Not Just AC's DB Plan

[Financial Guy]

Looks like quite a few companies are wishing they didn't have expensive DB pension plans.

Give the employees control with a DC plan, and regardless of what happens to the company, each employee has control of his/her funds.

http://www.theglobeandmail.com/servlet/story/RTGAM.20030512.wxrpens/BNStory/Business

[Guest Nova Zemlya]

Article By Dean Baker:

http://inthesetimes.com/comments.php?id=185_0_1_0_C

[Guest Max Continuous]

Comparing the two, what are the advantages and disadvantages of the Defined Contribution plan versus Defined Benefit?

I know that in the case of the DC, if the employee becomes deceased that the assets in the entire vehicle can be willed to your estate, where with a DB only half the pension annuity will be left to a spouse and family.

[Guest neo]

The issues are complex, M/C, but here's a few points...

The advantage of a Defined Benefit plan is that you 'know' how much money you will receive annually when you retire. There's a given formula based on your contributions, and you can map out your retirement strategy based on a fairly definite idea of how much you will receive.

That's the theory. Of course, there are reality checks involved. Your pension money in a DB plan is SECURED, but not guaranteed. Typically the employer will administer a DB plan; and adjust their portion of pension contributions according to complex financial rules based on certain assumptions. Consequently, there are ways in which the DB plan can fall short of money to fund its obligations, because the obligations remain fixed while the value of the pension fund varies. Or the employer could go out of business entirely; wiping out your pension fund to some degree.

So there's the trade-off with a DB plan. You have security based on a good idea of how much you will retire with, versus the risk of someone else administering your money in ways that could put your pension in jeopardy.

In a Defined Contribution plan, the employee and the employer typically make agreed upon, fixed contributions. For example, the employee might contribute 4% monthly with a matching contribution from the employer. The money is 'locked in' so that you can't access it until you retire. You do not know what your pension will be worth until you retire, because no promise is made about how much you will receive: there is no 'defined benefit.' Once you retire, your portion of the fund based on your contributions and any growth the assets accrued (or minus any loss sustained) over time is returned to you. At that point you deal with the money as you see fit.

Defined Contribution plans are often administered by the employees themselves through trustees and financial managers, and out of the hands of the employer. That makes you responsible for the pension, but also means that it has no vulnerability to your employer's financial situation. There can be no 'funding shortfall', because the only obligation the pension has is to return to you what you and the employer put in, plus any growth accrued, or less any loss sustained.

So there's the trade-off with the Defined Contribution plan: you do not know what your retirement income will be, but you have more ability to manage the risk as you see fit, and more independence from the financial state of your employer.

Different individuals will prefer different types of plans. Personally I prefer the DC scheme, and of course given recent events with some employers' pension fundings, that preference is an easier sell. But the DB plan's advantages are good for many people, too. One thing I am certain of, is that employees will need to consider the possibility of a Defined Benefit plan's failure and account for that risk, to a far greater degree than we have in the past.

neo

[Guest Max Continuous]

Thanks neo, I knew that it was a question that I could of asked my financial people, but might have gotten a biased answer.

>> One thing I am certain of, is that employees will need to consider the possibility of a Defined Benefit plan's failure and account for that risk, to a far greater degree than we have in the past. <<

Your comment above is exactly why I hope that possibly making the change to a DC will be evaluated. Cheers !

[Seeker]

DB - you will never get more than you expect and it could be less.

DC - you may get more you or may get less, it all depends on your own investing skill.

[Guest M. McRae]

Changing from DB to DC is not a bad idea if you have another 10 or so years to contribute. It is not as good an idea for those with 10 or less years left unless the markets are doing well.

[Financial Guy]

Well said, neo. I would add that a DC plan is similar to an RRSP - contributions are made, you can select the investments (in most cases) and you receive regular statements to see how things are progressing. You can change the investment composition within your DC plan on occasion, based on your own risk tolerance. You do not know how much you will have when you retire, but because you are in control of your own personal pension you can monitor the growth of your assets on a regular basis, as you receive regular reporting for your specific pension account.

If you die, in most cases the assets within your plan are transferred to your beneficiary. If you leave the company, you can transfer your DC assets (depending on vesting period) to a locked-in RRSP. If you pass away, your locked-in RRSP is transferred to your beneficiary, and becomes "unlocked".

