This is what's protecting your pension

As most people are well aware, job security in the private sector is often problematic in these days of corporate restructurings and mergers. This can extend even into the realm of employer pensions. It’s one thing to receive an inflation-indexed Defined Benefit pension sponsored by the government or a strong union, particularly if the pension is ultimately backstopped by taxpayers.

It’s quite another thing in the private sector. As the recipient of two modest employer DB pensions, the ultimate insecurity of such arrangements doesn’t always make for sound sleep. Fortunately, residents of the Province of Ontario are among the few Canadians who benefit from something called the Ontario Pension Benefits Guarantee Fund (PBGF).

Established in 1980, the PBGF covers more than 1,500 DB plans and 1.1 million members in the province. Participation is mandatory for most DB plans registered in Ontario. Initially, the PBFG provided a floor on the first $1,000 a month of pension income but in May 2017, the Ontario Ministry of Finance announced that “in the event that a pension plan is not fully funded and the employer is bankrupt, the government will be increasing the monthly guarantee provided by the Pension Benefits Guarantee Fund for a plan member’s pension by 50%, to $1,500 from $1,000.”

Not a king’s ransom by any means but surely better than the nothing that could occur in other provinces. The province also unveiled a “new funding framework,” with changes to the going-concern funding rules that included a shortening of the amortization period from 15 to 10 years for funding plan shortfalls; plus required funding on a solvency basis in the event a plan’s funded status falls below 85%.

It also said Ontario will be moving forward with a review of the rules governing wind-up of DB pensions. Employers will continue to be required to ensure pension funds are adequately funded and to pay into a reserve to protect benefits for workers and retirees. Employers will be required to make additional contributions if a plan’s funded status falls below a certain level. “There will be no impact on the pensions that retirees now receive as a result of these changes.” The province intends to introduce legislation in the fall to enable these changes.

While Ontario is the only jurisdiction in Canada with such a guaranty fund, retired actuary and pension expert Malcolm Hamilton says the United States has the Pension Benefit Guaranty Corporation (PBGC). According to Wikipedia, the PBGC was created as an independent agency in 1974. The monthly maximum is considerably higher than Ontario’s at US$5,011.38 a month, or US$60,136 annually as of 2016 for those aged 65 or beyond. In 2015, the PBGC paid out US$5.6 billion in benefits to “participants of failed single-employer pension plans.” That year, 69 such plans failed.

Hamilton says the United Kingdom has a similar vehicle called the Pension Protection Fund. While benefits are capped depending on age and length of service, again they are considerably higher than in Ontario.

But Hamilton is skeptical about these sort of backstops in general: “They are often insolvent and perpetually in need of government support wherever they are found.”

Senior pension analyst Sean Cooper says that given the Sears Canada situation, pensioners aren’t at the top of the creditors list. He advises would-be retirees to pay attention to the funding status of their DB pension “since if it’s chronically underfunded, it could be in danger.”

While DB pensions have a reputation for being “safer” than market-dependent Defined Contribution (DC) pensions, Cooper says DC pension plans are actually “safer since they’re held with the trustee. If the company goes belly up, your money is protected (unlike a DB pension plan).”

He adds that if an employer were to go bankrupt in another province, the DB pensioners would likely still end up getting some money (as opposed to nothing at all). “It would only likely end up being pennies on the dollar. This begs the question, should pensioners be moved up higher on the creditor list?”

Cooper says that if a major employer were to go bankrupt, there may not be enough money in it to cover the shortfall. However, the PBFG does help those with pensions in excess of the $1,500 limit. For example, in the case of a pension fund that’s 50% funded on windup because of a bankrupt plan sponsor, someone with a $3,000 monthly pension would receive $1,500 from the funded part of the $3,000 pension, plus $750 from the PBGF, which tops up the unfunded part of the first half of the pension.

In my own case, it’s not a slam dunk that both the sponsors of my “mini pensions” are rock solid. In another province, I’d be tempted to take the commuted value and “run” by converting the assets to my RRSP and ultimately RRIF. Then, as Cooper says, you actually have control of your assets.

However, since I live in Ontario, I prefer to hang on to these annuity-like pensions, even if they’re not inflation-indexed, knowing the PBGF at least puts a floor under them.

Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at [email protected]

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About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.