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When retirement savings tank
DID THE 85 FACTOR JUST BECOME THE 90 FACTOR?
i mentioned the hit they would take months ago,
– Sandro Contenta
Underfunded plans shake pensioners
David Jeanes thought he had "Freedom 55" when he retired from Nortel in 2003 with a full pension.With RRSPs sinking and pensions underfunded, many people will work longer or retire on far less
Mar 15, 2009 04:30 AM
Comments on this story (66)
Sandro Contenta
FEATURE WRITER
Liz Fong's plans for early retirement have faded with the economy.
An official with a Toronto office workers' union, Fong had planned to quit in three years, when she hit 60. Then her retirement savings tanked.
With stock markets showing no signs of recovery, Fong laughs when she recalls the once popular advertising slogan touting "Freedom 55."
"Looks like it's Freedom 85 for me," says Fong, president of Local 343 of the Canadian Office and Professional Employees Union.
Fong pushed back her retirement when she saw her "defined contribution" pension and RRSPs – both invested in the stock market – drop almost 20 per cent late last year to 2007 levels. She now thinks they may be at 2005 levels, but she's too afraid to verify.
Fong isn't alone, of course. The made-in-America recession has battered retirement savings in Canada – from individually held RRSPs to massive pension funds – to the edge of crisis, experts say.
There were assets of almost $2 trillion in RRSPs and registered pension funds in Canada in 2007. The global collapse in stocks, corporate bonds and real estate resulted in staggering losses in retirement savings. Estimates range from $300 billion to $400 billion, placing Canada's complex pension structure under severe strain.
Most Canadians don't have employer-sponsored pension plans. So, many close to retirement and fully dependent on RRSPs will either work longer than they had planned or retire on far more meagre pension incomes. Employers in the private sector are obliged by law to make up shortfalls in most of the pension plans they sponsor. If the stock market stagnates for years, actuaries estimate some will need to contribute half of annual salary costs to keep them viable.
Workers and retirees of struggling companies that have severely underfunded pension plans – including General Motors, Nortel and Air Canada – face significantly reduced pensions if their employers go bust.
Ontario, through its already deficit-wracked Pension Benefits Guarantee Fund, could be on the hook for billions of dollars in pension payments if major companies with underfunded plans go out of business.
Canada's aging population – more than 25 per cent will be older than 65 by 2031, compared with 13 per cent in 2005 – makes fixing the pension system all the more urgent.
The federal government last month announced cross-country hearings to "strengthen the security of pension plan benefits." Ottawa will cover only the 7 per cent of private plans under its jurisdiction, including those in airlines, banking and telecommunications.
Some provinces, including Ontario, have had recent task forces consider pension reforms. But their work was conducted before the recession hit and stock markets plunged.
"This is probably the most troubling environment that I've seen in my working life," says Malcolm Hamilton, a pension consultant at Mercer in Toronto with 35 years of experience.
Compounding the problem for many is a skewed pension system that allows bigger retirement savings and tax breaks for the minority of workers with "defined benefit" plans, including public servants.
Hamilton, the actuary for the Ontario teachers' plan, blames mainly finance department officials for the bias. He says their comfortable and secure government pensions have made them insensitive to the retirement struggles of the many Canadians in the private sector.
"They should be guilty to the point of embarrassment," Hamilton says, sitting in a conference room at his Bay St. office. "They've basically built this magnificent (pension) mansion for themselves where everybody else is out in tent city, and they couldn't care less."
The good news is that the Canada Pension Plan (CPP) is expected to meet its pension obligations, at current contribution rates from working Canadians, for at least another 75 years. It currently pays retirement pensions equal to 25 per cent of salary in inflation-protected benefits, up to a monthly maximum of $908. The average payment is $490 a month.
In 2006, almost 4.2 million Canadians received CPP retirement pensions, including one million surviving spouses or common-law partners. In addition, Ottawa pays low-income seniors a Guaranteed Income Supplement and those who meet residency requirements an Old Age Security pension (OAS).
Some see the CPP as the answer to pension troubles. They note its indexed payments, its wide coverage and its ability to make big investments at low overhead costs. Doubling CPP benefits would solve the most pressing pension challenge today – the growing number of working Canadians without employer-sponsored plans, says Darcie Beggs, a pension expert with the Canadian Union of Public Employees.
Only 38 per cent of employed Canadians are covered by workplace pensions – plans established by either employers or unions to pay retirement income. In the private sector, only 27 per cent of workers enjoy such plans, according to Statistics Canada.
In other words, a large majority of working Canadians are relying on CPP, OAS and RRSPs for their retirement income. Some are also counting on the sale of a home or farm, the survival of a small business or rental income. That explains the panic many feel, particularly those not likely to see a recovery in RRSP investments before they retire.
Many will delay retirement to offset those losses, says Grant Schellenberg, who analyzed a survey on the retirement expectations of workers aged 45 to 59 for a Statistics Canada report last fall.