[Seeker]

Actually now may be the best time to switch to a DC plan. The markets aren't doing well now but will likely recover in the next while ( buy low! ).

[Guest neo]

Hi F/G,

Those are excellent points, too.

It would probably be fair to say that Defined Contribution plans are more versatile and flexible for the employee. But as always, one has to be careful with generalizations because pension plans are an agreed (and presumably negotiable) issue between employees and their employers. They will differ from workplace to workplace.

Along the lines of what you were talking about, another aspect to Defined Contribution plans that I think is an advantage is that if your employment terminates prior to retirement, the funds from your pension can 'go with you.' In a ]Defined Benefit plan, if your work terminates prior to retirement, your contributions remain with your former employer until you reach retirement age. With the DC plan, the funds remain 'locked in' until retirement, but are released into your control as far as administration and investment are concerned. Again, you have more control over your asset.

An aspect of Defined Benefit plans that really gets my goat is the way they're treated by Revenue Canada (CCRA) vis-a-vis your RRSP headroom. As far as the CCRA is concerned, your RRSP allowable contributions are reduced by whatever you put into a pension plan. Fair enough, but what happens in DB plans is that the employer's ASSUMED contribution is deducted from your RRSP headroom as well. The CCRA looks at what your PRESUMED retirement earnings will be under the DB plan, then calculates back at what the employer's contribution would have to be to provide that. That assumed contribution is deducted from your allowable RRSP contributions in that year, EVEN IF the company has a total contribution holiday, as per the Pension Regulator Gnomes.

I would imagine that Air Canada employees, for example, have lost out on a enormous amount of allowable RRSP contributions due to PRESUMED employer contributions that were never made. I wonder if we'll ever get them back?

neo

[IFG]

Hi, neo - I hesitate to butt in here, not directly affected by AC's pension plan woes, and besides the issues can be so damn complicated. Still, it's hard to stay on the sidelines when you think important questions are getting mangled. So with the caveat that it's MVHO only, can I toss a thought or two into your discussion?

I'd keep my eyes on the deferred compensation road and not get too hung up on a bipolar DB vs DC vehicular debate. FWIW, with the assumption that you folks do come out of this thing intact, I wouldn't trash the benefits of your DB plan, even if they contract a little. I don't have one, and I'd sure as hell rather I did. As part of the restructuring, the company would probably love to foist a DC plan on you, if they can, whether you liked it or not. I'd bet you the company would like it, and not because it benefits you. Hopefully your pension committee guys will be watching out for you, and doing there best to preserve a good DB plan. I suspect it'll help them that a full or partial wind-up would be enormously complicated, and a lot of you would likely not welcome the financial result when it's finished. But they'd probably still like some informed support while they're at it.

If you must make a comparison of DB & DC plans, it's always one of apples and oranges. A couple of comments, tho' (again IMVHO).

It is correct that DC plans tend to work better for frequent changes of jobs, unless there's portability between the two employers. It is also true that withdrawing before an allowable retirement age, whether you defer a pension or take the commuted value up front, is not generally treated favourably under DB plans, particularly in your younger years. But one has to ask, how many AC pilots are affected by those drawbacks.

As for the problems facing your plan, I don't think anybody's losing their pension. Is not your fund actuarially underfunded by only a fairly small percentage (I don't have #'s handy). A DC RPP is hardly immune to the same forces. If you actuarially calibrate DC RPP's against individual retirement expectations, they'll mostly have taken quite a dive too. It's exacerbated in your plan's case by the contribution holiday, and I'd wonder why flags weren't raised by your pension watchdogs, particularly with the ongoing cash problems.

Still, a DB plan does allow time to work in everybody's favor to set things straight, perhaps with a market recovery, if absolutely necessary perhaps a modest contribution or benefit adjustment, but likely a digestible change for all players spread over time. The poor DC RPP sod about to retire has taken the full hit of the last few years solo, and it may not be over.

Which leads to an apparent gap in the risk assessment of many people who tout DC plans. The battle's not over when you stop working! You still have to work the money to get your retirement income, at a time when your risk tolerance should be lowest, and your ability to manage things may be declining. Whether you continue to actively invest, or purchase a steady income stream, your final level of income will be significantly beyond your control.

