Look into your pension plan today

Canada’s private pension industry is in a crisis mode. Any doubts about that were dispelled in June when a study prepared for the Association of Canadian Pension Management estimated that our pension plans face a shortfall in assets of $225 billion. In real terms, this means that, unless something is done, many employer-union-association plans will not have adequate resources to meet their financial commitments to retirees.

Equity losses suffered during the bear market are partly to blame. Combined with low interest rates, which depressed yields on fixed-income securities, plan managers have found themselves unable to generate the investment returns needed to meet actuarial requirements.

Federal and provincial regulators are keeping a close watch on the situation and demanding plan sponsors top up deficient plans where necessary. However, if a company doesn’t have the money, there’s a real problem. One of the factors that drove Air Canada to seek creditor protection was an order that it make up a shortfall of more than $1 billion in its plan. With business crumbling, the cash-strapped airline was unable to comply.

This leaves plan memberin a difficult position since they have no direct control over the situation. However, you aren’t completely helpless. Here are some steps to take if you have concerns.

• Organize a meeting of pension plan members and ask that the plan administrator and a senior officer of your company or organization attend. Demand hard answers on the financial health of the plan. If it is in a shortfall position, ask what is being done to remedy the situation. If there is no remedial plan, ask for a commitment that one be created within a specific period of time.
  If you are already retired, contact the plan administrator to see if a meeting has been organized. If not, request a one-on-one meeting.
• Understand your pension plan and your entitlements under it. Surprisingly, many people know little about how their plan works and don’t bother to find out until they are within a few years of retirement. In some cases, they aren’t even sure if they belong to a defined benefit plan (which uses a specific formula to determine your pension) or a defined contribution plan (which does not).
• Increase your personal retirement savings. Maximize your RRSP room after the pension adjustment is taken into account. Then, put aside a little extra to start building a non-registered retirement savings plan.

If we get lucky, the crisis will pass. A great bull market similar to that of the 1990s combined with rising interest rates could remedy at least part of the problem in a few years. But no one is predicting that combination of events any time soon, and we have no way of knowing how the pension crunch will evolve. The situation may improve over time, but don’t take that for granted. Protect your financial future in any way you can.

Pension cap update: In June 2002, I wrote about the unfairness of Ottawa’s pension cap on private plans and explained how it severely limits the amount of money a retiree can draw. Since 1977, the maximum pension allowable in the first year of retirement has been $1,722.22 times years of service (it can increase in later years if the plan has indexing provisions).

In his February budget, Finance Minister John Manley announced that this ceiling would finally be increased. The base figure for the formula will rise to $1,833 in 2004 and to $2,000 in 2005. After that, it will be indexed to inflation.

The long overdue changes don’t compensate for the 27 years during which the cap was left untouched while inflation steadily eroded the purchasing power of pensions. But the government has ensured that it won’t continue to pick the pockets of pensioners in the future. We should be thankful for that, at least.