# Worst case scenarios with private DB pensions



## Bananatron (Jan 18, 2021)

Morning everyone, I posted this over at Reddit but looking for additional input here.

As I understand it Canadian pension funds are audited (once every three years?) to ensure the pension coffers are fully funded.
These funds are separated from the companies financials, meaning in the case of bankruptcy the pension cannot be collected from creditors- in fact the pensioners become creditors.
Is something like we saw with sears a few years ago a worst case scenario? The pension was underfunded, the company went broke and the pensioners lost benefits and 30% of their monthly payments?
Or could it theoretically get worse than that? Would there ever be a scenario where employees lost their entire db pension?

Nortel was mentioned as a nightmare scenario where employees basically lost their entire pensions - after a 7 year delay with no pension at all due to court proceedings, they took a 60% haircut on their promised pensions. I thought current pension legislation (auditing and separation of funds) was created to prevent scenarios like this from happening again?


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## afulldeck (Mar 28, 2012)

Bananatron said:


> Morning everyone, I posted this over at Reddit but looking for additional input here.
> 
> As I understand it Canadian pension funds are audited (once every three years?) to ensure the pension coffers are fully funded.
> These funds are separated from the companies financials, meaning in the case of bankruptcy the pension cannot be collected from creditors- in fact the pensioners become creditors.
> ...


There is no guarantee for DB plans when companies go bankrupt. Its a crime.


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## Bananatron (Jan 18, 2021)

afulldeck said:


> There is no guarantee for DB plans when companies go bankrupt. Its a crime.


Thats what I really want to educate myself on. There is a point of no return with my pension where I can no longer take the cash settlement (partially sheltered, partially taxed) and am "locked in" to lifetime monthly payments.

By taking the cash and paying tax on over half of it I am already discounting my pension - but is it safer to do that and risk market volatility rather than risking my company going broke in 30 years? Anything is possible, right?


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## afulldeck (Mar 28, 2012)

Depending on where you live, you can move DB pension into a LIRA or locked-in RRSP with available head room.


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## sags (May 15, 2010)

In Ontario, single employer private DB pensions are guaranteed up to the first $1000 a month.





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Pension Benefits Guarantee Fund (PBGF)






www.fsco.gov.on.ca





In a world where all the pension funds were severely reduced,......... everyone's investment portfolio would be similarly impacted.


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## sags (May 15, 2010)

I received an email from GM Canada announcing they had purchased annuities from 3 companies to replace the salary retirement pensions.

They said the transfer of funds and administration was automatic and I didn't see any options available to move any money out.

I think there is an option of directing money from a pension into a LIF or annuity, but it is only available before receiving the pension.

I am thinking it may diversify the risk to move them to 3 insurance companies, but also removes the possibility of negotiating increased benefits.


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## ian (Jun 18, 2016)

Some of the ‘most at risk’ DB pensions are the multi employer variety. One of the co-op pension plans had members take a 50 percent haircut on pension amounts a few years ago.


My understanding is that on average, DB pension plans in Canada are currently well funded from an ongoing and a wind up basis.

I am a member of a smaller private pension. About 750 participants. Our employer had to make very significant additional contibutions to the plan around the 2007-10 timeframe to bring funding up to the 95 percent and higher level. We were fortunate to have an excellent employer that honoured their pension commitments. Having said that there were many years when the company did not have to make any contributions to the DB plan because it was doing so well financially.

i believe that Sears Canada pension plan members are in litigation with the bankruptcy trustee concerning the plan underfunding by a significant amount

I get a report every two or three years from the pension plan that I belong to. It is registered in Ontario. The report details the financial posiiton-on going as well as wind up. In the past it has been as low as 85 percent and as high as 103 percent. I have also gone to the Ontario pension regulatory site and looked up details/filings of the pension plan. I would think other provinces are similar. We have the choice of a commuted amount that can be rolled into a LIRA or a pension. In my case the pension was in fact the purchase of a third party annuity.


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## Ponderling (Mar 1, 2013)

On a different tack, at my work place we went from defined contribution group RRSP with company matching employee contributions in the year they are made to a new arrangement . That resulted in the old plan being wound up after we were bought out. Was under Sun Life management. 

