Personal Finance

Defined benefit pensions and company bankruptcy

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  • Jan 21st, 2019 9:32 am
Jr. Member
Oct 29, 2017
115 posts
14 upvotes

Defined benefit pensions and company bankruptcy

My father has been retired for the past 20 years or so and has been collecting a defined benefit pension from his past employer with whom he worked for 30 years.

The company has had some challenges with the new economy and the likes of Amazon and I have been questioning its long term survivability.

I'm just wondering, if the company did declare bankruptcy at some point, what happens to his defined benefit, does it stop or is it guaranteed? Also, are there any proactive steps that we can take at this time to reduce the risk of the company potentially going under?

Thank you
16 replies
Sr. Member
Feb 21, 2010
886 posts
263 upvotes
Scarborough
what is the funding ratio for the company? You can look for this information in their latest financial statements? Generally in bankruptcy, government will try to separate pension assets from other company assets that are available for liquidation.

Also in Ontario government had a proposal to guarantee from tax payers money 2k every month (from current 1k every month) when the company goes under. Is your dad getting more than 2k every month?
Deal Addict
Jan 20, 2016
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Houston, TX
timc00k wrote: My father has been retired for the past 20 years or so and has been collecting a defined benefit pension from his past employer with whom he worked for 30 years.

The company has had some challenges with the new economy and the likes of Amazon and I have been questioning its long term survivability.

I'm just wondering, if the company did declare bankruptcy at some point, what happens to his defined benefit, does it stop or is it guaranteed? Also, are there any proactive steps that we can take at this time to reduce the risk of the company potentially going under?

Thank you
If Stelco and Sears are an example, DB pensions are not guaranteed, imo.
As a proactive step, is it possible to get it converted to annuity/LIRA/RRSP?

I had a few years DB plan, but thanks it was converted to RRSP in time (company going through different stages of calamity afterwards, sold to overseas "investor" and most people being laid off in the end...)
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Deal Addict
Jul 3, 2017
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You're certainly right to be cautious by investigating the stability of the company and having a fallback plan. It's probably no coincidence that companies that have long offered defined benefits pension plans to employees are getting into trouble now. Many of them failed to look ahead to the inevitable long term effects of increasing lifepan and changing business model altering the ratio of beneficiaries to working employees. At best it constrains their flexibility as times change, and of course at worst it becomes a growing financial burden on the company.
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Mar 16, 2010
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Another reason why I like DC plans better, but I fall into the vast minority that do.
Jr. Member
Oct 29, 2017
115 posts
14 upvotes
romeocanada wrote: what is the funding ratio for the company? You can look for this information in their latest financial statements? Generally in bankruptcy, government will try to separate pension assets from other company assets that are available for liquidation.

Also in Ontario government had a proposal to guarantee from tax payers money 2k every month (from current 1k every month) when the company goes under. Is your dad getting more than 2k every month?
Could I get clarification on this. Are you saying that if a pensioner is getting $24,000 in annual company pension, this benefit will be kept separate from other company assets that can be liquidated? I don't recall his exact pension, but I do know it is under $24k.

Also, is this just in Ontario or do other provinces have something similar?
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Feb 1, 2012
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Thunder Bay, ON
DB pension funds in Canada are held in trust for the pension and cannot be accessed by the company even in the case of bankruptcy. However if a pension gets under-funded for any reason, the company has an obligation, with specific timelines, to get the pension back up to 100% funded. If the company is bankrupt, there is no more company to contribute to get the pension back to fully funded. Your father won't get nothing, but if the pension is underfunded and the company goes bankrupt the pension payment could be cut back, now or some time in the future. But just to reiterate, the funds that are in the pension now are protected and held in trust separate from other company assets.

Is there a pension statement available? A lot of companies issue a pension statement annually to members. The statement should have a factor called percent funded, or solvency ratio or something similar. Pensions get under funded for a number of reasons. Declining interest rates over the past decade have caused many pensions to be under funded because with low interest rates, more money is needed now to meet future obligations. If the solvency ratio is 90% then pensioners would get 90% of their full pension in the case of bankruptcy. Fortunately with interest rates this low, they are more likely to go up than down, which helps solvency.

