Canadian Pension Wind up versus FSM

Over the last week there has been a lot of discussion on the Yahoo Nortel Pension group about the pros and cons of winding up the pension, or using a private company (Financial Sponsorship Model) to continue the pension without wind up.

The NRPC has urged retirees to support the Financial Sponsorship Model (FSM) indicating that the payout percentage could be 8%-10% more. As pointed out by a number of people there is increased risk with the FSM versus the wind-up annuity approach.

In the case of the wind up with purchased annuity the payout ratio will be lower( NRPC has indicated around 64% if the pension is indexed), however there is a higher level of security since in Canada purchased annuities are insured against company failure by Assuris up to 85% or their value or $2000 per month which ever is higher.

In the case of the FSM approach the pension fund would not be wound up but would be managed by a private company. This means that the money in the fund would be invested in a variety of vehicles and managed by the operator. There is risk that the economy could once again impact the total value of the fund in the event of a turn down. On the other hand there would not be a cost associated with purchasing annuities, and there is also the possibility of gain in the value of the fund. Because the operator would expect to improve the value of the fund the pension payout would most likely be higher than through the annuity approach.

Unlike the situation of the Nortel guaranteed pension however, the private company managing the fund would not be obligated to make regular payments or top-ups into the fund as was the case when Nortel administered it. This could result in an eventual decline in the fund value if the investment gains do not meet the targets required, and could mean future reductions in pension payouts.

At this point there is no FSM option since the Ontario government has not yet agreed that this alternative is reasonable and legal. The only option on the table is the FSCO wind-up. The NRPC have been working with the Ontario Government to have them enact changes to the law to allow a FSM option.

In the event that Ontario agrees to do that, I think that there needs to be a vote by the retirees and those with deferred pensions in order to determine which choice to make. I don't think it is reasonable for the NRPC to make that decision on their own, since there appear to be a number of people who are uncertain as to the direction being advocated by the NRPC.

Before any option is chosen, there needs to be an information session at which the alternatives are clearly stated, along with the risks and rewards of each option. Independent views of each option should be presented by credible and respected financial analysts, so that the NRPC membership at large can have the data required to make an informed decision and choice.

Following the session, votes should be submitted by all retirees and future pensioners to the NRPC and the result verified by an independent agency to determine the direction forward.