# Insure your Pension?



## RedRose (Aug 2, 2011)

Just wondering if any insurance companies would insure against your DB pension?
All this 'pension underfunding news' does create doubt in those hoping for a secure income stream.
Last week a sunlife insurance rep suggested I take an annuity with him. He verbally guaranteed sunlife's strong position.
*As MG had said previously if the Pension or Insurance Company go belly up all bets are off.* My question is how does one secure the income stream?
It may or may not be possible as it is a topsy turvy world right now.


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## MoneyGal (Apr 24, 2009)

You can't "insure" against counterparty risk with a company pension, but a failed DB pension may be bailed out by government. 

If you are worried about counterparty risk but want a DB-pension-like income, you can buy a series of annuities on the open market from different companies, all of which have insurance through Assuris. 

Be aware that you will pay a premium of as much as 30% if you do this, because the purchase of an annuity on the open market will be much more expensive than the same income received through a company pension plan - particularly for women. 

This is fairly trivial to demonstrate with a commuted value of a DB pension and current annuity quotes.


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## RedRose (Aug 2, 2011)

Thank YOU for your prompt reply *MG.*
My niave mind at work again on this stuff.


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## carverman (Nov 8, 2010)

RedRose said:


> Just wondering if any insurance companies would insure against your DB pension?


Highly unlikely any insurance company would insure you against a 3rd party
(pension fund management) arrangement. Most insurance companies
want to minimize their risk by insuring just you...as in life insurance.
For a certain premium payment, you make a bet that you will continue
to live up to your normal life expectancy and maybe a bit beyond.
Life insurance companies prefer to take in money and make big profits
rather than payout...a pension fund is beyond their control unless they
have complete control of the pension fund. 



> All this 'pension underfunding news' does create doubt in those hoping for a secure income stream.


Having doubts about one's future is now becoming routine in todays financial
climate.



> Last week a sunlife insurance rep suggested I take an annuity with him. He verbally guaranteed sunlife's strong position.


Sure and they take a big chunk of the commuted pension too!
This is what is going to happen with my seriously underfunded Nortel
pension..as an annuity is one option...and if that option is taken by
me..I expect my pension income to be reduced yet again from the 30%
reduction I am already experiencing..except with an annuity..they pay
you until the day you die. 



> *As MG had said previously if the Pension or Insurance Company go belly up all bets are off.* My question is how does one secure the income stream?
> It may or may not be possible as it is a topsy turvy world right now.


The big insurance companies have enough assets that the probabilty of
them going belly up is ..well ..least probable..unless of course, the
country starts to go into a deep recession where everything including
capital assets is seriously affected. The gov't may prop them up..if
the gov't is stable financially...not sure if gov'ts can go bankrupt..but
countries like Greece, Portugal and Ireland are pretty much there already.


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## OhGreatGuru (May 24, 2009)

A decade ago i suppose this would have been a no-brainer - why would anyone feel the need to insure a DB pension? The collapse of some major corporate DB pension plans since then has changed some people's perspectives on the safety of such plans.

If you are worried:

1. Outside of your DB plan, don't invest in your company's stock, or even in the same indsutry sector (that really did in some Nortel employees);

2. Ask your employer to change to a DC plan. His CFO will probably be glad to get out from the pension liability and let you take the market risk.


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## Saniokca (Sep 5, 2009)

OhGreatGuru said:


> 2. Ask your employer to change to a DC plan. His CFO will probably be glad to get out from the pension liability and let you take the market risk.


I 100% disagree with that. You should almost never do that. There is a good reason why the CFOs are trying to get rid of the risk - trust me, they ask me to calculate the savings.


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## carverman (Nov 8, 2010)

OhGreatGuru said:


> A decade ago i suppose this would have been a no-brainer - why would anyone feel the need to insure a DB pension? The collapse of some major corporate DB pension plans since then has changed some people's perspectives on the safety of such plans.
> 
> If you are worried:
> 
> 1. Outside of your DB plan, don't invest in your company's stock, or even in the same indsutry sector (that really did in some Nortel employees);


I pulled out ALL my stock (out of the Nortel employee savings plan in 199/2000) where the employee contributes say 3%-6% and the company matches that in stock 3-6%. Actually, rather than stock..I asked for the
equivalent value in cash.



> 2. Ask your employer to change to a DC plan. His CFO will probably be glad to get out from the pension liability and let you take the market risk.


