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Defined Benefit Pension Plans - Segment One - InvestmentPitch.com

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In this first of several videos covering the pension landscape in North America, InvestmentPitch anchor Samantha Deutscher describes defined benefit pension plans.

Additional Information:

Company: InvestmentPitch
Website: http://www.investmentpitch.com/
Date Published: Jul 10, 2013
Transcript: Available

Video Transcript:

I’m Samantha Deutscher for InvestmentPitch.com

In this, the first of several segments covering the pension landscape in North America, and Canada in particular, we will take a closer look at defined benefit pension plans.

With recent headlines stating that “More than 90% of the pension plans of federally regulated companies in Canada had funding gaps at the end of 2011”, employees are beginning to question their pension plans.

Before we dismiss this statement as just the media looking for headlines, consider for a moment that this statement comes from Canada’s Office of the Superintendent of Financial Institutions.

In fact, in 2011 the percentage of defined benefit pension plans overseen by the OSFI that were underfunded had grown to 93%, up from 76% in 2010.

This shortfall was basically due to the modest returns on assets within the plan, coupled with higher pension liabilities.

If we look at this chart for the yield on the familiar Canada Savings Bonds, we can see that interest rates are at historic lows, which means revenues within pension plans are also far below previous levels, so it’s not surprising that many of these defined pension plans are underfunded.

This chart shows that if you turned 65 in 1985 you could expect to live approximately another 15 years if you are a male and another 18 years if you are female.

Whereas, if you turned 65 in 2004, you could expect to live approximately another 17 years if you are a male and another 20 years if you are female.

With everyone living longer, ex-employees will be drawing funds from their pension plans for longer periods.

This shortfall, of course, applies only to defined pension plans, and if your plan happens to be a defined contribution pension plan we’ll discuss those later.

Defined benefit and defined contribution plans may sound similar, but there is a world of difference between them - like comparing apples to oranges.

With a defined benefit pension plan, your pension amount is pretty well predetermined, and is expected to continue until you die.

The contributions are usually made to a trust account by you and your employer, with the funds managed by a professional asset manager.

These defined pension plans are required by law to be audited on a regular basis and if they don’t have enough assets to cover present and future pension liabilities, the employer deposits more money to the trust, if the employer has the money.

So what happens if your employer goes bankrupt, as happened to Nortel, once Canada’s largest company.

Unfortunately, for Nortel employees it’s all bad news, as their pension plans have been devastated, incomes for disabled and terminated employees have been lost, and the health benefits paid for with years of service have vanished.
These pension plans are not backed by the government, except for plans in Ontario.

So if you are lucky enough to be living in Ontario, your plan is partially protected, but only a fraction of the protection you would have received if you were an employee in some other countries.

It’s not just Nortel employees facing this problem, there is a long list of high-profile corporate bankruptcies, as well as cities and many states in the US facing enormous pension liabilities.

Remember the auto industry a few years ago, and more recently Hostess Brands, the maker of Twinkies, which recently filed for bankruptcy, a second time in a decade, declaring $2 billion in unfunded pension obligations.

And it’s not just the $2 billion that employees are concerned about, it’s the decades of income these funds would generate that is also lost.

What if your company is sold?

In most cases your old company will be responsible for paying the pension it has promised you.

Some employers will choose to close the plan, transferring whatever savings you have in the plan into a special retirement account.

Companies are not required to offer pension plans, and in most cases they can choose to shut the plan down at any time, which is called winding up the plan.

If this happens, the plan sponsor must distribute all of the savings to the plan members.

If the plan was properly funded, you should get everything you have earned so far. If not, things get quite complicated.

Given these shortfalls, both employees and employers are now turning to defined contribution pension plans.

In 1998, 90% of the Fortune 100 companies offered defined benefit pension plans to new employees.

This number dropped to only 30% by 2012.

Whereas defined contribution pension plans have grown in popularity, with 70% of Fortune 100 companies now offering defined contribution plans, up from 10% in 1998.

In our next segment we will discuss defined contribution plans, and the benefits they offer both employers and employees.

This segment has been sponsored by the BouryClyne Private Wealth Management Division of Raymond James Limited.

If you have any questions about your pension options, please contact Miles Clyne at 604-855-0654 or email miles.clyne@raymondjames.ca

I’m Samantha Deutscher for InvestmentPitch.com