Is Your Pension Plan Underfunded

Most Pension Plan Underfunded By Critical Amounts

It’s the worst case scenario. You’ve worked hard all your life and now you’re ready for retirement. Or worse yet, you may already be in retirement and enjoying your golden years and then you get the letter. The letter that says that there has been a recalculation of the total benefits that are being paid out, and due to lagging investment returns and unforeseeable costs, blah, blah, blah. Net result to you: a decrease in your monthly pension. No, a sharp decrease in your monthly pension.

pension plan

Why Is Your Pension Plan Underfunded?

That scenario sounds too outrageous to be true doesn’t it, sadly enough it is not and right now government funded pension plan recipients in Italy, Greece and France are finding out that it is all too true. How is it even possible? Demographics plays a huge role. So too does unrealistic expectations on rates of return on investments and the idea that the company, union or guild will continue to always grow and there will be an almost inexhaustible supply of new money flooding in.

substandard returnsThe reality is that most of the members of the vast majority of pension plans are continually getting older, and the numbers of contributors (those in the prime working years) continues to shrink. It is the same problem that most of the governments in the western world have faced or are facing now. Ironically, most South and Latin American countries, as well as those in Asia do not have the same challenges. Their cadre of youth and younger aged working force will ensure that they don’t have this problem coming their way for generations.

Pension fund managers after years of substandard returns decided in the late eighties and throughout the nineties to jump on the more aggressive higher interest yielding investments that many of our banking institutions became involved in. We all know the result of that. When the chickens came home to roost, banks went under, huge financial brokerages evaporated, and pension funds were decimated. Less money left to spread out among more and more hands as time went by.

The tanking of the global economy could not have come at a worse time for many funds and with resources already depleted, they are facing years and years of lower than normal returns on their investments. Pension plan managers are under intense pressure to provide good returns without any exposure to risk. Anyone asking for that didn’t take Economics 101 where you are taught that risk equals return. They are in a no-win situation. The only option is to reduce benefits.

Is Your Pension Plan Underfunded?

A recent report by DBRS indicates that there are some major concerns on both sides of the border. Some pension plans in the US are underfunded by as much as 55%, and here in Canada there are some as low as 70%. By contrast 80% is considered to be the absolute minimum for a pension plan to carry forward, and time has shown that amount to be in low returnsjeopardy when economic times are hard. In Canada, Manulife Financial, Scotia Bank and Royal Bank all fall into the 20 worst funded pension plan pool, which does beg this question.

Why on earth would you want to place your retirement funds with a financial institution that can’t even adequately manage its own pension plan?

It would be prudent for anyone with a pension plan to at least find out where it truly sits in relation to its level of funding, and then make the moves that are appropriate for you.

 

Don’t put yourself into a position where you are counting on them to keep food in your fridge. You may be a tad hungry.

 

Till Next Time

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Sigrid McNab

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About Sigrid McNab

Sigrid McNab is the author of #1 Amazon Best Seller, speaker and the CEO and Founder of sigridmcnab.com. Sigrid specializes in blogging, attraction marketing, and generating highly qualified leads. Sigrid teaches people how to build a successful online business.

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