Yes, but the way things are going these days..you could lose more in the long run in the years where you can no longer work to recover.
A properly invested pension fund (like the Ontario Teachers Pension fund that just sold Maple Leaf Entertainment INC to Bell/Rogers for ?? Billion..WILL ALWAYS will do better on returns than a private invested pension..
...and THE SAD REALITY THESE DAYS IS...
if you happen to land on a Rogue Investment firm.. you can kiss your pension and retirement income GOODBYE!.


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## carverman (Nov 8, 2010)

Saniokca said:


> I 100% disagree with that. You should almost never do that. There is a good reason why the CFOs are trying to get rid of the risk - trust me, they ask me to calculate the savings.


I support your statement. With the Nortel severe mismanagement, upper
management greed and grabbing a large chunk of the cookie jar, leaving just
crumbs for existing employees/pensioners..YOU CANNOT TRUST MANAGEMENT
TO DO THE RIGHT THING FOR YOU.. IF YOU DEPEND ON YOUR PENSION IN FUTURE YEARS!


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## OhGreatGuru (May 24, 2009)

Saniokca said:


> I 100% disagree with that. You should almost never do that. There is a good reason why the CFOs are trying to get rid of the risk - trust me, they ask me to calculate the savings.


I agree with you that for most DB plans it would not be a wise switch. But my suggestion was predicated on the statement "If it (the security of your pension plan) worries you..."

OP seemed sufficiently conerned about their plan that they were willing to pay insurance premiums to insure it. The OP has to balance the risk of the company's plan failing against assuming the market risk & return themselves.


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## RedRose (Aug 2, 2011)

I agree years ago DB with a company pension would have been a 'no brainer.'

Now the Annuity seems the strongest...that is the Insurance company, over my husband's employer.

The stock market is the other risky option. 
If I bought all blue chip stocks that pay dividends would this still be very risky or would it provide a fairly steady secure income stream?

I am not looking for risk-free, just mininmizing the risk.


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## MoneyGal (Apr 24, 2009)

I don't have time at this moment, but it would probably be useful to have a discussion of what you mean by "risk" and the different forms of risk to which investments can be subject. There's more than just market risk.


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## Square Root (Jan 30, 2010)

RedRose said:


> I agree years ago DB with a company pension would have been a 'no brainer.'
> 
> Now the Annuity seems the strongest...that is the Insurance company, over my husband's employer.
> 
> ...


You have asked this question on another thread. As MG said, there are many types and severity of "risk" in dividends. Companies sometimes have to reduce or eliminate dividends (MFC, Yellow pages,US Banks). Certainly if a company (Nortel) goes bankrupt their dividends stop. Generally though dividends are pretty stable and tend to grow over time as the companies earnings grow. Canadian banks, telco's, and pipelines have a good record of increasing dividends. If you buy shares with fairly low yields ,say under 4-5% you should be pretty safe. Obviously, diversification would also reduce your risk of dividend reductions. Eligible Canadian dividends are taxed at lower rates(Alberta about 18%, Ontario much higher) reflecting the fact that dividends are paid out of after tax income at the corporate level. in my particular case dividends are so attractive because I also have a very generous DB pension paid by a very strong company. This is not indexed to inflation so one of my key risks is inflation. Growing dividends can offset this risk. Also, I enjoy following stock markets and have the experience and education to do so effectively. i don't have an advisor. I suspect your stuation may be very different than mine.


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## carverman (Nov 8, 2010)

RedRose said:


> I agree years ago DB with a company pension would have been a 'no brainer.'
> 
> Now the Annuity seems the strongest...that is the Insurance company, over my husband's employer.
> 
> ...


"Rose"....Nortel was a blue chip stock for many years..and during the boom years, it was the "darling" of the TSE....a few years later..it's gone and so are the stocks..which were not worth the paper they were printed on
towards the last 2 years of it's existance.

John Roth (former CEO of Nortel) had a book written about him ("MAN OF THE YEAR") during the mid 90s..
a few years later they should written another book about him..how he took down a good high tech company...
"Corporate Bum of the Year". 

IF you had a cristal ball and psychic powers..you may be able to predict what the future holds in store..but in a recession...even blue chip stocks can go down..if the company doesn't pay returns (dividends due to losses)
and investors start selling off the blue chip stock looking for more lucrative investments.

Playing the stock market..even blue chip stocks is a crap shoot ( risky game)...you may win..or you may lose....


