READERS WEIGH IN WITH WORRIES
Experts provide answers to pension concerns.
Readers weighed in after The Vancouver Sun’s pension series with many questions. Here are some, answered by Clay Gillespie, managing director at Rogers Group Financial, and Greg Pallone, managing director at TRG Group Benefits.
Reader: We are told that as the Canadian birthrate has fallen to 1.5 children per family, below the replacement level, immigration numbers must continue as is or increase to maintain the ratio of workers to retirees in order to fund the CPP. Is this sustainable?
Gillespie: There is no doubt that a falling birthrate and an increase in retirees as the baby- boom generation continues to retire is going to put many government programs under increased pressure, but this should not be a problem for the CPP. This benefit was originally designed to be paid for by working Canadians and as long as we had more people working than retired this would be a reasonable way to fund the payments. However, in 1996 when reviewing the plan, the provincial and federal governments decided this would not be sustainable in the long run and increased how much employees and employers pay into the program.
Today, payments are higher than benefits being paid out and this should be the case until 2020. By that time the pension plan should have built up sufficient reserves to fund all future demands. It is a myth or fearmongering to suggest CPP will not be there when most Canadians retire. It is a completely different story whether CPP along with OAS would be enough to live on.
Reader: Saturday’s article stated that respondents to the Canadian Payroll survey said they would need a nest egg of more than $ 750,000 to retire comfortably. Are there any statistics from this survey or through other sources that suggest what size of nest egg Canadians actually do have when they retire?
Gillespie: This question is almost impossible to answer because of how retirements are funded. Generally individuals who belong to a pension plan would have saved a lower amount since much of their savings would have gone into the pension plan and not in accumulating assets. Individuals who do not belong to a pension plan would require significantly higher savings to fund their retirement. Most individuals looking at retirement are more concerned about the income they can generate, not the amount of their savings. A survey that my firm did last year with individuals who were within three and seven years of retirement found that only one- quarter expect to have an income of $ 5,000 a month or greater and one- quarter expect to have an income of $ 3,000 a month or lower.
Reader: I am retired and single and would like to know where my pension goes once I die. Does it go to my estate with no beneficiary named?
Gillespie: There is not enough information to fully answer this question. But I can give you some guidelines that may help. You could have chosen a pension with a guarantee option. For example, you might have chosen a pension that will pay you as long as you are alive or at least five years. So let’s assume you die after three years — this would mean that two years’ worth of your pension would be paid to your named beneficiary or your estate if you did not name a beneficiary. In this case, if you die after five years, no benefit would be paid to your estate. If you did not choose a guaranteed period, nothing will be paid to your estate no matter when you die. It is important to remember that the longer the guarantee period that you choose for your pension, the lower your payment will be.
Reader: Can you please explain the differences between defined- benefit pension versus defined- contribution pension in a simple format?
Pallone: A defined- contribution plan, also called a capital accumulation plan, defines the contributions to be made to a pension fund during your working lifetime. It could be a contributory ( you also contribute) plan or non- contributory ( just your employer contributes). Those contributions are invested into segregated investment funds and accumulate in your account until your normal retirement date, at which time the total amount held on your behalf is used to purchase your retirement benefit. The amount of the benefit is really unknown and not defined.
A defined- benefit plan defines the amount you will receive at your normal retirement date and the employer makes regular deposits to the plan, added to your contributions if applicable, to fund that pension promise. The employer assumes responsibility for making up any shortfall in funding that might occur from time to time to ensure that the promised benefit can be paid. In this case, the benefit at age 65 is known, but the cost is unknown.
Reader: Does the member own his or her contribution to the pension pool or does the pension corporation own it? ( Former BC Ferries employee)
Pallone: Your question can be taken a number of ways, so I’ll attempt to address it based on what most plan members mean when they ask about their contributions whenever I’ve attended plan member meetings over the years. Your contributions are yours to the extent that they are used to provide your pension at retirement. The B. C. Ferry Corp. pension plan is a defined benefit, multi- employer pension plan ( under the terms of the Public Service Pension Plan) so the company assumes overall responsibility for funding the pension benefit payable under the plan’s terms, but your contributions also fund the pension benefit. So you could say you “own” it, but you can’t have it except under the terms of the plan. Who owns any potential surplus funding under the plan is a whole other topic and often results in one of those answers that starts with, “it depends.” Unfortunately, I don’t have enough space here to answer that question fully or appropriately.
Reader: I am receiving a defined benefit pension plan from my former employer. It is 90- per- cent funded now. The company was recently sold to an American firm. How safe is this pension? Can I look at the fund as a untouchable, sacrosanct annuity? On the other hand, can the new owners “loot” the plan, or perhaps not bring it to full funding? Or, is my pension safe till I die?
Pallone: This is another one of those complex questions that just begs for more information so I’ve made some assumptions in my answer, like the company is a going concern and is not closing its doors. With approval from regulators, the new owners could wind up the pension plan and stop funding for pensions at that point under the supervision of the superintendent of pensions.
Generally speaking, the employer would need to make additional payments to meet solvency requirements applicable under the terms of the plan and the assets would be distributed to members in accordance with the pension provisions of your plan. You could experience a reduction in benefits at wind- up under these conditions, but those benefits would be those that accrued to you up to the wind- up date.
They just might be less than if you remained a member until retirement. So depending on your definition of looting, the pension is touchable and not sacrosanct on the basis described here, but the pension benefit accrued to you on wind- up would be paid at your normal retirement date. Other settlement options might also be made available at the windup, so you should consult your financial adviser before signing off on something that might be years away.
Reader: I am 59 and had to retire early due to health issues. I have taken a lump- sum payment of my company pension from my employer ( locked in an RRSP). What benefits am I entitled to from the government and at what age?
Pallone: Gillespie provides a more complete answer about your entitlements from government programs, but I wanted to address the locked- in funds you have as part of your withdrawal from your employer plan. They must also be used to provide a monthly retirement income at your normal retirement age, or no later than the end of the year you’re 71. The form of that pension could come from an annuity or from a Life Income Fund.
In respect of the latter, the tax department regulates the amount that you can withdraw from a LIF depending on your age when you start withdrawal, long- term interest rates and the investment return of the fund. For example, if you turned 65 in 2011, the maximum withdrawal is .072 multiplied against of the value of the LIF at the start of the year. The withdrawal rate increases as you age, subject to prevailing long- term interest rates.