I wonder why people, who expect the same secure steady income as the next guy while they work, would throw that away when they retire. As if investing "skill" was always the determining factor (what a conceited notion), do people really think that is a more fair way to determine income level during retirement when they steadfastly resisted letting corporate profitability, or job performance set it while they're working? And let's remember that an active retirement may last damn near as long as your pensionable career.

I'm not saying the world's always cruel to people without a DB plan, & many of us will make out just fine. Just be clear that they're a major benefit for the employee (and consequently sometimes a major headache for the employer), that companies now avoid. Regret it if it ever comes to losing it, that would be a huge concession (again IMVHO!).

A final note on your tax beef, neo. Here's the principle: Mutt and Jeff, planning to retire on the same date, on the same income, calculate they each need to set aside $X/year to do so using an agreed set of assumptions. Mutt's employer says he'll pay him that same income as a pension, and Mutt'll only pay half of $X. That represents an un-taxed part of Mutt's compensation, as it does when Jeff's employer matches half of his RRSP or DC RPP contribution. Regardless of how and when the employer fulfills the pension obligation, the full "value" of it comes out of Mutt's allowable RRSP contribution, leaving Jeff & him still on the same footing. The contribution "holiday", which doesn't change the employer's ultimate obligations in the slightest, also doesn't affect RRSP room. BTW, neither does a required extra top-up contribution affect it the other way. Clear as mud?

Cheers, IFG (

[IFG]

DB - you will almost always get what you expect but in rare cases it could be less

DC - you may get more, you or may get less, it all depends mostly on factors completely beyond your control.

Cheers, IFG

[IFG]

Hi, neo - I hesitate to butt in here, not directly affected by AC's pension plan woes, and besides the issues can be so damn complicated. Still, it's hard to stay on the sidelines when you think important questions are getting mangled. So with the caveat that it's MVHO only, can I toss a thought or two into your discussion?

I'd keep my eyes on the deferred compensation road and not get too hung up on a bipolar DB vs DC vehicular debate. FWIW, with the assumption that you folks do come out of this thing intact, I wouldn't trash the benefits of your DB plan, even if they contract a little. I don't have one, and I'd sure as hell rather I did. As part of the restructuring, the company would probably love to foist a DC plan on you. Don't know if that's an option here, your pension committee guys should be watching out, and hopefully doing there best to preserve a good DB plan. I suspect it'll help them that a full or partial wind-up would be enormously complicated, and a lot of you would likely not welcome the financial result when it's finished. But they'd probably still like some informed support while they're at it.

If you must make a comparison of DB & DC plans, it's always one of apples and oranges. A couple of comments, tho' (again IMVHO).

It is correct that DC plans tend to work better for frequent changes of jobs, unless there's portability between the two employers. It is also true that withdrawing before an allowable retirement age, whether you defer a pension or take the commuted value up front, is not generally treated favourably under DB plans, particularly in your younger years. But one has to ask, how many AC pilots are affected by those drawbacks.

As for the problems facing your plan, I don't think anybody's losing their pension. Is not your fund actuarially underfunded by only a fairly small percentage (I don't have #'s handy). A DC RPP is hardly immune to the same forces. If you actuarially calibrate DC RPP's against individual retirement expectations, they'll mostly have taken quite a dive too. It's exacerbated in your plan's case by the contribution holiday, and I'd wonder why flags weren't raised by your pension watchdogs, particularly with the ongoing cash problems.

Still, a DB plan does allow time to work in everybody's favor to set things straight, perhaps with a market recovery, if absolutely necessary perhaps a modest contribution or benefit adjustment, but likely a digestible change for all players spread over time. The poor DC RPP sod about to retire has taken the full hit of the last few years solo, and it may not be over.

Which leads to an apparent gap in the risk assessment of many people who tout DC plans. The battle's not over when you stop working! You still have to work the money to get your retirement income, at a time when your risk tolerance should be lowest, and your ability to manage things may be declining. Whether you continue to actively invest, or purchase a steady income stream, your final level of income will be significantly beyond your control.

