Most pensions today are running a deficit due to the low-interest-rate environment. But don’t focus solely on funding levels. You most need to worry about your pension when an insolvent employer is winding up a plan that’s in deficit, says Scott Clausen, professional leader for Canada for retirement, risk and finance at Mercer. “You need a combination of those two things for the plan to be at risk.”
Even if the plan is wound up, the employer would still fund the deficit, Clausen says. More important is the health of your employer: is it teetering on insolvency or in a dying industry? “Pension risks are likely higher at a company that is in a precarious financial situation with a small pension deficit than at a financially strong employer with a large pension deficit,” he says.
Some provinces have safeguards to protect pensioners when plans are wound up with deficits: in Ontario, for instance, the Pension Benefits Guarantee Fund would step in. “But there are limitations and exclusions,” says Clausen. For instance, the PBGF doesn’t cover any plan improvements in the last five years, and benefits above $1,000 a month aren’t covered.
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