Retired Money: Is your pension covered by a Pension Guarantee Fund?

My latest MoneySense Retired Money column just went up and covers the subject of  a Pension Guarantee Fund for employer-sponsored Defined Benefit pension plans. The United States and United Kingdom both have versions of these but as the piece points out, the only Canadian province to have one is Ontario.

Click on the highlighted headline to access the full article: What to know about the Pension Benefits Guarantee Fund.

Earlier this year, the Ontario Government announced that its Ontario Pension Benefits Guarantee Fund (PBGF for short) was boosting the amount of guaranteed pension (should a plan go bust) from the previous $1,000 a month to $1,500 a month. But as I point out, depending on how a plan is funded, because of partial payouts in the case of plan insolvency, this actually means pensioners are protected for somewhat more than $1,500 a month.

So, according to my sources, in the case of a pension fund that’s 50% funded on windup because of a bankrupt plan sponsor, someone with a $3,000 monthly pension would receive $1,500 from the funded part of the $3,000 pension, plus $750 from the PBGF, which tops up the unfunded part of the first half of the pension.

Established in 1980, Ontario’s PBGF covers more than 1,500 DB plans and 1.1 million members in the province. Participation is mandatory for most DB plans registered in Ontario. As the article notes, the amount of protection is somewhat less than in the US and UK: the US one covers a whopping $5,000 a month. Even so, $1,500 a month sure beats the non-existent guarantees of the other nine Canadian provinces.

What if your pension is not covered by a PBGF?

One source in the article suggests that those in pension plans carefully scrutinize the solvency of their employers’ plans. And if you’re in a DB plan and don’t have any PBGF, you might consider taking the commuted value and rolling it into an RRSP or equivalent vehicle, where you’d have more control over the fate of your retirement funds.

As I note in the piece, I am myself an Ontario resident and receive two modest employer DB pensions. And while they may not be the most solid plans in the world, the Ontario PBGF does provide some comfort. Investors already take a lot of risk in investing their RRSPs, RRIFs, TFSAs and non-registered investments and it’s nice to have a portion of your funds in what York University finance guru and author Moshe Milevsky calls a “real pension.” That is, a pension that’s guaranteed to pay out for as long as you live, no matter how markets do.

Government pensions and pensioning your nest egg

Perhaps not inflation-indexed like members of some union-backed pensions and most government workers but with DB pensions being increasingly rare, their virtues are not something to minimize. Keep in mind that the Canada Pension Plan (CPP) and Old Age Security (OAS), or the equivalent Social Security in the United States, are all inflation-indexed pensions that behave like Defined Benefit pensions. Those who lack an employer plan may want to consider deferring benefits of either CPP/OAS or Social Security until age 70 in order to boost monthly payouts.

A combination of such government programs AND an employer DB plan backed by a Pension Guaranty Fund should provide a measure of security. If you lack much in the way of these kind of vehicles, keep in mind that you can always annuitize some of your investments, a strategy outlined in Moshe Milevsky’s excellent book, Pensionize Your Nest Egg.


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