Now we get employer match, but in the year after employees make the contribution. I guess it is bit cheaper for the company , as no match in the last year you contribute, and likely tax benefits the the co as well I would guess. Still Sun Life management

So employees of oldco get a letter - tick one of three offered boxes and old GRSP gets either paid as cash, rolled to an annuity, of into a Sun Life LIRA, as I recall.

I wrote a nice letter back, reminding them that there is another option they did not seem to mention - transfer to a LIRA elsewhere. 
I set up a LIRA at Itrade first and said transfer all but 20K to Itrade. Now in Itrade I can pick whatever to own, versus only the Sun Life offering of MF products.

The reason for 20K left at SL was that they change an annual small account service fee for all accounts under 25k. I already had more than 5k from the new co contributions.

They wrote back that it was going to cost $150 to transfer. I said fine -I think there is very good chance it would cost me a lot more over time in lost net returns to me to leave all the funds with them.


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## ian (Jun 18, 2016)

There were two things that shocked me as a senior manager in an IT firm that offered a DC plan to employees.

The first was how many employees left money on the table by either not participating or not participating to the extent that they could. 

The second was the incredibly small percentage of employees in the DC plan who actually logged in, reviewed the performance of their selected funds, or made changes to their fund selections even once per year. Most selected their investment options once when they joined the plan and forgot about it after that.

It was the same for those in optional add on components of the grandfathered DB plan that had employer matches.

These company matches are a key component of total remuneration yet many left a fair amount of money on the table each and every year.


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## sags (May 15, 2010)

A lot of people have no clue.

We had one guy retire and then come back months later and want to reverse it because he couldn't live on the amount. Another was shocked to learn that he couldn't "double dip" CPP and his pension, and quite a few who could retire with full pensions and didn't even know it.

Pensions were discussed at our ratification meetings but all people cared about was $ per hour and paid time off.

If anyone asked a question about health care or pensions.....a groan would go up from the crowd.

Fortunately for them, with a big union we had expert pension and health care reps, good lawyers, economists, and others who did the "deciding" for them.

Sad to say.......but true.


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## james4beach (Nov 15, 2012)

ian said:


> These company matches are a key component of total remuneration yet many left a fair amount of money on the table each and every year.


I've seen it too. The last US company I worked for had one of the most amazing self-directed pension with-company-match deals I've ever seen. The lowest fees you could hope for, excellent lineup of fund options .... for example this world class Vanguard fund was one of their defaults! (MER 0.07%)

The HR & finance team had gone to amazing lengths to find this great plan for the small company. I admired them so much, they really did a great job trying to help the employees as much as possible. And yet, many employees just kind of shrugged and didn't bother opting in, or made very low contributions without taking advantage of the huge match.

It's easy for some of us to forget, but most people have very little knowledge or interest in (proper) investing.


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## kcowan2000 (Mar 24, 2020)

A few years ago, Ontario reduced the DB funding requirements from 110% to 85 %. Nortel and Sears did not cause them to rethink. In aggregate, the funds earned 9.2% last year, so they are a long way from being underfunded. We have an oversight committee of retirees for our DB plan. Funding of such funds is a tax write off so it is a favourable place to put excess profits.


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## ian (Jun 18, 2016)

I realize that there is always an exception however the numbers over the past few years indicate that the vast majority of DB plans in Canada are in reasonably good (90 percent plus funded) shape.

It is a very easy process to determine to determine the most recent valuation/health of the DB plan in which one is a member if for some reason you are not being sent a report every few years.


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## Bananatron (Jan 18, 2021)

ian said:


> I realize that there is always an exception however the numbers over the past few years indicate that the vast majority of DB plans in Canada are in reasonably good (90 percent plus funded) shape.
> 
> It is a very easy process to determine to determine the most recent valuation/health of the DB plan in which one is a member if for some reason you are not being sent a report every few years.


You mind sharing this process? I can't seem to find anything in my pension site.


