Building your Financial
Success
With Alain Aube
Retirement Planning and RRSP's
Pension Plan Uncertainty - what does it mean to you?
You've probably seen headlines like: Pension Plans in Peril, Pension
Plan Crisis Looms. Should you be concerned about the solvency of your
employer-sponsored pension plan? The quick answer is maybe - but not to
the point of panic or even the nagging worry that you're definitely
going to be pension-pinched come retirement. Let's look at the
background to these stories, at what you can do ease your pension plan
concerns, and at other steps you can take to help ensure an adequately
funded retirement.
If you're like 85% of Canadians who are enrolled in a company sponsored
pension plan, you participate in a Defined Benefit (DB) pension plan,
where the amount of pension benefit you'll receive is based on a formula
that includes your years of service and salary. Trouble is, Canada's DB
pension funds rely on the returns they get from investing plan
contributions to keep their plans (and yours) fully funded - and with
the continued poor market conditions of the recent past, many funds have
suffered sustained losses. That's what has prompted the recent rash of
news stories questioning the health of the pension system.
Statistics compiled by the Association of Canadian Pension Management (ACPM)
show that, using current assumptions, Canadian pension plans will have
only enough assets to cover 75% of future payouts, instead of the 120%
they enjoyed during the peak markets of a few years ago*. When the
assets in a DB plan shrink like this, it's up to employers to make up
the deficit by making additional contributions. Many worry that at least
some of those companies may not have the cash to adequately top up their
plans.
So, this reduction in plan assets is a concern - but not a catastrophe.
For one thing, the market pendulum will eventually swing back and should
improve returns on the investments held by the pension fund. For
another, provincial pension authorities require that an actuarial
valuation be performed on DB plans every three years to determine their
financial status and assess their solvency.
Additionally, few Canadians count solely on a company pension for their
retirement income. In this country, we enjoy a three-pillar retirement
income system: The first pillar is a company pension -- either a DB plan
or a Defined Contribution (DC) plan or both; the second is personal
savings in non-registered and registered plans (RSPs); and the third is
basic income from government plans like the Canada /Quebec Pension Plan
(CPP/QPP) and Old Age Security (OAS). In combination, these three
retirement income streams can provide for a comfortable retirement. And,
when the three-pillar mix is tailored to your personal retirement
objectives, it can help insulate you from potential problems such as the
current projections of DB plan shortfalls.
If you have questions about the health of your company's pension plan,
you can get answers from your employer or plan administrator. When
queried, they must inform you about the current solvency of your plan
and what your expected benefits will be. If your plan is projecting a
deficit you should ask for information on the exact steps your company
is taking to remediate it. You should also receive an annual pension
statement from your employer that will tell you how much you've accrued
in benefits, and how much you've personally paid into the plan.
If you still have nagging concerns about your company pension plan or
whether your three-pillar retirement income mix will adequately support
your dreams for the future, now's a good time to review your situation
with a financial planner.
* As quoted in the Financial Post, Tuesday, May 27, 2003