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## Daniel A. (Mar 20, 2011)

After reading Pension Heist it seems very clear why strong DB pensions are where they are.
The thief's at the top with the help of government regulation robbed the pension funds aided by benefit specialists.
Ontario Teachers Pension Fund is in the business of generating cash for it's members, private corporations are only looking for ways to steal the pension money by spinning off the gravy then reselling.
Great stuff for those at the top special pension funds and fat bonuses and the hell with the little guy that put 20-30 years in building the company.

Laws need to change pensioners should be first in line always, pension surpluses should never be touched or moved.

Let the executives earn a living like the rest of us. These guy's show up and expect wealth after five years working, the rest of us spend our lives working for.


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## Four Pillars (Apr 5, 2009)

RedRose said:


> I agree years ago DB with a company pension would have been a 'no brainer.'
> 
> Now the Annuity seems the strongest...that is the Insurance company, over my husband's employer.
> 
> ...


Stocks are far riskier than a pension or annuity. That doesn't however, make them the wrong choice.

You're still doing the "all or none" thinking. If you take the pension as cash, you can move some of that into the markets/GICs whatever and some into annuities - there are a lot of different combinations available to you.

You also need to consider your existing investments and possible income streams such as OAS and CPP. A good financial advisor would be able to put all these different factors together for you and hopefully present the various options.

I can't remember what you said about your other finances, but the decision about what to do about a pension is far more significant for a person who only has that pension and nothing else to live on, compared to someone who has other income streams and other assets.

If it's just risk you are concerned about then I suspect taking the pension money as cash and buying annuities (from different companies) is likely the least risky option. However, as MG has noted - there is a cost to that action, since the payouts will be less than the existing pension (assuming it doesn't run into problems in the future).


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## carverman (Nov 8, 2010)

Four Pillars said:


> Stocks are far riskier than a pension or annuity. That doesn't however, make them the wrong choice.
> 
> 
> If it's just risk you are concerned about then* I suspect taking the pension money as cash and buying annuities (from different companies*) is likely the least risky option. However, as MG has noted - there is a cost to that action, since the payouts will be less than the existing pension (assuming it doesn't run into problems in the future).


Uh???..on my last pension statement, there is income tax deducted at source.

Taking an actuarized pension amount as cash (check mailed to an individual) will probably involve a tax withholding portion (20%) TAX HIT..because the money moves to you personally, so you would get a T4P? statement from the pension
trustee in the year, you collapse the pension. I don't know what the tax sheltering for the annuities is (yet).

The annuity insurance company of your choice, takes an additional discount(roughly 10%) on your pension fund for managing your pension fund until the day comes when you no longer need it. There IS NO FREE LUNCH HERE!
IMO, This is NOT the best way to go about to re-invest your DB pension. but it is a safer choice, even if you take a hit
on the slightly reduced monthly payments. 

In my case, whats left of the severely underfunded Nortel pension (being wound up now) will be actuarized and transferred DIRECTLY from the pension trustee to the selected option of my choice..LIF or annuity...no other options available to me.
For me, personally,, I'm will be taking about a 40% TOTAL pension income reduction hit, when the wind up occurs this year. 
A 30% hit occurred already from the severe underfunding, requiring a pension cut back this year..
+ another 10% when Sun Life takes over..they are not in business to do "free bees" on annuities!


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## carverman (Nov 8, 2010)

Daniel A. said:


> After reading Pension Heist it seems very clear why strong DB pensions are where they are.
> The thief's at the top with the help of government regulation robbed the pension funds aided by benefit specialists.
> 
> Laws need to change pensioners should be first in line always, pension surpluses should never be touched or moved.
> ...


I fully agree here Daniell.
*In Nortel's case, the Ontario gov't is directly responsible for allowing the DB pension fund to become underfunded! *

Nortel when they were making money hand over fist, found money to top it up..but starting in 2000,
when their stocks started to dive, and their telephony business started to taper off,
the execs went out an bought all kinds of *useless companies* at inflated prices to try to prop up
the overall business....the reserve fund ran out..,,company was drained of cash, so they were
in the red again. They killed the goose that laid the golden eggs! 