I wonder why people, who expect the same secure steady income as the next guy while they work, would throw that away when they retire. As if investing "skill" was always the determining factor (what a conceited notion), do people really think that is a more fair way to determine income level during retirement when they steadfastly resisted letting corporate profitability, or job performance set it while they're working? And let's remember that an active retirement may last damn near as long as your pensionable career.

I'm not saying the world's always cruel to people without a DB plan, & many of us will make out just fine. Just be clear that they're a major benefit for the employee (and consequently sometimes a major headache for the employer), that companies now avoid. Regret it if it ever comes to losing it, that would be a huge concession (again IMVHO!).

A final note on your tax beef, neo. Here's the principle: Mutt and Jeff, planning to retire on the same date, on the same income, calculate they each need to set aside $X/year to do so using an agreed set of assumptions. Mutt's employer says he'll pay him that same income as a pension, and Mutt'll only pay half of $X. That represents an un-taxed part of Mutt's compensation, as it does when Jeff's employer matches half of his RRSP or DC RPP contribution. Regardless of how and when the employer fulfills the pension obligation, the full "value" of it comes out of Mutt's allowable RRSP contribution, leaving Jeff & him still on the same footing. The contribution "holiday", which doesn't change the employer's ultimate obligations in the slightest, also doesn't affect RRSP room. BTW, neither does a required extra top-up contribution affect it the other way. Clear as mud?

Cheers, IFG

[Guest neo]

My, you certainly took that bit between your teeth and ran with it. I'm just not sure why.

I have a personal preference, but I don't advocate one type of plan over the other. They each have their pros and cons, their risks and benefits, and it's for the employer and employees to decide which they prefer.

Your criticism of a DC pension vis-a-vis having to manage the money after you retire is no drawback at all. If you don't want to manage your own money, then turn it over to a trustworthy manager. The financial vehicles for providing an income from your pension at that point are straightforward and well-understood. The only investment difference at that point between a DC plan and a DB plan is that with a DC plan you, the employee, get to choose who you want to take care of your money. With a DB plan, you're stuck with the employer's management of your money: for good or for ill.

The one caveat I have about DB plans was clearly stated in my previous comments, but it bears repeating I think. Employees will have to take a far closer look at the risk of corporate insolvency (and even malfeasance) as it affects DB plans. To this point many employees, perhaps the majority of employees, have believed that their pension income was guaranteed under a DB plan. This is not the case. The pension funds are secured, but not guaranteed. And of course, the question needs to be asked: Secured by what? Just one more risk factor that must be accounted for, that's all.

I think I understand the the RRSP headroom issue, or I thought I did until you provided that explanation. However, you haven't spoken to the issue I raised. In a DC plan, your RRSP headroom is reduced by the ACTUAL amount that is placed in your pension; with a DB plan your RRSP headroom is reduced by the amount you put in plus an ASSUMED amount that the employer puts in, regardless of whether or not the employer actually makes that contribution.

I think of your allowable RRSP contributions as a financial benefit, and if you lose it without an offsetting benefit, that seems like a disadvantage to me.

Best wishes,

neo

[Guest neo]

My, you certainly took that bit between your teeth and ran with it. I'm just not sure why. But if anyone else feels I mangled the question, I certainly hope they will seek professional advice for clarification. My only wish was to be helpful and stimulate thought on the subject.

I have a personal preference, but I don't advocate one type of plan over the other. They each have their pros and cons, their risks and benefits, and it's for the employer and employees to decide which they prefer.

Your criticism of a DC pension vis-a-vis having to manage the money after you retire is no drawback at all. If you don't want to manage your own money, then turn it over to a trustworthy manager. The financial vehicles for providing an income from your pension at that point are straightforward and well-understood. The only investment difference at that point between a DC plan and a DB plan is that with a DC plan you, the employee, get to choose who you want to take care of your money. With a DB plan, you're stuck with the employer's management of your money: for good or for ill.

The one caveat I have about DB plans was clearly stated in my previous comments, but it bears repeating I think. Employees will have to take a far closer look at the risk of corporate insolvency (and even malfeasance) as it affects DB plans. To this point many employees, perhaps the majority of employees, have believed that their pension income was guaranteed under a DB plan. This is not the case. The pension funds are secured, but not guaranteed. And of course, the question needs to be asked: Secured by what? Just one more risk factor that must be accounted for, that's all.

