Monday, June 22, 2009

Bankruptcy impact on pension income

The usual thinking is that people can live on a pension if their income is about 80% of what they earned when they were working. This seems reasonable if the kids have grown up, the mortgage has been paid off, and other debts retired. At 80% income, people can make adjustments and live a lifestyle that is much like what they had before.

Since retiring 8 years ago, my income has been at or above the 80% level, and especially during the boom times as the stock market went up. My lifestyle was much as it was before retirement and it was a pleasant life. Then came the market meltdown and my investments took a nose dive. At least my pension income was still proceeding along at the same rate even if my investment returns were negative, and during 2008 it seemed like we would be OK and be able to weather the storm.

Then in January 2009, the company paying my defined pension declared bankruptcy and went into chapter 11. Immediately my income dropped 30%. We had to take stock and I reluctantly had to turn to the savings in my IRA to make up that difference. Luckily we have money in the IRA even though it too had been pounded by the market. As conservative investors we had managed to keep most of the capital but it had suffered close to a 20% drop which was a shock to our system.

After some calculation we went ahead with a new plan to withdraw funds from the IRA to replace the missing pension income. Our total income then returned to the level it was before the bankruptcy but we are prematurely eating into our IRA investments to maintain it.

Part of our other income was also at risk however. Since I had worked for the same firm for 35 years, part in Canada, and part in the US, I was receiving pension from those two subsidiaries. My US pension had ceased immediately since it was considered non-qualified, but my Canadian pension was ongoing. It was being paid out of the pension trust fund.

When the company, Nortel, declared bankruptcy they continued to manage the pension trust funds, however, in spite of government regulations on pension trusts, the funds were woefully under funded.

The best estimates of the pension trust fund showed it was probably only able to support about 60%- 70% of its long term obligations.

So now we face the prospect of another cut in pension income as Nortel liquidates and winds up the pension funds. For the US retirees who are receiving a qualified pension as part of the defined pension plan, there is protection by the PBGC. Unfortunately we don’t qualify for that.

The Canadian pension however, has no insurance protection whatsoever. There is no Canadian PBGC equivalent. As a result our Canadian pension will drop probably by 40% or maybe even as much as 50%. So my pension income in total will be reduced by 50%-60%. Hence I face the prospect of living on about 40% of what I expected as pension income plus the withdrawals from my IRA

This doesn’t seem reasonable at all. After spending so much time and energy helping to build a company and contributing many hours above and beyond what I was getting paid for, my reward is a like a slap in the face. Surely our society is better than that?

Retirees should be treated with more respect than this and pension funds need to be fully protected by all governments. Relying on companies to look after their retiree population is preposterous. It seems that once you are gone, you are forgotten and the ongoing payments become a burden rather than a necessary expense.

Well, I’m sure we will survive somehow, but this lesson needs to be brought forward to make sure the next generation to retire faces some stability in their last years.

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