WEALTH Matters — SUMMER 2009

how SAFE IS MY pension ?

The ‘credit crisis’ which began in 2007, and the resulting stock and bond market declines in late 2007 and late 2008 have created serious challenges for businesses and investors. Members of pension plans are not immune to these challenges, although they may not notice them directly.

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upcoming changes to canada pension plan

how pension plans work

how safe is my pension?

investment fraud

If you have a Defined Contribution (DC) plan, you will see these impacts on your account statement. Your investments will have reduced market values and GICs will renew at lower rates. The charts on this page show an example of the degree of change over the past 12 months. Even though the Toronto Stock Index is up over 30% since its March 2009 low, it is still well below its June 2008 high. Since a pension plan is designed to accumulate value and provide income from that value over many many years, short term declines in value have a long time to reverse themselves, so there may be no reason to panic.

If you are planning to retire within the next year or two and had planned to buy an Annuity to provide income, you may want to consider converting to a Life Income Fund for now, to allow time for markets to recover, and for annuity interest rates to improve.

If your employer goes bankrupt, your DC plan assets are safe because they are held separately in an account that belongs to you, and already includes your employer’s contributions.

If you have a Defined Benefit (DB) plan, things are quite different. Because your pension benefit is not based on the value of the plan’s investments, your annual statement will not show the value of the plan’s investments or its investment return. You may still be impacted by market conditions, but in indirect ways. One way is through plan changes to contribution and benefit rates, and the other is through a cancellation of the plan by an employer in bankruptcy.

When the assets of the pension plan are not large enough to pay all future pension benefits then the plan is considered ‘underfunded’ by regulators, who will require the employer who ‘sponsors’ the plan to make up the shortfall. The sponsor must ensure that the contributions and the investment strategy will be able to fund future benefits. If they miscalculate, or suffer large declines on equity investments, the sponsor has the obligation to fix it. Even if a plan is cancelled, or contributions and benefits are adjusted for future service, it still needs to pay out the benefits members have earned up to that point. So an underfunded plan can’t be fixed by asking the members to contribute more or take less benefits. Because of this risk, many employers have eliminated DB plans over the past 20 years and converted them to DC plans where the plan member has the investment management obligation and risk.

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For this reason, some plan members who are retiring or leaving their employer before retirement, prefer to take their pension settlement in cash and invest it themselves. Then they have the investment risk but avoid the risk of an underfunded plan being wound up and leaving them with a reduced benefit.

Which risk is better? That depends on your situation. Because these issues can be quite complex, many pension plan members look to us to help them understand their options and make informed decisions. Please call us if you have questions about your situation.

A particularly troubling situation can result when the employer’s business is in financial difficulty, and at the same time has an underfunded DB pension plan that it must contribute more money to. This might be too much for the employer and the company may declare bankruptcy. Current bankruptcy laws favour bondholders and other lenders before pension liabilities, so if there is not enough money, the pension plan will be wound up in an underfunded position. Then the only option is to reduce future pension benefits for the members.

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