Pension Plan Security

Question: I plan to retire in a few years. If my employer goes bankrupt, what happens to my pension?

Answer: Pension plans generally will be one of two types: a De- fined Benefit Pension Plan (DB Pension) or a Defined Contribution Pension Plan (DC Pension).

DB Pension Plans specify retirement income. The amount of pension income is set by a predetermined formula that is either a percentage of the employee’s average annual income or as a fixed dollar amount per year of employment.

DB Pension Plans are funded by employee/employer contributions and earnings on invested as- sets. DB Pension Plans are obligated to pay benefits to both present and future retirees including any survivor benefits to spouses. Actuarial calculations determine the amount of money the plan should have invested to meet both its current and future payment obligations after accounting for both investment income earned and employer/employee contributions. These actuarial calculations are based on assumptions such as life expectancies of present and future pensioners, earnings on investments and the continuation of the employer’s business. A DB Pension Plan is in surplus if it has more than enough to meet its current and future obligations. It is in deficit if it has too little.

A DC Pension Plan does not guarantee any specific retirement income. DC Pension Plans require employer and/or employee contributions in fixed amounts according to employee income or employment position. On retirement, the total of these contributions plus investment returns on them accumulated over the period of employment are paid as a lump sum to purchase an annuity or are deposited into a Registered Retirement Income Fund or a Registered Retirement Savings Plan of the employee.

DB Pension Plan assets are not available to an employer’s trustee—in—bankruptcy and are safe from the employer’s creditors. A pension plan is a claimant in the bankruptcy of the employer and shares in its assets with other creditors in accordance with priorities established by the Bankruptcy and Insolvency Act (Canada) (BLA). Under the BIA, pensions have priority over some, but not all creditors to recover required but unpaid employer contributions. However, these contributions may not be recoverable if there are insufficient assets in the bankruptcy. Most other pension claims rank only as unsecured claims and may not be paid at all.

In either case, if an employer goes bankrupt, the pension plan will be wound up. A DC Plan pensioner who retired before bankruptcy will be unaffected. However, those employees with a DC Plan pension who have lost their jobs because of the bankruptcy will receive less than if they had worked to retirement. DB Plan pensioners may receive reduced pension payments because of the termination of continuing employer/employee contributions as well as any reduction in earnings on investments. Pensioners with plans in deficit are vulnerable to pension reductions. Current employees will not get what they expected because they will not have worked long enough to draw a full pension.

Ontario is the only Canadian jurisdiction having a Pension Benefits Guarantee Fund (PBGF). This fund pays the pensioner the lesser of the amount needed to top up a monthly pension to the required amount, or $1000. However, the PBGF is presently in deficit and the government may choose not to continue it, especially if there are significant claims!

Pensions are complex. Contact your pension administrator, union, MPP and Financial Services Commission of Ontario about your particular plan.

“The key to a happy retirement is to have enough money to live on but not enough to worry about.”

The foregoing is not legal advice and is not to be relied upon by the reader for any purpose. Readers are advised to seek legal advice from their own lawyer  for any specific legal questions. Neither the author nor the publisher accept any responsibility for reliance placed by the reader on the contents of this article and no representation or warranty is given as to accuracy or completeness.