In these unpredictable economic times, it’s not hard to imagine large corporations going bankrupt or becoming insolvent. In fact, we don’t need to imagine it – we can turn to examples such as Sears Canada, who cut their pensions by 30%, or look over the border at the bankruptcy of major automotive brands or airlines such as American Airlines who recently filed for Chapter 11 bankruptcy.
If you’re an employee of a large corporation with a pension plan, should you be worried if the company goes bankrupt or is shut down? Absolutely. No company is immune to economic downturn or recessions, and leaving your pension with the company is risking your retirement future by betting on the health of the company long after you’ve left it.
What protections do you have?
Will your retirement pension fund that you’ve been paying into vanish, leaving you hanging out to dry?
Fortunately, as a Canadian employee, there are some safeguards in place at the Federal level to protect your pension through The Pension Benefits Standards Act of 1985.
Administered by the Superintendent of Financial Services appointed by the Financial Services Commission of Ontario, The Pension Benefits Act puts certain rules in place to regulate registered pension plans in Canada. Among those rules, there are requirements such as:
- Requiring all pension plans in Ontario to be registered with the Superintendent.
- Requiring that they have an administrator put in place, such as a board of trustees or pension committee, to manage the affairs of the plan.
- Requiring that the plan has sufficient funding to provide the benefits that have been committed under it “in accordance with the prescribed tests and standards for solvency”.
The Pension Benefits Act stipulates how pensions should be handled in the event of “Termination and Winding-up of Pension Plans”, and also provides employers with the ability to elect to enter into a “distressed pension plan workout scheme”. In both cases, your pension is not guaranteed to be 100% secured, and the Superintendent could cut back your pension.
In the province of Ontario specifically, reforms were passed in 2010 to strengthen pension funding rules. Ontario regulates over 8,000 employment pension plans (approximately 40% of all registered pension plans in Canada).
Unfortunately, the Federal protections alone, even with the reforms, aren’t always enough to protect your pension if you leave it with your employer.
We saw this in the case of Sears Canada. In the United States, Sears Holding Corp.’s American employees saw better protection than Canadians. The U.S.’s Pension Benefit Guaranty Corp. protected the American employees while Canadian employees got the short end of the stick and saw benefits cut by a massive 30%. Canadian Sears’ pensioners also lost their medical and dental benefits.
Sears Canada serves as a cautionary tale to employees who leave their pensions with their employer.
Moving Your Pension To A Financial Institution
This is where a copycat annuity comes into play.
Whether you are retiring or being terminated, the copycat or mirror annuity allows you to receive the same pension from a Canadian insurer that your employer promised you.
Canadian insurance companies such as Canada Life (formerly Great-West Life) and Sun Life Financial have been around for over a hundred years. Canada Life is approaching 130 years in business, and Sun Life have a history spanning back to 1865. These are Canadian institutions that aren’t going anywhere any time soon.
Besides a long, stable history, Canadian insurers also bring other advantages to the table such as:
- Pensions and life insurance is their primary business. It’s what they do, and they do it really well.
- They manage a lot of money. For example, Sun Life has over CAD$1 trillion in assets under management operating in a number of countries. Your employer simply doesn’t have the same scale or assets under management as a financial institution.
- Widely diversified investment portfolio with diversified global operations.
- Prudent capital and risk management.
- A proven and successful track record in Canada.
- They are Canadian, unlike some large employers who may have factories and operations in Canada but are really run by their headquarters in the U.S. or other countries.
What Happens If The Insurer Goes Bankrupt?
In the highly unlikely event that a large Canadian insurer goes bankrupt, there are additional protections and safeguards you can put in place to guarantee your retirement income.
This is done through Assuris.
Founded in 1990, Assuris is a not-for-profit organization that protects Canadian policyholders in the event that their life insurance company should fail. Through Assuris, your income is 100% protected up to $2,000 per month. If your income is over $2,000 per month, they protect your annuity policy by guaranteeing that you will retain at least 85% of your monthly income benefit.
They are currently protecting over 60 member companies (including Canada Life, Sun Life, Desjardins).
With your annuity being underwritten by Assuris, you can have peace of mind that if your insurer fails, your Payout Annuity policy will be transferred to a solvent company.
What If My Bank Fails?
Imagine you’re in retirement, with your pension income being deposited into your bank account each month. What happens if your bank closes it’s doors tomorrow? What happens to all your savings that you’ve deposited into your savings account?
Compared to the United States (which has seen over 560 banks fail since October 1, 2000), the banking industry in Canada is very strong.
The Canada Deposit Insurance Corporation (CDIC) is a Canadian federal Crown Corporation created by Parliament in 1967 to provide deposit insurance to depositors in Canadian commercial banks and savings institutions. The CDIC ensures that your eligible deposits are protected if your bank fails. You’re protected for up to $100,000 of cash and term deposits, such as Guaranteed Investment Certificates (GICs), held in a registered retirement income fund.
Summary
As you can see, you have various different safeguards put in place to protect your pension retirement income when you retire. When you leave your pension with your employer, it has some Federal protections, however, it can beneficial to move your pension to a Canadian insurer with a proven track record to help de-risk your retirement income and lower the chances of seeing a pension cut due to your employer going bankrupt.
The team at Pension Solutions Canada specializes in helping individuals prepare for retirement and protect their assets. Let us review your pension and retirement plan. If your pension is currently with your employer, we can walk you through the steps of moving it out of the company through a copycat annuity with a larger insurer such as Canada Life or Sun Life. We’ll also help you with estate planning, address tax minimization, and answer all of your retirement questions.
Call us at 1-888-554-6661 to get started. Our services are no cost to you.
