Thursday, 6 July 2017

Another reason why you should opt for commuted value payment from Defined Benefit Pension plan

As I reiterated before, it is best to receive lump sum payment or commuted value (CV) from the defined benefit plan when you leave the company and invest in annuity. Note that there are some taxable events to consider. Sears Canada, which filed for bankruptcy protection, recently filed a motion with the courts to suspend certain monthly payments to its pension plan and post-retirement health and life insurance benefits, citing cash constraints. At stake is $3.7 million worth of cash payments to various DB plans, postretirement health and benefit plans.
Such issues are not uncommon. U.S. Steel Canada in Hamilton, Ontario filed similar motion with the courts to reduce pension and other benefit payments. Nortel Network, which has long been bankrupt, recently resolved its pension payment issue, resulting in a huge reduction of benefits to pensioners.
Just so you know, and I repeat, DB pension payments, despite being ‘guaranteed’ are not truly guaranteed.  If a company defaults on its payments to pensioners, the Pension Benefit Guaranty Fund (PBGF) essentially guarantees pension payment up to $1,500 (assuming the latest pension reform). If you are entitled to $5,000 a month payment, and the company that you worked work declared bankrupt, you may only get $1,500 from PBGF, thus losing $3,500.

FYI, the $1,500 a month that you finally receive after months or years waiting are also essentially a return of principle in most cases. Recall that you have been contributing approximately 5% of your pay into the pension plan each year. Assuming your average pay over the years was $100,000 and you have worked 40 years, and the rate of return was 6%, you would have accumulated almost $800,000 by the time you retired. And if you have invested $800,000 purchasing an annuity with an insurer, you would have received a monthly income of $4,000 a month - GUARANTEED. This is because ASSURIS ,which acts as an insurance fund, guarantees the higher of $2,000 of the amount or 85% of the promised benefits. 

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