Personal Finance

Are private sector Defined Benefit Pension Plans basically legalized Ponzi schemes?

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  • Jul 17th, 2017 9:40 am
[OP]
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Are private sector Defined Benefit Pension Plans basically legalized Ponzi schemes?

Whether it be Sears Canada now or the big 3 automakers during the 2008 financial crisis, I've never heard of a single one outside of the government (which, of course, can always raise taxes to cover any actuarial failures) that was fully funded and managed to deliver on the promised benefits independently from the parent company.
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Dec 5, 2015
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Raident wrote:
Jul 16th, 2017 3:01 am
Whether it be Sears Canada now or the big 3 automakers during the 2008 financial crisis, I've never heard of a single one outside of the government (which, of course, can always raise taxes to cover any actuarial failures) that was fully funded and managed to deliver on the promised benefits independently from the parent company.
No

You only hear about the ones underfunded since it's news...many are fully funded...why would you hear about those?

The big banks, telcos etc all have db plans that are funded
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Here is an article reviewing the 100 largest pension plans accross Canada. Mind you it is mixed with public sector ones, but you will see some private names as well.

http://www.benefitscanada.com/pensions/ ... enda-83468
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all monies should be held in trust ( I would think this is already happening)
and all companies who offer such a plan should be required to be no more then 5% out on contributions each quarter, so if the company goes under, the plan has 95% of the money to cover its liabilities.
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rocking23nf wrote:
Jul 16th, 2017 11:00 am
all monies should be held in trust ( I would think this is already happening)
and all companies who offer such a plan should be required to be no more then 5% out on contributions each quarter, so if the company goes under, the plan has 95% of the money to cover its liabilities.
Pension regulators are far ahead of you.

When a pension plan is set up, there is a pension administrator, and money is irrevocably contributed to the pension plan for the exclusive use of the pensioners and can't be used for anything else. As a result, pensioners tend to do pretty well if the company goes bankrupt.

Most pension plans are somewhat under funded (and there are legal restrictions as to how underfunded they can be), so it is only that small underfunding that is at risk in bankruptcy.
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Raident wrote:
Jul 16th, 2017 3:01 am
Whether it be Sears Canada now or the big 3 automakers during the 2008 financial crisis, I've never heard of a single one outside of the government (which, of course, can always raise taxes to cover any actuarial failures) that was fully funded and managed to deliver on the promised benefits independently from the parent company.
it's fine, the managers are key personnel are still getting a bonus
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Raident wrote:
Jul 16th, 2017 3:01 am
Whether it be Sears Canada now or the big 3 automakers during the 2008 financial crisis, I've never heard of a single one outside of the government (which, of course, can always raise taxes to cover any actuarial failures) that was fully funded and managed to deliver on the promised benefits independently from the parent company.
Here are some links I posted in another thread about this:
http://business.financialpost.com/perso ... 71bdc82061
http://www.cbc.ca/news/canada/ottawa/no ... -1.3804516

In Ontario Nortel pensioners received millions of dollars from the government's pension guarantee fund but still saw their pensions cut to 60 per cent of their original amount, with other benefits like health insurance eventually cut off, according to Meunier.

The new agreement would top up Ontario recipients to more than 90 per cent of their original pensions.
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rocking23nf wrote:
Jul 16th, 2017 11:00 am
all monies should be held in trust ( I would think this is already happening)
and all companies who offer such a plan should be required to be no more then 5% out on contributions each quarter, so if the company goes under, the plan has 95% of the money to cover its liabilities.
M8Rxmjsik wrote:
Jul 16th, 2017 12:47 pm
Pension regulators are far ahead of you.

When a pension plan is set up, there is a pension administrator, and money is irrevocably contributed to the pension plan for the exclusive use of the pensioners and can't be used for anything else. As a result, pensioners tend to do pretty well if the company goes bankrupt.

Most pension plans are somewhat under funded (and there are legal restrictions as to how underfunded they can be), so it is only that small underfunding that is at risk in bankruptcy.
I didn't know about this part of the regulations.
The biggest pension mess seems to be nortel. So does that mean all those pensioners get at least 95%?
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TrevorK wrote:
Jul 16th, 2017 3:12 pm
Here are some links I posted in another thread about this:
http://business.financialpost.com/perso ... 71bdc82061
http://www.cbc.ca/news/canada/ottawa/no ... -1.3804516

In Ontario Nortel pensioners received millions of dollars from the government's pension guarantee fund but still saw their pensions cut to 60 per cent of their original amount, with other benefits like health insurance eventually cut off, according to Meunier.

The new agreement would top up Ontario recipients to more than 90 per cent of their original pensions.
While I'm happy to hear that Nortel pensioners in Ontario are finally receiving what they're due, if I'm understanding correctly, the article says that under the settlement, 50% of their pensions are coming from Ontario government coffers, and only 40% will be coming from (what's left of) the pension plan. Which would make Nortel's pension plan the very embodiment of a Ponzi scheme - those who collected their pensions in past decades and passed away before 2009 clearly did better than those who are still alive today, and all without having to be bailed out by taxpayer money.

