Is your pension plan going to be able to meet its obligation to you?

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I have written a lot about the brain trust we work with at my office. One major topic we keep coming back to is the weakness in Pension Plans and their obligations. There is more than one way that Pension Plans report their ability to meet their obligations. I have two examples, one from a future retirees point of view and one from a reporting pension plan.

We are running into pension plans pitching their current plan holders to send them more money; one is using buying back past employment as a way to send them more money to manage.

1) I had a call from a client the other day who was approached to “buyback contribution room”. I asked for the numbers that were quoted and found the following:

This client is 12 years from retirement and has a variable GMWB investment. This would have to be cashed in to send money to the pension plan. This particular GMWB is an older one and guarantees the annual payout increases a minimum of 5% (simple interest) a year until income is taken. The payout level is guaranteed for life. This payout guarantee can't decrease, but the guarantee can increase, and stay at this new higher level. My goal is to have the investments grow better than this minimum guarantee, as this will further increase the guaranteed income for life.*

62% higher income than Pension Plan Quote

Here are the results of the comparison to retire at age 65:

Buyback amount at Pension Plan                  $145,412.39

Pension Plan Additional payout                     $599.03 Monthly or $  7,188 Annually

Same investment in the GMWB investment  $969.42 Monthly or $11,633 Annually (this is the minimum guarantee)                                                                                  

Difference          62% higher payout               $370.39 Monthly or $  4,445 Annually

*A GMWB is a very intricate product and you must sit down with one of the few professionals who both understand and offer GMWBs to be properly informed of all guarantees and costs. GMWB offerings change over time. Since this is a contract, once you are invested your guarantees are set for life.

Not only are we concerned about pension plans around the world, we are seeing articles from well respected sources that confirms our concerns. We are ahead of the curve as usual. Here are two links from great sources:

The second link makes a point about the discount rate (the interest rate used in to measure the future of the fund: higher rates than reality makes for more favourable coverage than is reality). This number is an arbitrary measurement that is used very liberally to mask problems.

To me the discount rate is, and always has been, the rate of inflation plus the ten-year federal bond. In Canada that would be 1.3% inflation (July) plus 1.08% (Sept. 2) for the 10 year Canada bond: making the discount rate 2.38%. Many smooth this over a period of time to protect from large short term swings.

A widely considered safe pension plan we recently looked at had their discount rate at 4.80%, helping mask potential shortfalls.

2) There are two major ways I have seen used to measure a pension plan’s health:

a) Ongoing concern: This calculation tries to provide an answer if certain factors are met in the future.  

b) Wind up: This looks at what would happen if no more money was contributed.             

Any pension plans that I can find use their own version of the Ongoing Concern scenario. This makes it hard to compare.

$68.5 Billion - Less in Funding While Borrowing to Invest - This should be the headline

This pension plan, using twice my discount rate expectation, states that it has a funding surplus, but if they met all their obligations they would be at a shortfall (a 22 Billion dollar downward swing). In small print in the investment section we found that they have borrowed 28% ($46.9 Billion) of the net worth of the pension plan to invest more. This significantly increases the risk to the pensioners.

All this while having a high discount rate. It would be much worse with a lower rate.

A fund borrowing this much would be a Hedge Fund in the public realm

You have to know where to look to get these facts. It certainly isn’t in all the pretty pictorials they use to show the story their way. That’s $68.9 Billion hidden behind pop-ups and small print.

This plan has gone from:

10 Active members for every one Retired in 1970 to

4.1 Active for every Retired in 1990 to

1.4 Active/Retired currently. It is expected to go to a

0.9 Active/Retired ratio.

Who is Funding the Future?

The thesis for the original model doesn’t work in today’s world. Who is funding the future? I find it hard to believe their statement of liquidity from just looking at the discount rate and workers to retirees ratio over time, let alone the fact that they are living longer in retirement. As you dig deeper there is much more to know.

It becomes even more unbelievable when they show that they have $3.3 Billion coming in every year and $5.5 Billion going out yet they say the deficit is expected to shrink in the future. This negative spread is expected to grow.

They are hoping investment income will make up the difference. At this time there is more world volatility, market volatility and bonds are at historically low levels. 30% of government debt in the world is paying negative interest rates, that’s not going to help returns.

Protect Yourself

Read your pension reports and ask questions – publicly

Don’t put all of your trust in your Pension Plan. This particular plan states exactly this in its literature.

Save and invest intelligently for yourself

Your Independence Matters

Terry McIntyre is an independent investment advisor with Manulife Securities and can be reached at: 905-896-9060, ext.3838, or website:

This material is not to be construed as an offer or solicitation. The securities mentioned may not necessarily be considered suitable investments for all clients. Contact your Investment Advisor to discuss your individual investment needs.