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## ian (Jun 18, 2016)

You need to find out where your DB plan is registered. Could be a Province or it could be Federal(banks, telco, etc). For Ontario you simply have to go the FSCO (finacial services commission of ontario) site. Go the the pension plan member area. You only need one of..the DB sponsors name, the name of the plan, or the plan number in order to access the plan. Keep in mind that some employers have multiple plans. 

Once you get into the plan you can view the employer's mandatory submissions-both financial health and pension plan amendments over time.

I had a dispute with my former employer over my average pensionable earnings. There had been two mergers and multiple amendments. The pension plan amendments over time time on this site proved that my pensionable earnings were required to be calculated in a different way than was proposed. A difference of about 32 percent in my favour. This applied to several of my colleagues. One of them went back and had is pension entitlement adjusted a year or so after retirement.


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## sags (May 15, 2010)

In 2005, I was offered $260,000 as the commuted value of my pension.

I argued the commuted value was ridiculously low but ran out of time to continue.

So I retained the pension and have collected $530,000 in the past 15 years and retained all the ancillary benefits.

Commuted values are only as good as the person calculating them, and mine were not remotely accurate.

A few years later the commuted values for the same pension were almost $1 million.

My advice is to tread carefully when dealing with commuted values.

I think the low valuation saved me from myself and big losses in 2007 so it worked out well for me....but still, they need to be accurate.


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## Bananatron (Jan 18, 2021)

sags said:


> In 2005, I was offered $260,000 as the commuted value of my pension.
> 
> I argued the commuted value was ridiculously low but ran out of time to continue.
> 
> ...


They are never fair when you consider how much (or shall I say how little) of it is tax sheltered. 
My DB plan chews up about 20k per year of RRSP room. After 10 years it is worth a great deal more than $200,000, but thats all that is tax sheltered. The rest of it is paid out as income. Some are "lucky" enough to have RRSP room, but for those of us that don't - we're looking at a tax bill in the 6 figures if we had to cash out.


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## ian (Jun 18, 2016)

There is actually a predetermined method of calculating commuted values that the pension provider must follow. The value fluctuates inversely with the forecasted future short and long term interest rates. The lower the interest rates, the higher the commuted value.

Like anything else, it is best to have numbers like this calculated independently of employer. Or at least do a ball park number first to see if the number provide to you is in the ball park. I simply checked the commuted value number that I was given with the prevailing insurance company annuity rates to see if it was in the ball park. In the end I opted for the pension. About 25 percent of my commuted DB value would have been taxed immediately in my hands. All of the commuted value of my supplementary pension was taxed immediately.


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## Spudd (Oct 11, 2011)

ian said:


> You need to find out where your DB plan is registered. Could be a Province or it could be Federal(banks, telco, etc). For Ontario you simply have to go the FSCO (finacial services commission of ontario) site. Go the the pension plan member area. You only need one of..the DB sponsors name, the name of the plan, or the plan number in order to access the plan. Keep in mind that some employers have multiple plans.
> 
> Once you get into the plan you can view the employer's mandatory submissions-both financial health and pension plan amendments over time.


I tried this but for my employer I could only see an information screen that said what type of pension it was, number of members, other such generic information. If I clicked on filings I saw a list of filings they had sent in, but you couldn't click on anything to view the filings. I tried also looking for CIBC just as an example of another company, and same situation there. The website did say it was in transition so perhaps this is just growing pains.


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## Eclectic12 (Oct 20, 2010)

Bananatron said:


> ...Would there ever be a scenario where employees lost their entire db pension?


Seems doubtful as both the company and the pension would have to have no assets.



Bananatron said:


> ... Nortel was mentioned as a nightmare scenario where employees basically lost their entire pensions - after a 7 year delay with no pension at all due to court proceedings ...


The articles I have seen have said that during the court proceeding, things like health benefits and disability pensions were dropped. Worse, after the pension administrator was appointed two years after filing for bankruptcy where the full pension was paid - the full pension that was paid was classed an over payment. In addition to the cut to the amount, repayment of the difference was assessed (i.e. double hit as less money coming in plus a bill for the over amount).

