# 'Frozen DB Pension Plan



## fraser (May 15, 2010)

I am vested in a company DB plan that was 'frozen' (not certain if this is the correct term) at at 31/12/2010. At that time, all existing members of the DB would commence participation in the DC plan from 1/1/2011. The company did not announce plans to 'wind up' the DB plan.

My company DB plan annual statement includes details on monthly pension amount, etc, and provides a commuted value as well. When I review the commuted value and compare it to what it would cost me to purchase an annuity with the same attributes, the commuted value in the annual statement comes up at $80K short of this 'replacement' value.

My question to those familar with pension legislation is can the company decide to wind up the DB plan and force members to take the commuted values vs the annuitized pension? My preference is for the pension, not the commuted value. I do not plan to take the pension until 1/1/2014 but would do so at an earlier point in time if there was a chance that by waiting I would be forced into accepting a commuted value (on wind up).

The pension plan is small-valued at approx. $50M at 31/12/2007. (fully funded on ongoing basis, $2M underfunded on a solvency basis). I have not seen the 31/12/2010 numbers yet but the company is healthy and has a history of making supplementary contributions to the plan in order to keep it fully funded.


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## carverman (Nov 8, 2010)

First of all, I am not a pension expert..but from my own experience with my DB pension (and it's ongoing windup), my comment is:

That a company that started a registered DB pension plan for it's employees who are qualified 
(10 years service I believe), cannot just tell them it is
going to "windup" the DB pension plan. 

The company, as long as it exists, and is a viable operation, is responsible for topping up the registered
plan ...if there is a shortfall. 

Now of course, these DB plans were formed years ago, when things were a lot different than today, and I don't think that enough thought was given to "what if?" 
A lot of assumptions were made 30 years ago which may
not be correct for today's pension plan situations. 

In 1996, I was given the choice of staying in the old Nortel DB plan or going over to the "new" DC plan, and they would have come up with commuted value for me
to change over.

Unfortunately for me, things were still going quite well
for Nortel at that time, so I, like many others, chose to stay in the DB plan, where we thought..we would be "guaranteed" a pension income without any personal
involvement with managing it.

Nobody suspected that the company would get into financial difficulties and get away by not topping up any yearly shortfall..as what happend for a few years, until they went bankrupt.

The Ontario Pension Commission allowed them to get away with it, (deferring the annual company topup contributions) ,which was shown in red (liabilities)on
their annual financial report. 

The company "promised" to make up the shortfall as soon as they returned to profitability..which never happened.


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## MoneyGal (Apr 24, 2009)

fraser said:


> When I review the commuted value and compare it to what it would cost me to purchase an annuity with the same attributes, the commuted value in the annual statement comes up at $80K short of this 'replacement' value.


This kind of fluctuation is normal and it relates (primarily) to how annuities are priced on the open market vs. DB pension plans. 

The pool of people in the DB pension plan is not that similar to the pool of people who voluntarily annuitize - this is the problem of forced participation (a DB pension plan - everyone participates, regardless of their health and expected longevity) versus adverse selection (annuities purchased on the open market - people only buy them when they are pretty certain they are going to "win the bet" with the insurance company and outlive average life expectancy).


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## Daniel A. (Mar 20, 2011)

The sad fact is yes a company may change from a DB to DC without the approval of plan members.
The rules in the province of registration for the plan govern.

This is one reason we read about pensions in unionized work places becoming the major issue, it's much harder to make the change in a highly structured environment.


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## fraser (May 15, 2010)

Are companies that do choose to wind up DB plans (Ontario registered) required to give written notice to vested members and if so how much notice?

If notice is given, statutory or otherwise, would I be correct in assuming that that I could decide to take the pension prior to the final date of wind up if this was financially beneficial to me or if I preferred this option (which I do)?


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## carverman (Nov 8, 2010)

fraser said:


> Are companies that do choose to wind up DB plans (Ontario registered) required to give written notice to vested members and if so how much notice?


 It depends on the circumstances of the windup.

The Ontario registered pension plan legislation is quite complicated with a lot of legalese..but this is a section from it on "windup notice" 

http://www.e-laws.gov.on.ca/html/regs/english/elaws_regs_900909_e.htm#BK23

In my case, we knew within a couple of months from Nortel's bankruptcy in December 2008, that the DB pension plan was severely underfunded (25-30%) and was not sustainable in the long term. 

