as they think they are going to because they make mistakes that pension funds would never make. It's not that we couldn't, necessarily, but we don't.
….

I think that's giving pension fund managers way too much credit.

One can access the same prudent investment management oneself. The Saskatchewan Pension Plan, for example, is managed by Leith Wheeler Investment Counsel and Greystone Managed Investments. There are mutual funds available managed by both companies.

Defined benefit pension plans have done so much better not because of their investment managers. That credit should be given to the sponsoring employer who has been kicking in extra money to make up the shortfall between the actual return on the invested contributions and the returns needed for the promised retirement payouts.

Many of those defined benefit plans had contribution levels and payout levels both set way back when long-term investment returns were expected to be much higher. Government bonds were expected to be easily around 8% per annum. Equities were around 15% per annum.

Nowadays, equities are expected to be around 6% to 8%. A five-year Government of Canada bond is around 0.73%.

jgclghrn said

Norman1 said
Assets in pension funds from employee and employer contributions are separate from those of the employer. Should the employer become insolvent or go bankrupt, it doesn't take their pension fund down with them.
.

You are right Norman1 but I thought Nortel had underfunded their plan and therefore on wind up of the pension plan the members will not get the value they were promised.

Defined Benefit Plan Sponsor Failure - What Happens to the Plan

The members will each get their full contributions (employer and employee) plus the investment returns on those contributions.

However, that won't be enough to buy a life annuity today for the monthly income they were promised. That's because annuity prices are higher now as the result of the low interest rates.

Similarly, I have never heard of the kind of plan you are describing, Norman.
Perhaps what you are describing applies to some plans run by private enterprise companies, but very few of them offer defined benefit plans.

Yes, this is a defined benefit plan of which I speak, and it is a quasi-governmental organization. An agreement was reached with regulators to make provisions for funding shortfalls and adjusting premiums if the fund should fall short of expectations whereby contributions would be increased from active working members, matched by employers. Employers never have to add any more than that. Provision was also made to suspend cost of living increases temporarily if needed, but with first priority to be restored as soon as funds available. The fund has assets close to $9billion. The managers don't have time to run mutual funds! lol

The increase in premiums will likely be lifted shortly, and they have never had to suspend inflation increases..

Pension plans are something where size matters, from what I have read. The situation you are describing sounds to me like a smaller plan that would do well to amalgamate with a larger more successful one. Spouse's plan is actually looking for more groups to add, but they are only looking within related sectors. They added one smaller group this past year, that I know of.

jgclghrn said

Yes but if the plan was underfunded in the first place the assets wouldn't have provided for the expected benefits anyways.

That's not necessarily true.

That funding calculation is an actuarial calculation that involves an estimated rate of return. The result fluctuates quite a lot depending on the rate of return used and the current value of the assets.

An example of this is McGill University's pension plan: McGill: The process of calculating pension plan deficits.

At the end of 2006, the calculation showed a funding surplus of $33,597,000. Three years later (end of 2009), the calculation showed a funding deficit of $46,313,000. A $79.9 million change.

Pension regulations recognize this volatility in the funding calculation. In the case of McGill's pension, their regulations allow such deficits to be resolved over 15 years, not every time the calculation is done.

There seems to be a problem with the way these particular private sector funds are run. I can't say for sure what it is, but the situation is very different with my spouse's public sector one. Blaming it on the Bank of Canada sounds lame. I wonder if contributions have simply not been set at a rate which could withstand bad years.

Spouse's plan experienced significant gains in the last two years, quite the opposite of the G&M report. The Bank of Canada did not create an insurmountable problem for them.

I have read the Annual Reports and all other communication which has come from spouse's plan over the last several years, including the period when contributions were restructured (increased) following the last economic crisis, which was caused by the private sector gone awry. There are procedures laid out in spouse's plan as to what is to happen in the event of a looming shortfall, and also standards by which this can be measured. The procedures never involve one-sided additional contributions from employers. It is extremely likely that contribution rates will actually go down in the next year or two, for current employees and employer both, because of these procedures.

It sounds to me like these private plans may need better oversight or assistance to ensure ongoing adequate contribution levels and a formula for dealing with shortfalls which is fair to both sides. Perhaps they would do better if they amalgamated.

But of course, if the goal is to never increase their own contributions, discredit defined benefit plans, and take less responsibility for reliable retirement incomes, then they are on the right track. And this can apply both to these corporations and to the general public.

From my experience, defined benefit pension plans work well if there is a commitment to making them work, on both sides, and if the plan is managed well.

Loonie said

There seems to be a problem with the way these particular private sector funds are run. I can't say for sure what it is, but the situation is very different with my spouse's public sector one. Blaming it on the Bank of Canada sounds lame. I wonder if contributions have simply not been set at a rate which could withstand bad years.

Spouse's plan experienced significant gains in the last two years, quite the opposite of the G&M report. The Bank of Canada did not create an insurmountable problem for them.

That's true. In hindsight, the contributions, employer and employee, were too low. But, no actuaries decades ago would have thought interest rates would be as low as they are now. So, the discount rate used to calculate contributions was much higher. That resulted in what are, in hindsight, contributions that were too low.

This funding issue resulting from low interest rates affects all defined benefit plans, not just the ones in the private sector.

To get an idea of how far off the contributions were, one can look at annuity rates.

Back in time, in the March 13, 1992 issue of the Globe and Mail, the Personal Finance article "Life annuities guarantee lifetime income" on page B6 says that a 70-year old man back then can buy an annuity that pays him around $565/month for life for $50,000.

Today, $50,000 will buy only $298 per month for life at RBC Insurance for a 70-year old Ontario male.

That same $565/month for life now costs about $89,600, a 79.2% increase from 1992.

We see the same effect when we try to buy GIC's to generate income.

I have read the Annual Reports and all other communication which has come from spouse's plan over the last several years, including the period when contributions were restructured (increased) following the last economic crisis, which was caused by the private sector gone awry. There are procedures laid out in spouse's plan as to what is to happen in the event of a looming shortfall, and also standards by which this can be measured. The procedures never involve one-sided additional contributions from employers. It is extremely likely that contribution rates will actually go down in the next year or two, for current employees and employer both, because of these procedures.

It sounds to me like these private plans may need better oversight or assistance to ensure ongoing adequate contribution levels and a formula for dealing with shortfalls which is fair to both sides. Perhaps they would do better if they amalgamated.

But of course, if the goal is to never increase their own contributions, discredit defined benefit plans, and take less responsibility for reliable retirement incomes, then they are on the right track. And this can apply both to these corporations and to the general public.

From my experience, defined benefit pension plans work well if there is a commitment to making them work, on both sides, and if the plan is managed well.

I don't know how your spouse's plan can make up the shortfall with increased employer and employee contributions over such a short period of time. Perhaps the fund's investments actually exceeded the discount rate and the funding shortfall is not as much.

I agree. If the both sides can come to an arrangement that's fair to the employer and pension members, then defined benefits plans can work.

But, without such an agreement, the employer is liable for the full cost of the promised pensions, regardless of what the contributions were. The liability is not capped to just what is currently in the pension fund.

The amounts involved are not small. Canada Post reported earlier this month that it's pension deficit is around $6.2 billion!