I think I understand the the RRSP headroom issue, or I thought I did until you provided that explanation. However, you haven't spoken to the issue I raised. In a DC plan, your RRSP headroom is reduced by the ACTUAL amount that is placed in your pension; with a DB plan your RRSP headroom is reduced by the amount you put in plus an ASSUMED amount that the employer puts in, regardless of whether or not the employer actually makes that contribution.

I think of your allowable RRSP contributions as a financial benefit, and if you lose it without an offsetting benefit, that seems like a disadvantage to me.

Best wishes,

neo

[Guest neo]

My, you certainly took that bit between your teeth and ran with it. I'm just not sure why. But if anyone else feels I mangled the question, I certainly hope they will seek professional advice for clarification. My only wish was to be helpful and stimulate thought on the subject.

I have a personal preference, but I don't advocate one type of plan over the other. They each have their pros and cons, their risks and benefits, and it's for the employer and employees to decide which they prefer.

Your criticism of a DC pension vis-a-vis having to manage the money after you retire is no drawback at all. If you don't want to manage your own money, then turn it over to a trustworthy manager. The financial vehicles for providing an income from your pension at that point are straightforward and well-understood. The only investment difference at that point between a DC plan and a DB plan is that with a DC plan you, the employee, get to choose who you want to take care of your money. With a DB plan, you're stuck with the employer's management of your money: for good or for ill.

The one caveat I have about DB plans was clearly stated in my previous comments, but it bears repeating I think. Employees will have to take a far closer look at the risk of corporate insolvency (and even malfeasance) as it affects DB plans. To this point many employees, perhaps the majority of employees, have believed that their pension income was guaranteed under a DB plan. This is not the case. The pension funds are secured, but not guaranteed. And of course, the question needs to be asked: Secured by what? Just one more risk factor that must be accounted for, that's all.

I think I understand the the RRSP headroom issue, or I thought I did until you provided that explanation. However, you haven't spoken to the issue I raised. In a DC plan, your RRSP headroom is reduced by the ACTUAL amount that is placed in your pension; with a DB plan your RRSP headroom is reduced by the amount you put in plus an ASSUMED amount that the employer puts in, regardless of whether or not the employer actually makes that contribution.

I think of your allowable RRSP contributions as a financial benefit, and if you lose it without an offsetting benefit, that seems like a disadvantage to me.

Best wishes,

neo

[IFG]

Hi again, neo - you know, I re-read my posting and you're right, I did seem to run a bit far with it. Altho' the post did begin addressed to you, my thoughts were actually not meant for you specifically (except for the bit about your tax beef). Can't account for or excuse the unnecessarily strident tone, certainly the 'mangled' reference was uncalled for; I'll will try not to do that next time. Can I plead 04:00AM dementia?

:$

If I can still pursue it with you, tho', by all means anybody should seek pro advice before major financial decisions, but as with the medical and legal professions, isn't it good to be an informed client? As for here, as you often point out, this is a forum for our own thoughts and perceptions, and hence all the caveats and IMHO's.

With respect, I believe your notion about the dependability and ease of self-management after you retire are is a common misconception, if you are implying that you can engineer anything like the predictability of DB plans. Lord knows, that is one of the mantras - YOU have the choice, YOU can be as safe as you wish etc etc.

But the reality is that professional management by and large is no better than the market indexes (generally returning significantly less after fees) which does not insulate you from the vagaries of the equity markets (and we all know about the monkey and dart-board test comparisons); alternatively, prevailing interest rates (over which you have absolutely no control) will dictate your options and returns either investing in debt instruments, or purchasing an annuity.

You can yourself imagine the variability of savings at retirement. I'm sure you'll concede the risk in depending on equity returns for your primary income. On the conservative side, consider the effect of prevailing interest rates on the purchase of an annuity, say $50K. Ask your own advisor what that annuity would have cost somebody 5 years ago, and what it would cost now, or the converse, how much annuity income could be purchased with say $500K or $1M 5 years ago and today. Overlay your best guess of a professionally managed 25 year saving plan, one culminating in 1998 and the other today.