The survey was conducted in 2007, before the recession hit. It found workers nearing retirement in a generally positive mood, with 69 per cent expecting their retirement income to be adequate. Those concerned about their pensions planned to retire later than those who weren't.
The median retirement age in the private sector is 62. In the public sector it's 58. The difference points to pension systems that divide workers into "haves" and "have-nots," says Toronto pension consultant James Pierlot.
The fortunate ones – usually those with unions – have "defined benefit" plans, enjoyed by 17 per cent of workers in the private sector and 78 per cent of those in the public sector. These plans guarantee a pre-set pension income regardless of what stock markets do. If the markets plunge, employers are obliged by law to make up the difference with tax-deductible contributions, though some plans may increase contributions for workers as well.
Workers relying on RRSPs have no retirement income protection. Neither do those in "defined contribution" plans, where the employer sets up individual accounts for employees and makes part of the contribution. Neither group can make up for losses in the stock market – even if they have the money to do so – unless they have unused RRSP contribution room. And they can accumulate much less retirement savings annually than those with defined benefit plans – a maximum 18 per cent of salary compared to 40 per cent for a 55-year-old public sector worker, for example.
"How many people know what I've just told you? Almost nobody knows this," Pierlot says in an interview.
"The ideal end-game for me is people call their MPs and say, `I want to have a good pension, too. Can you please do something about it?'"
But these days, defined benefit plans have also been hit hard. Watson Wyatt Worldwide, a leading actuarial firm, estimates the typical Canadian plan began 2008 with funds to cover 96 per cent of its pension obligations – even if the company became bankrupt. By the end of the year, the typical plan had enough for 69 per cent.
Public sector plans sponsored by governments are safest. To help private pension funds, the federal and Ontario governments have announced plans to extend from five to 10 years – under certain conditions – the deadline for making them solvent. But workers and pensioners with companies that fail would see pension benefits slashed if the plan is underfunded.
Ottawa resident Heather McIntosh, 52, fears that will be the case at Nortel, the once mighty telecom equipment maker. She lost her job on Jan. 11 after 35 years at the company, many of them as an executive assistant to senior vice-presidents. Three days later, Nortel filed for bankruptcy protection from its creditors.
Her years of service were enough to qualify her for a full pension, with no reduction due to her age. But the plan was underfunded by $1.8 billion in 2007, and some reports put the shortfall more recently at $2.8 billion. So unless Nortel survives on its own or is sold to a company that will assume its pension obligations, 5,900 workers and 16,000 retirees in Canada face a reduction in the pensions they expect or already receive.
"I'm sitting in limbo," says McIntosh. "I don't know if I'm going to get a pension, and if I am, how much?"
McIntosh says severance documents she signed with the company prevent her from giving out financial information. So she won't say how much pension she is supposed to receive. But Nortel employees with her experience get about $2,500 a month.
To make matters worse, McIntosh's RRSPs have crashed and she lost "a whole bunch of money" invested in Nortel stock. With a mortgage, car payments and a teenager in high school, McIntosh's husband, a retired economist, was forced to go back to work and recently landed a contract. McIntosh is looking for a job.
"The whole thing is just so sad," she says.
In Mississauga, Air Canada pilot Hans Veit has similar anxiety. An Air Canada pilot for 29 years, he plans to retire when he turns 60 in eight years. He pays into a defined benefit plan that guarantees him about 60 per cent of his salary. He won't say how much he makes but notes that a pilot with 35 years of experience earns about $200,000.
But with Air Canada wobbling again – it lost $1 billion last year – and talk of bankruptcy in the air, Veit fears all bets are off, particularly with a $3.2 billion shortfall in the pension plan.
Veit considers his lifestyle modest – his wife calls him a cheapskate and his car is 10 years old – yet he wonders if he should cut back. He wants certainty about his pension and calls on Prime Minister Stephen Harper to guarantee as much as possible the viability of pension plans for companies that go bust.
The uncertainty "is causing my family to alter their spending habits," Veit says. "Everybody is saying spend, spend, to get the economy going, but I'm thinking I should be saving because I don't know what's down the road for me."
As a plan under federal jurisdiction, Air Canada's pension fund isn't eligible for Ontario's Pension Benefits Guarantee Fund. It covers pension shortfalls for employees up to $1,000 a month – a figure the province's Expert Commission on Pensions recently recommended be boosted to up to $2,500.
But the guarantee fund already has a deficit of more than $100 million. Picking up the shortfall tab for General Motors alone would cost Ontario $3 billion, according to one actuarial estimate. And if the government spent the money, taxpayers who have seen their RRSPs plummet will demand pension bailouts too, argues Mercer pension consultant Hamilton.
"When you find yourself in this situation you're just picking the lesser of evils," he says, referring to the provincial government's options.
Still, Hamilton notes that Canadians with even a partial workplace pension will be better off than those nearing retirement with only CPP, OAS and battered RRSP savings.
It's not a recipe for destitution, no matter what pension category Canadians are in, Hamilton argues. But many nearing retirement face noticeably less comfortable golden years.
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