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Retirement, Pensions and Bankruptcy in Canada: The Future Is Up To You

There were three interesting stories in the press this week about pensions and bankruptcy in Canada.

On Wednesday the CBC ran a story on how the Liberals vow to change bankruptcy laws. Here’s a quote from the story:

The Liberal Party says it is committed to changing Canadian bankruptcy laws so former employees of failed companies like Nortel don’t lose their pensions and disability benefits when their employer goes bust.

“You gotta know that I’m hearing you loud and clear — the Bankruptcy Act must be changed,” Liberal Leader Michael Ignatieff told Nortel pensioners at a rally on Parliament Hill Wednesday.

Ignatieff said his party will be meeting Monday to discuss new proposals for the pension system. Liberals are committed to changing bankruptcy laws “so that you are not left at the back of queue in insolvency and bankruptcy,” Ignatieff said. “It’s not right; we agree with you.”

The basic point being made by Mr. Ignatieff is that it’s possible for a company to go bankrupt, and as a result workers can lose their pensions. He uses Nortel as an example, a once proud Canadian company that is now bankrupt.

The second story was written by David Olive, in the Toronto Star, and he took the opposite view: Pension Crisis: Not So Fast. He makes the point that Canadians have many sources of retirement income, including company pensions, and the Canada Pension Plan, and RRSPs. Outside experts have determined, in fact, that Canadians have pension protection as good or better than anyone else in the world.

In the third story the Globe and Mail discusses the Illusion of Pension Security in Canada, and makes the point that only 30% of Canadians have employer sponsored defined benefit pensions, so the “pension crisis” is nothing new.

So which view is correct? Should Canada’s bankruptcy laws be changed, or are we on the right track?

Unfortunately for Mr. Ignatieff, changing Canada’s bankruptcy laws is not a practical solution. First, as readers of this weekly column are very well aware, Canada’s bankruptcy laws were amended back in 2005, and 2007, but the final changes did not come into force until September 18, 2009. You can read all about the new rules in our posts on the new bankruptcy rules in Canada. Given the speed the government has worked in the past, if he wanted to make changes, it would be years before any changes were implemented.

Second, changing the bankruptcy laws misses the point. First, if only 30% of Canadians have a pension plan through work, that means most of us don’t have one, so changing rules to protect something we don’t have serves no purpose. In addition, the employee’s pension plan is not an asset of the company. It is a separate fund, entirely for the benefit of the employees. When a company goes bankrupt it’s assets are liquidated, and the proceeds go to the creditors. The pension is not liquidated; it’s not part of the company’s assets.

In simple terms, each pay period the company contributes money to a separate fund, and it is that fund used to fund the employees retirement. The best way to protect an employee’s pension is to protect the fund. The government should enforce rules to ensure that pension plans are adequately funded. If they are, even if the company goes bankrupt, the money will be in a separate fund to continue to pay retirement benefits to the employees.

The answer, then, is not to change bankruptcy laws, but instead to ensure pensions are properly funded. That can be done by enforcing the existing rules.

I’m not opposed to changing bankruptcy rules. Unfortunately, when a company goes bankrupt, there is usually very little money to distribute, so even if the pension plan got whatever money was available, it may not be enough. So, changing the bankruptcy rules would offer little protection to workers. Enforcing existing rules to ensure that pensions are fully funded is a more logical solution.

Even more important, however, is that you must look out for yourself. Every day I meet with people in financial trouble, and I give all of them the same advice: I can show you how a consumer proposal or a personal bankruptcy will deal with your debts, but only you can adjust your spending or increase your income so that you don’t have debt problems in the future.

The same advice applies to your pension. You can rely entirely on your employer, or the government, to take care of you when you retire. Or, you can take some of the responsibility yourself. If you were to start at the age of 35 and put $200 per month in a savings account, you would contribute $72,000 to your savings account by age 65. If you contributed that money to an RRSP, and re-invested your tax refund each year, and if you earned interest on your savings, you could easily have a quarter of a million dollars, or more, by the time you retire. But that’s up to you. You have to decide to save $200 per month; no-one else will do it for you.

I realize that some people simply cannot save $200 per month. Some can save more, some can save less. But when you calculate how much you spend on coffee, or fast food, or smokes, most people can find a few dollars each month to save. (There are lots of great money saving tips on the internet to give you ideas).

But what about you? Should you rely on the government to fund your retirement? No, you should rely on yourself.

The maximum benefit paid by the Canada Pension Plan at age 65 is $908.75 per month. If CPP will be your only source of income when you retire, and if your living expenses are more than $908 per month, you will have a problem.

My advice? Make a decision, right now, to plan for your retirement. Here’s what you should do:

1 Start by making a personal budget. Make a list of what you spend each month, and decide what expenses you can cut to increase your savings.

2 Eliminate your debts. There is no point in putting money in a savings account earning 1% interest if you are paying 20% interest on your outstanding credit card balance. Review your debt management options, and make a plan to start dealing with them. You may be able to deal with your debts on your own, or you may need to file a consumer proposal or personal bankruptcy to get a fresh start. Regardless of the solution, the sooner you start, the sooner you will have a solution to your money problems.