Ontario's pension guarantee fund did a top up during the legal case so the cut was far worse for other provinces. IIRC, Ontario pensioners after top up were receiving 60% of the pension during the court proceedings.

I didn't see any articles saying the basic pension stopped being paid during the court proceedings. 




Bananatron said:


> ...they took a 60% haircut on their promised pensions.


The court cases meant more assets went into the pension fund than was initially offered. I'd have to find the final update but what I recall was that for Ontario pensioners - the asset top up put them at 90%.

Part of the problem is that most articles are trying to give highlights for a complicated situation.


Cheers


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## Eclectic12 (Oct 20, 2010)

Bananatron said:


> They are never fair when you consider how much (or shall I say how little) of it is tax sheltered.
> 
> My DB plan chews up about 20k per year of RRSP room. After 10 years it is worth a great deal more than $200,000, but thats all that is tax sheltered. The rest of it is paid out as income. Some are "lucky" enough to have RRSP room, but for those of us that don't - we're looking at a tax bill in the 6 figures if we had to cash out.


Then I would guess you have a generous DB pension as I have twice left DB pensions with ten years of service and the full proceeds were rolled over to a LIRA with zero RRSP contribution room needed.

Cheers

*PS*
Or it may be how close to retirement you are/were when the estimate of so much taxable income was made.


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## GreatLaker (Mar 23, 2014)

Eclectic12 said:


> Then I would guess you have a generous DB pension as I have twice left DB pensions with ten years of service and the full proceeds were rolled over to a LIRA with zero RRSP contribution room needed.
> 
> Cheers
> 
> ...


This link explains how to calculate the maximum amount of a commuted value that can be transferred to a LIRA without needing existing RRSP room.
How to Calculate Pension Maximum Transfer Value (MTV) | Million Dollar Journey 

It's likely that the CV rises faster than the present value factor used to calculate the MTV, which would lead to an excess amount that cannot be rolled into a LIRA as the pension member gets older.


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## ian (Jun 18, 2016)

DB pensions were/are great for oldsters like me who stayed with the same firm for 25 years. DB pensions really gain in value as you age with the company.

DB pensions are not the most advantageous for those who have multiple employers during their careers as is the case with many employees today. Many of those people prefer a portable DC plan.

I took a look at the pension stats of the DB plan that I participate in (2019 numbers). 762 members. 72 percent of the members are former employees with DB entitlement, ie no longer employed by the company or retired. 25 percent are retirees/beneficiaries, 3 percent or so are still active employees. At one time we had 2000 plus employees. These numbers do not reflect past DB members who actually left the company and withdrew their commuted values into a LIRA. 

These numbers tell a story about how often today people change employers today.


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## Eclectic12 (Oct 20, 2010)

GreatLaker said:


> ... It's likely that the CV rises faster than the present value factor used to calculate the MTV, which would lead to an excess amount that cannot be rolled into a LIRA as the pension member gets older.


For the DB pensions I left, the MTV was static so the CV definitely rose faster. 
It made no difference though as the MTV was greater than the CV.

Neither DB pension had indexing or a bridge benefit while I had at least three decades or more to go before the plan usual retirement age.


Cheers


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## ian (Jun 18, 2016)

If you are considering takin the commuted value of your pension be sure to determine if any of it will be taxable in your hands. In my case only a portion of the commuted value could be rolled over into a LIRA.

There is limit on registered DB pensions imposed by CRA. Once your earnings exceed that most companies will place the excess in to what is called a supplementary pension plan. This is not regulated in any way and is paid from the firms earnings. IF the firm goes bankrupt, your supplementary pension is gone. Some firms, like mine, calculate the commuted value of the supplementary plan pay it out. But it cannot be sheltered-100 percent taxable. My employer paid mine out in three payments over 14 months covering three tax years in order to reduce the tax burden.


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## Eclectic12 (Oct 20, 2010)

Good point about checking what part of the CV can be rolled over and what part, if any is taxable.


Interesting idea that earning more than the CRA DB pension limit is enough to get one access to a supplemental pension plan. So far, I'm three for three that the second requirement is to be an executive so it seems more of a YMMV. 