In Ontario the FSCO is a good resource for pension information.
https://www.fsco.gov.on.ca/en/pensions/ ... -Work.html

The Pension Benefits Guarantee Fund is what the other poster referred to:
https://www.fsco.gov.on.ca/en/pensions/ ... .html#PBGF
https://www.milliondollarjourney.com/a- ... e-fund.htm
https://www.torys.com/insights/publicat ... sion-plans
If an Ontario company becomes insolvent the PBGF will top up the pension payments up to $1000 /month. I don't really know the details. It is only for Ontario regulated pensions though. I worked in Ontario for a federally regulated company and the PBGF did not apply.

OSFI regulates pensions in Canada:
http://www.osfi-bsif.gc.ca/Eng/pp-rr/Pages/default.aspx
http://www.osfi-bsif.gc.ca/eng/pp-rr/pp ... db-pd.aspx

Bottom line is pension funds are held separately from other company funds, but if the company goes bankrupt and the solvency ratio is less than 100% the pension payments may be reduced.
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Sep 8, 2007
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Dpack22 wrote: Another reason why I like DC plans better, but I fall into the vast minority that do.
"Vast minority"

Interesting term.
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Mar 16, 2010
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cartfan123 wrote: "Vast minority"

Interesting term.
Pretty much everyone I've talked to about the plans almost immediately says, "isn't DC the bad one?" without even knowing the difference between them.
Jr. Member
Mar 14, 2015
180 posts
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Montreal, QC
Dpack22 wrote: Pretty much everyone I've talked to about the plans almost immediately says, "isn't DC the bad one?" without even knowing the difference between them.
He was pointing out that a minority can't be vast, otherwise it would be considered a majority. correct term should be vast majority.
Jr. Member
Oct 29, 2017
115 posts
14 upvotes
Deepwater wrote: DB pension funds in Canada are held in trust for the pension and cannot be accessed by the company even in the case of bankruptcy. However if a pension gets under-funded for any reason, the company has an obligation, with specific timelines, to get the pension back up to 100% funded. If the company is bankrupt, there is no more company to contribute to get the pension back to fully funded. Your father won't get nothing, but if the pension is underfunded and the company goes bankrupt the pension payment could be cut back, now or some time in the future. But just to reiterate, the funds that are in the pension now are protected and held in trust separate from other company assets.

Is there a pension statement available? A lot of companies issue a pension statement annually to members. The statement should have a factor called percent funded, or solvency ratio or something similar. Pensions get under funded for a number of reasons. Declining interest rates over the past decade have caused many pensions to be under funded because with low interest rates, more money is needed now to meet future obligations. If the solvency ratio is 90% then pensioners would get 90% of their full pension in the case of bankruptcy. Fortunately with interest rates this low, they are more likely to go up than down, which helps solvency.

In Ontario the FSCO is a good resource for pension information.
https://www.fsco.gov.on.ca/en/pensions/ ... -Work.html

The Pension Benefits Guarantee Fund is what the other poster referred to:
https://www.fsco.gov.on.ca/en/pensions/ ... .html#PBGF
https://www.milliondollarjourney.com/a- ... e-fund.htm
https://www.torys.com/insights/publicat ... sion-plans
If an Ontario company becomes insolvent the PBGF will top up the pension payments up to $1000 /month. I don't really know the details. It is only for Ontario regulated pensions though. I worked in Ontario for a federally regulated company and the PBGF did not apply.

OSFI regulates pensions in Canada:
http://www.osfi-bsif.gc.ca/Eng/pp-rr/Pages/default.aspx
http://www.osfi-bsif.gc.ca/eng/pp-rr/pp ... db-pd.aspx

Bottom line is pension funds are held separately from other company funds, but if the company goes bankrupt and the solvency ratio is less than 100% the pension payments may be reduced.
Thank you, I know even my own DB pension with a fortune 500 company is underfunded so I'm pretty sure his will be as well. I haven't looked at his pension statement in a while, but I will certainly take a look.

