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By Adrian Mastracci
Published in Canadian Treasurer
Special Section: Pensions
December 2005 / January 2006 Issue
Much has been said recently about potential shortfalls looming for some company pension plans. The most recent is a US$9.8 billion underfunding of the United Airlines pension, which is being transferred to the Pension Benefit Guaranty Corporation. In other words, US taxpayers get to pony up some more tax dollars to bail out an under-performing pension fund.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Pension plan shortfalls present a worrisome hazard, especially for retirees.”
Other concerns in the last couple of years have involved pension funds at IBM and General Motors. Some Canadian companies are also making headlines with their pension plans.
While nobody has a precise grip on the scope of the shortfalls, it has become a worrisome pit. Investors are very aware that someone has to pay for the plans’ shortcomings.
The various reports raise important pension issues that many investors, consumers and retirees have yet to fully appreciate. These problems can affect both private and public pensions.
Unfunded pension liabilities could become a serious concern. The companies, the affected parties, their advisers and the regulators require a workable game plan. Even the public can assist.
Pension issues are dear to many. And, of course, to many of my clients, who frequently seek advice on a variety of pension situations.
Dealing with pensions means making decisions that are usually not reversible. Notable pension events occur when:
1. A choice is presented to join a pension plan.
2. An early-retirement opportunity is offered.
3. A choice is to be made at normal retirement time.
4. A pension value is transferred a to a registered account.
5. A pension value is transferred a to a new employer.
6. An opportunity exists to buy back past pension service.
Pension income has always been an important part of the retirement puzzle. However, the current debate on pension shortfalls rattles some of the pillars and assumptions of retirement planning.
The ideal scenario is a robust stock market, a reasonable return on bonds and a growing economic climate. However, while we wait for that combination, it is best that the affected companies remain profitable for as long as possible.
There are only so many precious corporate earning dollars. Funding pension shortfalls will require some. Patient shareholders also want some.
The public can help by giving more thought to spending patterns when they make consumer choices. As an example, buying the widget made domestically ultimately supports that company's pension plan. Buying the imported widget helps the offshore pension plan.
At the same time, companies have to ensure that consumers favour their homegrown products and services over other solutions. That message has to reach all companies and consumers.
The resourceful companies that pay special attention to this dilemma will be more successful. The resulting improvements in corporate profitability will make it easier to deal with their pension commitments.
Pension plans continue to be an integral part of many retirement plans. Some rely on the pension plan to provide a significant portion of the retirement income.
As a matter of course, I discuss the pension ramifications with each of my clients. I ask what would happen to their retirement plan if the expected pension receipt was reduced by 25% to 50%. A disturbing thought indeed, but one that all pension plan members need to consider.
In fact, every member of a pension plan should become more informed on its funding issues. They should ask themselves what can be done to improve their plan’s future prospects.
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