Retirement Time Bomb

The startling new revelations about the alarming state of Canada’s pension industry are a potential time bomb that so far has been met with a frightening indifference by our political leaders.Mad cow disease and the renewed SARS outbreak in Toronto are grabbing the headlines, but the pension crisis has serious long-term implications for millions of Canadians and must be addressed.This grim fact was highlighted in a recent speech delivered by Canada’s Superintendent of Financial Institutions, Nick Le Pan, to the National Press Club in Ottawa. In it, he said that of the 370 defined benefit pension plans monitored by his office, about 60 are on the “watch list”. That’s 16 per cent of the total, but it only represents the tip of the iceberg.

Pension administration is a shared federal-provincial jurisdiction. The federal Superintendent is responsible for only 10 per cent of all the plans in Canada. If Ottawa’s experience is symptomatic of what’s happening nationally, there could be some 600 defined benefit plans across the country that are in trouble.

And even that doesn’t reveal the full story. Participants in defined contribution plans, which greatloutnumber defined benefit plans now, could be in even worse shape. These plans do not guarantee a specific pension; rather the payment at retirement is based on the returns generated by the securities within the plan. It’s reasonable to assume that these plans have been hit equally hard by the stock market dive, perhaps even harder. Those losses will translate into lower pensions in the future, and the closer you are to retirement the greater the impact is likely to be because there is less time available for stocks to recover.

Estimates for the total shortfall in Canadian pension plans run as high as $225 billion, according to a study prepared for the Association of Canadian Pension Management.

There are two things that individuals can do in the face of this threat to their retirement income.

First, if you’re a member of a pension plan, sit down and have a serious talk with the plan administrator or organize a meeting of all participants. Ask hard questions about the financial well-being of the plan and where the money is invested. Specifically, find out whether the administrator expects the plan to be able to fulfil its obligations as matters now stand. If not, ask what is being done about it.

There are two ways to deal with a shortfall. One is to increase the contributions to the plan to bring it back to financial health. This may require increased funding by both the employer and the plan members. The other is to restructure the benefit package so as to reflect the new reality. Either course is painful, but less painful then finding out that the plan is insolvent just as you’re about to retire.

The other thing you can do is to build your own personal retirement reserves. That means maximizing your RRSP to the fullest extent possible, although pension plan members may have very little contribution room available. In that case, make use of other investment options, including setting up a non-registered portfolio and/or taking out a universal life policy, which offers significant tax advantages.

So far, governments have shown no inclination to come to the rescue of troubled pension plans. As Mr. Le Pan said: “We cannot guarantee that benefits will be met in all cases.”

In fact, only one jurisdiction in Canada offers any help for retirees whose defined benefit plans run into trouble. Ontario has a Pension Benefits Guarantee Fund, which has been around for years but it so obscure that there is barely any mention of it on the website of the Financial Services Commission of Ontario, which administers it.

The program is funded by contributions from pension plan sponsors and covers about 2,200 plans. But it is very limited in the protection it offers; the maximum pension that it will guarantee in the event of a financial crisis is $1,000 a month. That’s peanuts by today’s standards.

According to Mr. Le Pan’s office, no other jurisdiction in Canada offers even that degree of protection.

Contrast that with the situation in the U.S. There pensioners are protected by a federal agency known as the Pension Benefit Guaranty Corporation (PBGC), whose directors are appointed by President of the United States and include the Secretaries of Labour, the Treasury, and Commerce. This shows how seriously the Americans take this matter.

The PBGC is a model of what we desperately need in Canada. Created in 1974, it currently guarantees the basic pension benefits of about 44 million Americans, participating in over 35,000 defined benefit plans, to a maximum benefit of about US$3,600 a month (almost C$5,000). No tax dollars are used in the funding; the operations are financed mainly by insurance premiums from companies that sponsor pension plans and from the returns on PBGC investments.

The value of such an organization was proven recently when the PBGC announced that it would assume the responsibility of paying pension benefits to 95,000 workers and retirees of Bethlehem Steel, which went into receivership with a huge shortfall of US$4.3 billion in its pension plan. Without the PBGC backstop, tens of thousands of people would have seen their pensions sharply reduced or even wiped out entirely.

Canada’s shared pension jurisdiction makes the creation of a comparable body here more difficult. Nor has there been a perceived need for our own version of the PBGC until now. But neither has our pension industry ever faced this kind of crisis.

The time is right for our political leaders to face the issue squarely and to take some long overdue action. Let’s hope that someone in Ottawa is paying attention.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail publication featuring financial guidance from some of Canada’s leading experts. For details on a three-month trial subscription for visitors, go to