3 Start saving. Once you know what you spend, and you have eliminated your debts, you can start a savings plan. The sooner you start, the more you will save. Set up two bank accounts: one for purchases you need to make within the next year (such as for Christmas, or car repairs), and the other will be long term savings for the future (for your children’s education, or to buy a house, or to fund your retirement).

If you decide that your future is up to you, you can start making positive changes now, and you won’t have to rely on the government changing bankruptcy laws in the future to protect your retirement.

5 Responses to “Retirement, Pensions and Bankruptcy in Canada: The Future Is Up To You”

Bill B said...

Great for today’s logic, but they are dealing with people that started working during the 40’s and 50’s, some for less than $2.00 per hour and before all these savings plans ,at that time the prescribed pension was part of your salary, so don’t try to give us digital TV’s when most of the labor force was just getting used to radio

c awadia said...

Let me give you a different view. I am nortel person who has pension and is currently on serious disability.
I paid into disability plan at Nortel for over 10 years and then went on LTD. I was never told my disability plan
was self insured now under Bankruptcy I am about to loose 90% of my already 50% cut disability
income. There is no protection for people on disability income under bankrupcy. Now I am told i might have to live on about 5K a YEAR with no benefits. How is this fair?

Mr. Ignatieff, Mr.Layton, Mr. Duceppe all understand our situation and fully support amendment for company disabled workers as secure status. As for your comment about Companies have no money in bankruptcy . Nortel had 2 BILLION in case before filing for Bankruptcy, currently Nortel has about 7 BILLION in cash. In Bankruptcy the courts agreed to 40 million dollar bonuses for managers who as the same ones who brought the company to the ground. The same time they layed off thousands without severance on the street. How is this fair?

I refer you to this article which pretty well summarizes our crisis:

Philip Slayton, author and former dean of law at the University of Western Ontario, says the problem is further compounded by the way assets are divvied up in a bankruptcy. He thinks that pensioners should go to the front of the line, but in Canada pensioners have to ?ght it out with everyone else. The result is that pensioners and disabled former employees can end up battling the high-priced lawyers and accountants hired by big banks to get what’s owed to them, a situation Slayton calls “fundamentally unfair.” Mark Zigler, managing partner at Toronto law ?rm Koskie Minsky, which is representing ex-Nortel workers, says the situation for disabled employees is especially dire. Canadian companies could be compelled to get third-party insurance to back up their long-term disability programs, but instead, corporations are allowed to self-insure. This means that employees who thought they were getting their disability payments through a big, safe insurance company can end that their benefits suddenly evaporate when the company they worked for goes bankrupt.

Anonymous said...

The collapse of Nortel is neither the first nor the last time that corporate bankruptcy in Canada will throw the most vulnerable into poverty. We saw it with Eaton’s and Massey Ferguson. In the unsteady economy we face, we are likely to see it again soon.

Gary McCaig said...

You advise Canadians to not depend on their company pension but to save in RRSP’s.
Surely as a person handing out this kind of financial advice you must be aware that if you belong to a company sponsered defined benefit plan your RRSP room is reduced – often to zero. In my working career I paid well over $100,000 extra income tax because I could not claim an RRSP deduction for my savings.
I also take issue with your comment that something that will help only 30% of workers is not worth doing. That is a stupid comment and one you would not be making if you were in the 30%

A Licensed Trustee said...

I didn’t expect this column would touch such a nerve. Let me restate my basic point:

You can’t expect your company, or the government, to take care of you. You have to take care of yourself.

That may mean you should put money aside in an RRSP. Yes, I understand that if you are a member of a defined benefit pension plan your RRSP contribution room is reduced by the amount contributed to your pension plan, so you probably won’t have both a pension plan and an RRSP. But that doesn’t mean you can’t also pay off your debt so you are debt free when you retire (which keeps your living costs low), and it doesn’t mean you can’t also save money outside of an RRSP.

I didn’t say that pension plans were stupid. Obviously if there is a pension plan where you work, you will be enrolled in it, and you should take advantage of it. My point is that you should not assume the pension will actually be there for you when you retire. As recent events have shown, pension plans can get in to trouble.

I agree that high rates of government taxation make it harder to save money for retirement. I also agree that it is unfair that someone who started work in the 1940’s and 1950’s may be disadvantaged today due to the pension crisis. Fortunately someone who was 20 years old in 1940 is 89 years old today, so hopefully during that time they managed to save some money (back when taxes were low). But yes, it is a crisis if you are now retired and your promised pension is not there.

Finally, my point on bankruptcies and pensions is this: the pension should NOT be part of the company’s assets. The pension should be a separate fund, separate from the company, so that the company cannot “dip into” the fund when they want money. The stock market was booming a few years ago, so companies like Nortel said “great, we can stop putting money in, or even take money out, since the stock market will go up forever.” Recent events have proven that to not be the case. A separate fund would protect those funds in a bankruptcy. That doesn’t require a change in our laws; it requires our existing laws to be enforced.