This is my analogy..because the company could have weathered the recession of 2008/2009 if it was a leaner, stronger company on it's own merits with it's own think tank/R&D in house..
..but the execs John Roth hired were bedazzled by "more gold", and they ran what was a solid company into the ground!
This is similar to the Avro Arrow project, that idiotic Dief the Chief kiled off, because he had no clue as a politician,
so he cut the funding in exchange for some TOTALLY USELESS BOMARC MISSILES THAT REFUSED TO LAUNCH IN
THE ARTIC CONDITONS... and Canada lost a fighter aircraft industry that was superior in
most respects! So the same for Nortel famous in the innovation of telephony. 

It wasn't the workers that put in 25 years that killed the company, it was the middle management workers that worked their way up and knew the business..it was the execs who got greedy!... and didn't fully understand the nature of the 
business..another Canadian tragedy! 

How did the DB pension fund start to run a deficit?
Ok, the management decided, "we don't have the cash now to top up the fund this year, but we will make an agreement with
the pension fund trustees to top it up NEXT year,when we will proabably return to some form of profitablilty...or maybe the year after..."

Profit and loss..that's the root of fully funded company DB pensions. Good year..huge bonuses for the execs..and they toss some carrots into the DB pension bin.
In famine years...cutbacks everywhere, more borrowing, more cutbacks... and the last thing that comes to mind for the rats before leaving the sinking ship...is to carry off their booty in the form of stock options or huge severance
packages "for a job well done!"


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## Eclectic12 (Oct 20, 2010)

carverman said:


> ... the way things are going these days..you could lose more in the long run in the years where you can no longer work to recover.
> 
> A properly invested pension fund (like the Ontario Teachers Pension fund that just sold Maple Leaf Entertainment INC to Bell/Rogers for ?? Billion..WILL ALWAYS will do better on returns than a private invested pension..
> ...and THE SAD REALITY THESE DAYS IS...
> if you happen to land on a Rogue Investment firm.. you can kiss your pension and retirement income GOODBYE!.


Then too, even if the pension fund and one's personal investments are performing similarly, a well run fund has negotiated or has the economy of scale for much smaller transaction fees than a DC or individual typically does.


Cheers


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## Square Root (Jan 30, 2010)

Although, Nortel is a sad cautionary tale of mismanagement, we should recognize that this example is a tiny minority of company sponsored pensions. The vast majority of which operate with no issues. I would say that in most cases the risk is small but not insignificant.


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## RedRose (Aug 2, 2011)

Thank YOU All for your input. I greatly value the different perspectives and collective experiences.

I am almost afraid to come here with my questions. I hope you are not getting tired or angry with me.

I can live on the other investments and other pension income. 
So the lump sum if invested at a conservative 4% -5% blue chip dividend stocks and allowed to accumulate in 12yrs would be in the range of 1 million
if no fees paid to FP or Banks, and 2m in 30 years, if calculator correct.

Am I completely 'out to lunch' with this thinking or is it on the right track?


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## MoneyGal (Apr 24, 2009)

Square Root said:


> Although, Nortel is a sad cautionary tale of mismanagement, we should recognize that this example is a tiny minority of company sponsored pensions. The vast majority of which operate with no issues. I would say that in most cases the risk is small but not insignificant.


Quoting in full to echo this message fully.


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## Square Root (Jan 30, 2010)

RedRose said:


> Thank YOU All for your input. I greatly value the different perspectives and collective experiences.
> 
> I am almost afraid to come here with my questions. I hope you are not getting tired or angry with me.
> 
> ...


Sounds reasonable to me if you start with $400-500k and invest in large "blue chips". Not sure why you would want to amass such a large legacy though?


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## Four Pillars (Apr 5, 2009)

RedRose said:


> I am almost afraid to come here with my questions. I hope you are not getting tired or angry with me.
> 
> I can live on the other investments and other pension income.
> So the lump sum if invested at a conservative 4% -5% blue chip dividend stocks and allowed to accumulate in 12yrs would be in the range of 1 million
> ...


If I get tired of answering - then I'll just stop posting. Hasn't happened yet. 

Extrapolating stocks over a 12 year time frame doesn't really work. If things go well - your scenario might happen. If things don't go so well - you might end up with the same amount as you started with. If things go poorly - you could end up with some fraction of what you started with (ie 50%).

Nobody can predict what will happen to those stocks in the next 12 years. You have to look at different outcomes, assign probabilities to each scenario and decide if the risk is acceptable.

The words "conservative" and "blue chip" should be taken with a grain of salt. Big dividend company stocks are usually safer than small company stocks or growth companies - but please don't make the mistake of thinking they can replace or come close to an annuity or fixed income in terms of safety.