Had Nortel's pension plan not been a Ponzi scheme, then this lawsuit would never have happened in the first place as the pension plan would have had no trouble paying 100 cents on the dollar to every single pensioner whether it be back in 2009 when Nortel went backrupt or today or even in the far future on the day the last former Nortel employee passes away.
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rocking23nf wrote:
Jul 16th, 2017 11:00 am
all monies should be held in trust ( I would think this is already happening)
and all companies who offer such a plan should be required to be no more then 5% out on contributions each quarter, so if the company goes under, the plan has 95% of the money to cover its liabilities.
Sponsors can't control interest rates or investments, so I'm not sure where you got the 5% number.

The Canada Post plan is something like $6B short.
[OP]
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taxrage wrote:
Jul 16th, 2017 9:09 pm
Sponsors can't control interest rates or investments, so I'm not sure where you got the 5% number.

The Canada Post plan is something like $6B short.
I think rocking23nf was implying that if a pension plan falls below 95% funded, regardless of how it happened, then the company should be forced by law to immediately make up for the shortfall using whatever means possible. Or in other words, if a company chooses to provide its employees with a defined benefit plan, then they should be ready to accept that pensions always come before profits.

Of course, in tough economic times like 2008 when stocks suffer a 40% tumble, it might mean pensions before survival as an otherwise healthy company might have to liquidate itself in order to shore up a pension that just lost 40% of its value. So I'm not sure how I feel about this, but then again, I'm leery of defined benefit plans in the first place.
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Raident wrote:
Jul 16th, 2017 6:41 pm
While I'm happy to hear that Nortel pensioners in Ontario are finally receiving what they're due, if I'm understanding correctly, the article says that under the settlement, 50% of their pensions are coming from Ontario government coffers, and only 40% will be coming from (what's left of) the pension plan. Which would make Nortel's pension plan the very embodiment of a Ponzi scheme - those who collected their pensions in past decades and passed away before 2009 clearly did better than those who are still alive today, and all without having to be bailed out by taxpayer money.

Had Nortel's pension plan not been a Ponzi scheme, then this lawsuit would never have happened in the first place as the pension plan would have had no trouble paying 100 cents on the dollar to every single pensioner whether it be back in 2009 when Nortel went backrupt or today or even in the far future on the day the last former Nortel employee passes away.
Have you looked at the reasons why Nortel was unable to pay 100% of their pension debt?

It seems a stretch to call it a ponzi scheme if you have not done any basic research into the situation. Once you have an understanding of the situation you would be in a better position to state whether it is or is not a ponzi scheme.
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The thing to remember with these corporations is that their ability to fund pensions is only as good as their financial capability. So the ones you see struggling are the companies that are suffering like Sears, Nortel or Canada Post. This in itself is not a ponzi scheme or constitutes fraud. Rather, the company ran out of money to contribute to it. A ponzi scheme is blatant fraud using initially collected money to pay back returns to make the scam look legit. A company should generally produce profits that allow them to pay out this pension benefit to their employees. That's where Sears and Nortel failed at: making a profit.

It is true that hearing about managers getting bonuses doesnt make for good optics. If people are being laid off, why are managers who played a part of a business's demise gettIng a bonus? The thing is that it is the managers and higher ups that are required to Implement new strategies to try to return profitability or in the worst case, recoved as much money in a liquidity situation. While it is sad to see a cashier or stock person lose their jobs, they do not possess any specialized skill required in a turnaround.

One thing lost on this is that not just employees are the ones losing their jobs and benefits, but creditors to the companies are as well. Sure we may think mostly large banks or investment dealers, but this can Include the responsible mom and pop investor putting away money and had some of their savings in Sears Canada bonds or stock.

The thIng is many defined benefit plans while amazing in their benefits come with that risk in that they are only as safe as the entity backing them. That doesnt constitute a scam. It isnt impossible either for pensions to recover. Take Air Canada where only a few years ago, their pension was at a multiple billion dollar deficit only to now be sitting at a surplus today by turning around it's busIness. Even governments are struggling to keep up. Countries like Australia or Chile who have national pensions that force employees to contribute to an investment fund of their choice have done better and have lower deficits due to this reduced liability. Canada, in 2001, switching the CPP to an arm's length of the government coffers and invested separately has also reduced this liability as well. Japan and the US where pension contributions are treated like general revenue (Japan has recently changed this) are where the national pensions are severely underfunded. US social security technically holds US Bonds in theory, but in reality is just an accounting notation and is treated like general tax revenue. The underfunded liability for the US Social Security is one of the largest potential liability for the US treasury.

In this day in age with demographics, the math of defIned benefit pensions are difficult to support. Either the benefits must decrease or the contributions must be defIned. I think people who take comfort in having a defined benefit plan should be made aware of this risk and still save accordingly. Of course, most people are not made aware, let alone have the financial literacy to realize this risk.

So no, private pension plans are not ponzi schemes. Just that people need to understand that they are only as good as the companies sponsoring them and that their is always a risk of a business goIng bankrupt.
Last edited by xgbsSS on Jul 16th, 2017 10:49 pm, edited 1 time in total.
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[OP]
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Nearly every company will fail someday - according to Wikipedia, there are only ~5,500 companies that are over 200 years old, the majority of which are small family businesses in Japan where the company's history is closely intertwined with the family's lineage.

Of course, no company is run with the intention of going bankrupt, but in a capitalistic society where time is nearly infinite, it's pretty much an inevitable end result. Sears, for instance, topped the Fortune 500 list back in the 1970s - who would've imagined that it would end up in such a pathetic state? Nonetheless, the lack of acknowledgement of this inevitability that makes me wonder if these pensions are Ponzi schemes.

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