Pattie Lovett-Reid: How safe is your pension?
You have worked hard, contributed faithfully and now it is time to collect your pension. We all know defined benefit plans are a dying breed, but there are still some that do exist, and there are pensioners who count on them to help fund their retirement .
Mercer is out with its quarterly solvency position report and there’s good news: plans edged higher in the second quarter of 2017. Their Mercer Pension Health Index, which represents the solvency of a hypothetical plan, stand at 103 per cent compared to 102 per cent at the beginning of the year. In other words, most pension plans are about 10-15 per cent better funded than they were a year ago. That is not to say they are all fully funded.
Something to keep in mind is that all contributions made to a defined benefit plan (both yours and your employers') are held in trust for the benefit of all plan members. So when you contribute to a defined benefit plan, your contributions are safe.
If by chance your employer goes bankrupt, contributions are no longer made and your promised pension is in jeopardy. An underfunded plan is different and often relates to the investment performance of plan contributions. We saw this happen during the economic crisis in 2009 and during recessionary periods. Due to the costs involved, companies are given flexibility to restore their plans to full funding.
But we all still remember the anger and frustration of Nortel employees who had their financial lives turned upside down with the company's bankruptcy.
According to Mercer, a typical balanced pension portfolio would have returned 3.6 per cent during the second quarter of 2017. Broad-market Canadian bonds provided positive returns, while equity markets were generally up with the exception of Canada.
The bottom line is having guaranteed monthly payments for as long as you live is very attractive – as long as the health of the company is intact. With longer life expectancies, the value of a defined benefit plan has increased. But with lower interest rates, you may be concerned about your plan. Call you plan administrators to see if monthly payments still make sense or should you even consider a lump sum today if there is any concern your payment amounts could be compromised.
Do your due diligence but don't do anything until you seek independent financial advice and have a thorough understanding of the pros and cons of monthly payments versus a lump-sum payment.
Plus, it is always a good thing to stay on top of all your various streams of income in retirement because at the end of the day no one is going to care more about your retirement than you.