The third company does allow everyone to pay their own money into a supplemental plan that can buy select pension enhancements but other than negotiating the plan and paying for it's maintenance/reporting, the company puts no funds in. It's more like a Group RRSP, except for the restrictions on what it can be used for.


The middle DB pension was interesting as those who joined when I did, before the merger went into full effective were in the DB pension at all levels of employee. Those joining a month later had to be a manager or above to have a DC pension.


Cheers


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## Canadafan (Oct 19, 2014)

Bananatron said:


> Morning everyone, I posted this over at Reddit but looking for additional input here.
> 
> As I understand it Canadian pension funds are audited (once every three years?) to ensure the pension coffers are fully funded.
> These funds are separated from the companies financials, meaning in the case of bankruptcy the pension cannot be collected from creditors- in fact the pensioners become creditors.
> ...


First im going by genral knowledge, watching etc.
As mentioned the majority of DB pensions are properly funded: You mentioned a audit every 3 years. That is mandated by Provincial or federal pension rules.
What the are looking for is 2 things ( in general)
1. Ability to pay into the future the existing and projected pensions as/plan/month to the actarial age of employees.
2. the "wrap up" funding of the plan should the company fail & need to pay-out vested funds and/or commuted values.

Both of these calcualtions combined give a "funding strength" ratio i.e. 90% to 110% "funded."
Where things go off the rails is when companies are starting to fail & they at the same time, under fund the pensions..cash flow crunch etc.
Regardless of company or model, the pensions are a separate "business" of the company. So a bankrupt company does not mean a banrupt pension.
Moving to the positive side of the story:
If your employer is functioning & profitable, the pension will be there for you. & all the "worst case scinarios" are a red herring.
If your emplyer is on edge, finnancially then yes the future of the pension could also be at risk. Never zero, but some ratio of the maxium expected.
Considring those two thought lines? if you are concerned & your concern has merrits, perhaps a new job is in order.
or of company is fine, enjoy & leave the worrying to the accountants & fund mangers.
"benefits"are a total Separate conversation. many companies are avoiding post retirment benifits like the plague. Unlimited liability, and very hard to fund.
It has been mentioned the Provincial gaurentee of upto $1000/month etc . The zero is highy unlikely...IN Canada. USA? dont know.
I dont know the data, but the actual number of DB pension fails or reductions is very small.


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## Eclectic12 (Oct 20, 2010)

I suspect the USA for zero is unlikely. 


At the same time, there used to be "investors" in the USA that specialized in buying companies to layoff the staff and file paperwork to say there was too much money in the plan, compared to the few remaining members. There are also reports of executives to stay around for the bankrupt company windup whose salary/bonus money was being scooped out of the pension plan.


Cheers


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## ian (Jun 18, 2016)

The US has a few disasters on their hands. Some of the coal industry DB's are on life support.

One of the biggest is the Teamster's Central States. It has moved passed life support to pending insolvency. At the current rate it will run out of money in 5 years. It has 10B in assets. Expenses exceed income by $2B per year. Lot of talk in Congress about it. The real issue for Congress is that fixing this mess may imply a duty to fix others. Just this one DB plan would bankrupt the federal Pension Guarantee Corp.

It is a multi employer DB pension that started to go down when trucking was de-regulated. Lots of industry bankruptcies. The smart employers bailed years ago....UPS took their lumps and started their own plan. They saw the writing on the wall.

DB pensions always suffer after a recession. First, their investment values decrease and second some firms fail-but only after failing to top up their DB plans or even make the regular payments. Airline employees in the US have suffered greatly over the years with underfunded DB plans and bankrupt airlines.


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## ian (Jun 18, 2016)

New comparative data on Canadian pension funds









Canada’s pension system gets top grades in new benchmark | Benefits Canada.com


Canada’s pension system was ranked first overall among 15 countries in the Global Pension Transparency Benchmark. It ranked Canadian funds first in governance, citing the “global reputation for superior performance and governance excellence” of Canada’s five largest funds, namely the British...



www.benefitscanada.com


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