Monday, September 20, 2010

Canadian pension annuity or FSM

With only 10 days before Nortel hands over the administration of the Nortel Canada pension plan to Ontario administrators, it is still unclear if there is any other option than to accept annuities at this the worst possible time in 25 years for buying an annuity.

There are still large questions to be asked about the entire process and whether it is advantageous to many pensioners to avoid the standard wind up process by opting for a new idea called the Financial Sponsorship Model.

The Canadian NRPC are urging Ontario legislators to allow a change in the regulations which would take control of the Nortel Canada pension away from the government administrators and turn the fund over to private investment companies who would administer and invest the funds, instead of purchasing annuities as is called for in the current process.

The basic premise of the NRPC is that gains could be made through investment to replenish some of the losses in the fund caused by economic impacts, and poor regulations that allowed Nortel to let the fund value drop below 100%. Of course investment means increased risk, which could dilute the funds over time and many people are concerned that this approach may place their pensions even further into jeopardy at some future time.

An independent financial analyst has raised concerns about moving away from the annuity process which could make things worse for many Ontario pensioners whose pensions are $1000 or less per month. The standard wind up would continue to provide their pensions at 100% based on the Ontario Pension Benefit Fund top up, which would offset any drop due to Nortel pension underfunding.

It is argued that almost half of Nortel pensioners fall into this situation, and to divert the wind up process into an FSM could mean that those pensioners would then be at risk of having their pensions reduced below $1000 per month. Part of this argument is due to the agreement made earlier this year which provided additional funds into the OPGF by the Federal Government in order to ensure that the Nortel Ontario Pensioners would receive the top up. This was part of the deal between the NRPC and Nortel, and if the process if diverted from the standard wind up to an FSM then the OPGF top up may not be a certainty.

As a result there are many Nortel pensioners who are fearful of their pension being reduced by such a change when the current process guarantees they will continue to receive what they have been receiving, albeit without any cost of living indexing. I imagine that most of us, if we were in that situation, would feel the same.

The other half of the Nortel Canada pensioners however don't have the luxury of the OPBGF. That in itself is a shameful indictment of the Canadian Federal Government and their apparent disdain for seniors in this situation. Many pensioners live in other Provinces and out of the country and therefore won't be eligible for the OPGF if their service was outside Ontario. Also many Ontario residents have pensions which are more than $1000 per month. So they will suffer regardless. The pensions will be cut to at least the 64% funding ratio and then possibly further when the costs of purchasing annuities are factored in. Also the percentage funded number is still an unknown since a proper actuarial calculation and asset assessment has not been carried out.

The move to an FSM for those people may be more attractive since it could mean a larger pension if the investments provide positive returns. However the risks are high and there is no Canadian precedent.

However, I think that we will have no choice. The Ontario government has said that they will not consider the FSM and frankly based on the lacklustre approach of the Canadian and Ontario governments to all the efforts we have made so far, it looks like they will dig their heels in.

If they do, then I think we need to be looking at the ways in which they administer the money through annuities. Surely a $2.5B fund can command a better return rate than individual annuity purchases and with government support there has to be some creative idea that would maximize the rates of return on this enormous amount of money.

1 comment:

  1. When it's time to retire, often your pension plan reaches maturity and you're faced with some decisions. A great option is to transfer its accumulated value into a pension annuity. It seems simple enough, but with all the options offered to investors, it's hard to know what's best.

    Pension Annuity MA