It is good to see that if the company goes under, he doesn't totally lose out on the pension, it just drops by the amount that it is underfunded which I don't think would be a big impact to him with his other pensions and investments that are now in play.
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lamerveille wrote: He was pointing out that a minority can't be vast, otherwise it would be considered a majority. correct term should be vast majority.
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Mar 9, 2012
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Dpack22 wrote: Another reason why I like DC plans better, but I fall into the vast minority that do.
Nothing wrong with DB's...they simply should be funded 'outside' of the company itself. Take OMERS for example, if my OMERS employer goes tits up, not a big deal, because OMERS is separate from the employer.

The issue with these types of plans, though, is strong union pushing back with any plan changes (namely, contribution amount that can vary year over year). This happens because these types of plans MUST remain liquid at all times. Not gripping, but my DB contribution went up by 50% a few years back over a period of about a year. Employer has to match. So you can imagine that this affect your paycheque in two ways 1) it's lower because you are contributing more, 2) it's also lower because the employer can't afford to give you the raise they may have without the contribution amounts changing.

That said, DB's like OMERS remain liquid. The Ontario Teachers Pension Plan is much the same, very liquid. Wouldn't matter if the school board had to make massive changes, the OTPP is separated from everything else.

I've talked to people who were/on a DB from other companies, company pensions are linked to the company itself a lot of the time. So when things go sour, your DB become at risk.

DC's are great because generally they are completely yours. My dad had a DC and when he died, my mom got the whole thing. It was locked in for a few years, but it was nice to have regardless.
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Oct 21, 2014
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jeff1970 wrote: Nothing wrong with DB's...they simply should be funded 'outside' of the company itself. Take OMERS for example, if my OMERS employer goes tits up, not a big deal, because OMERS is separate from the employer.

The issue with these types of plans, though, is strong union pushing back with any plan changes (namely, contribution amount that can vary year over year). This happens because these types of plans MUST remain liquid at all times. Not gripping, but my DB contribution went up by 50% a few years back over a period of about a year. Employer has to match. So you can imagine that this affect your paycheque in two ways 1) it's lower because you are contributing more, 2) it's also lower because the employer can't afford to give you the raise they may have without the contribution amounts changing.

That said, DB's like OMERS remain liquid. The Ontario Teachers Pension Plan is much the same, very liquid. Wouldn't matter if the school board had to make massive changes, the OTPP is separated from everything else.

I've talked to people who were/on a DB from other companies, company pensions are linked to the company itself a lot of the time. So when things go sour, your DB become at risk.

DC's are great because generally they are completely yours. My dad had a DC and when he died, my mom got the whole thing. It was locked in for a few years, but it was nice to have regardless.
Good points. Your DB can also be all yours if you take the commuted value upon retirement.
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Nov 13, 2013
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Dpack22 wrote: Another reason why I like DC plans better, but I fall into the vast minority that do.
I agree. People get the idea DB are way more generous based on long longevity estimates and discounting the much higher contribution rates. Also don't forget when someone dies mere months after retiring their heirs usually get nothing. (spouses excepted).
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Jul 3, 2017
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fogetmylogin wrote: I agree. People get the idea DB are way more generous based on long longevity estimates and discounting the much higher contribution rates. Also don't forget when someone dies mere months after retiring their heirs usually get nothing. (spouses excepted).
Most commercial companies aren't in the charity business, so if they were doing their calculations correctly all along, the average pension contributions would have been set correctly, and there would be no average difference between DB and DC.

The exception is when there is an outside payer to shake down for the shortfall, i.e., the taxpayer in the case of government plans.
Newbie
Jan 20, 2019
1 posts
Gungnir wrote: Good points. Your DB can also be all yours if you take the commuted value upon retirement.
Best read your statement- most only allow you to take your commuted value if you leave before age 55- after 55, it stays where it is as a DB payout, and you cannot take any value (into a Locked-In plan). Nope.

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