The decision to windup the plan came sometime in 2009 or probably 2010. I know that only from the Nortel Pension Action Committee information emails (former employees that are driving it...
to get whatever they can from the pensioner's perspective.

We have been informed by the committee that the windup could take "months", but nothing in legal notices or forms have been sent to us by the lawyers representing the pensioners..at least so far. 

I see there a formal notice in the current plan adminstrator dated Nov 15/2010, that the DB plan is going to be wound up, and to notify them of any change of address. 
I may have received this in one of my monthly statements..I don't remember.



> If notice is given, statutory or otherwise, would I be correct in assuming that that I could decide to take the pension prior to the final date of wind up if this was financially beneficial to me or if I preferred this option (which I do)?


Don't know about this. Maybe someone else may know the answer.


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## OhGreatGuru (May 24, 2009)

fraser said:


> If notice is given, statutory or otherwise, would I be correct in assuming that that I could decide to take the pension prior to the final date of wind up if this was financially beneficial to me or if I preferred this option (which I do)?


You would have to check with plan administrator. But it seems unlikely. Pension plans are actuarially calculated based on specific assumptions about retirement ages to start receiving benefits. Unless you met the the eligibility rules for starting your pension penalty-free, how can the plan afford to start paying people early?
Secondly, if you did qualify for an early pension, it is a normal requirement that you cease employment (at least temporarily) before starting it. The employer is then not obligated to take you back into his new pension plan (or for that matter to rehire you at all)


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## fraser (May 15, 2010)

I am no longer empployed by this company. I am fully vested and am eligible for a reduced pension (5% per year) immediately and a full pension in 3 years.


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## OhGreatGuru (May 24, 2009)

Your mention that the DB plan had been replaced with a DC plan lead me to assume you were a continuing employee. 

As others have suggested you need to check with provincial laws and the plan administratorabout your options. Assuming the employer is able to continue meeting its pension obligations (perhaps a big assumption nowadays) your vested pension entitlement should not be affected by the changes to the pension plan since you left the company.


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## MoneyGal (Apr 24, 2009)

I went back and read the original post again. 

There are a couple of different terms in this thread which are being mixed together. A company announcing that it will cease offering a DB plan to new and continuing employees is not the same as a pension plan wind-up. 

And while solvency of the company is a relevant factor that should be assessed by anyone with a company pension plan, this is not a new factor that arises if and when a company converts to a DC plan. 

There are some interesting studies from the U.S. about what people do when faced with the choice between a pension and a lump sum. The short answer is that most people - overwhelmingly so, in the case of the Florida pension plan (where all 625,000 employees were offered that choice in 2003) - will choose a pension instead of a lump sum.


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## carverman (Nov 8, 2010)

MoneyGal said:


> I went back and read the original post again.
> 
> There are a couple of different terms in this thread which are being mixed together. A company announcing that it will *cease offering a DB plan to new and continuing employees is not the same as a pension plan wind-up. *


Yes, this was my experience at Nortel in 1996, when their employee ranks swelled more than 50% of what it was before. Any new employees (or existing employees
not yet vested) would on be on the new DC plan. 
The existing employees with vested DB pension had the option to go over to the new DC plan or stay in the DB plan.



> And while solvency of the company is a relevant factor that should be assessed by anyone with a company pension plan, this is not a new factor that arises if and when a company converts to a DC plan.


It's hard for employees to determine what the future solvency of the company will be 5 to 10 years down the road, as markets and economies change. 

Nortel was "flying high" in 1996 (when they came up with the new pension plan, they were paying dividends on their stock and their stock was up and I think there was even one more 2 for 1 split....then within 5 years,
it all started to unwind...bad management, customers backing off purchasing, too many employees on board, etc..the final nail in the coffin was the recession of 2008.

Had I been in possession of a crystal ball in 1996, I definitely would have gone for the new plan, where I would be contributing some of my paycheck
into the plan , and had some control on electing the options for my portion in DC plan. 

Of course, the Nortel contributions were going into their stock..and that is the killer for us...their stock value
started to go down hill from 2001 onwards and that resulted in billions of dollars down the drain. 

In a desperate hope to reconstitute the stock value in 2006 they even tried to buy back 10 of the old stock and issue new stock equal to the same value..and the stock was well underwater at that point ...and going down for the "third and last time!" Thank God, I had the sense
not to excercise my stock options after I retired in 2002!


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