Again, I'm not suggesting a dividend stock approach is wrong, but be aware of the risks.

BMO dropped in half in 2008 - can you handle that type of volatility?


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## Eclectic12 (Oct 20, 2010)

carverman said:


> [ ... ]
> 
> The big insurance companies have enough assets that the probabilty of
> them going belly up is ..well ..least probable..unless of course, the
> ...


Hmmm .... Confederation Life was the fourth largest Canadian Insurance company, in the top 30 for North America and had $19 billion in assets when it went under in 1994.

I'm not finding much in terms of details for Sovereign Life (1993) or Les Coopérants (1992). 

Not much detail either for any pension or annuity assets - though I suspect these assets were bought by other companies at the wind-up.


Another question is whether 1992 through 1994 would qualify as a deep recession.


Bottom line is that like a lot of things ranging from sport teams to financial institutions or db pension plans, good management is critical.


Cheers


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## MoneyGal (Apr 24, 2009)

*No annuity-holders lost any income when Con Life went under *- all the obligations were transferred to solvent companies (Empire Life and Canada Life for most). 

Here's the wind-up information from the liquidator:

http://www.confederationlife.com/main_areas/policyholder_info.html


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## MoneyGal (Apr 24, 2009)

Hit "submit" too soon. 

For Soverign Life, the block of business was transferred to Standard Life. 96% of policyholders retained all benefits. For the remaining 10% of policyholders, no one lost more than 10% of their original benefit. 

I don't know specifically where the policies from Les Cooperants went - I don't know that much about the Quebec insurance business - but I do know the policies were transferred to solvent companies. 

For a little more info: http://www.assuris.ca/Client/Assuri...solvencies!OpenDocument&audience=policyholder

Bottom line: your insurance is insured.


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## Eclectic12 (Oct 20, 2010)

MoneyGal said:


> Hit "submit" too soon.
> 
> For Soverign Life, the block of business was transferred to Standard Life. 96% of policyholders retained all benefits. For the remaining 10% of policyholders, no one lost more than 10% of their original benefit.
> 
> ...


Thanks for the Confed liquidator link which clearly spells out that the annuities were taken over.

I did see the Assuris link for Sovereign Life but as I have not heard an annuity referred to as a policy, I wasn't going to assume the annuities were covered.


Regardless, my point is less about losses/insurance and more about how lots of assets and/or size is not protection from bankruptcy. 

The original quote was that:


> The big insurance companies have enough assets that the probabilty of them going belly up is ..well ..least probable..unless of course, the country starts to go into a deep recession ...


Confed Life was big, had a lot of assets, Canada was not in deep recession and yet it went under. 

IMO, good management is far more important of the two. Good management for a DB pension or an insurance company should translate into stable pensions or annuities etc.


And yes, a lot of items are insured, like CDIC on deposits, there are limits as well. for example, for some of annuity bits, it's "100% to a 100K max" or "$### per month or 85% of benefit, whichever is higher". 


I suspect that in the situation quoted, where the whole country was in deep recession and a lot of insurance companies were struggling and failing, the limits would have a bigger role.

Fortunately, this hasn't been the past history and I haven't seen any indication this has changed.


Cheers


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## Four Pillars (Apr 5, 2009)

Eclectic12 said:


> I suspect that in the situation quoted, where the whole country was in deep recession and a lot of insurance companies were struggling and failing, the limits would have a bigger role.


In that situation, there might not be any better options. Private DB plans might be under a lot of pressure, the markets will likely be dropping and it is possible that the government could make major cuts to public pensions (see present day Greece).

My point is that if you are looking at 'worst case' scenarios, you can't just apply them to annuities - it has to be applied to other products/asset classes that might be affected.

I'm not suggesting that this is what you did. However, I want to clarify for Mz Rose that annuities are not as bad as someone reading this thread might assume.


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## RedRose (Aug 2, 2011)

> Sounds reasonable to me if you start with $400-500k and invest in large "blue chips". Not sure why you would want to amass such a large legacy though?


*Square root:* Just to answer your question above. It is not amassing a large legacy it is not giving away 900K-1M for these companies to manage for that length of time. I would probably end up having to live on most of it after the inital pension income dwindles and does not keep up with inflation. That is why I was looking at that calculation.

I can see a good mix of a variety of products, including an annuity might work. Just mulling things over to help me come to a definite decision.

Thank you for bearing with me thru all this.


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