Don't get me wrong here, neo, I'm not Chicken Little crying about the falling sky. I've got to do my own retirement. I probably have taken a bigger beating lately than anybody at AC is likely to take on their DB pension, even if there is a benefit adjustment, but c'est la vie and so far I'm still OK. DC plans or RSP's are all that most people have nowadays, and we make them work as best we can, but I just wish that people understood ALL the risks and pitfalls out there, and IMHO the financial planning industry is often lax on some aspects, but that's another topic.

In a DB plan the employer is stuck with their own management, not the employee, except in the rare cases of insolvency. Your point about careful monitoring is well taken, but remember the funds are segregated. How AC got as far in arrears as they did get while on a contribution holiday is a question deserving an answer, but it doesn't serve anybody to overstate the problem either, as I believe some have done. DC savings are hurting now too.

To the tax thing again: this is just the sort of complex little question best discussed over beers, rather than laborious electronic comm'ns. I'll try another analogy. I don't know if pension rules would actually permit it, but let's say the employer (Mutt's from my little fable) chose to make a single upfront deposit, which using all the same assumptions would yield the required income on Mutt's retirement. In meeting the pension obligation this is the same as choosing the annual deposit route. Each subsequent year, no further employee contribution is required, because the funding obligation is met. Mutt is getting exactly the same compensation "value" and tax consideration as Jeff, whose employer is contributing annually to the DC plan. Don't you think Mutt and Jeff should have the same RRSP room? (honestly, trying no Voodoo here, just an imaginary structure to show no contribution in a given year, but obligations met and value received).

If the obligation to Mutt is covered, he suffers no 'loss', therefore no additional tax break. And BTW, if he actually does suffer a loss, thru' plan adjustment or whatever, the past pension adjustment values do change. This is all a gross oversimplification. e.g. your assumption that the pension adjustment accounts a defined fund payment by the employer is not strictly true. It's an arcane calculation which somehow seems to rob more of the RSP room than it should regardless of whether the employer contribution was actually made, so yes there could be some slight RRSP disadvantage with DB vs DC, but it's not tied to whether or not the employer is contributing ... & my head hurts ...

Cheers, IFG (

[Guest neo]

A worthy reply. Thanks.

I think that in any area that matters to you, being as informed as possible is the way to go.

Dependability & predictability of a DB plan vs. that of a DC plan, post retirement:

In this specific attribute, you can make your post-retirement DC plan as dependable and as predictable as, let's say, a U.S. Treasury T-Bill? By contrast, you have no influence whatsoever over the predictability of your DB plan: it's in someone else's hands to manage. You do not know what security is backing your pension. It could be a U.S. Treasury T-Bill (or the equivalent), but it could be something else. It could be investments that subsequently perform poorly and leave the pension in an underfunded state; only to have your employer go insolvent afterwards. Where is your dependability, your predictability now?

Please understand, I fully acknowledge that this does not happen often. But there are 35,000 employees at Air Canada who will assure you that even once is too much. It's true that there is risk in any forward-looking financial endeavour, be it a DC plan or a DB plan. I simply say, this particular risk is associated only with the DB plan and it's one that employees should take into consideration, perhaps more so than we have done in the past.

Your points about the uncertainty of the income you can generate from your DC pension funds on retirement are entirely valid. If you wish to ameliorate that uncertainty, then plan conservatively. Consider using a long-term benchmark as your predicted rate of return. If rates are somewhat lower than that upon your retirement, don't lock in. Wait for the rates to come back up to historic levels, and then fix your income.

I think it's great that people speak out about the potential pitfalls and advantages of both kind of pension plans. The more information people have, the better equiped they will be to make informed choices, when a choice is available. I'm pretty sure that for many of us, it's a grass is greener on the other side kind of issue. If our plan is doing well, we don't think much about it. If it does poorly, we cast longing glances at the other side of the fence.

I'll leave the RRSP headroom issue for that beer that you kindly offered to buy.

neo

[Guest neo]

A worthy reply. Thanks.

I think that in any area that matters to you, being as informed as possible is the way to go.

Dependability & predictability of a DB plan vs. that of a DC plan, post retirement:

In this specific attribute, you can make your post-retirement DC plan as dependable and as predictable as, let's say, a U.S. Treasury T-Bill? By contrast, you have no influence whatsoever over the predictability of your DB plan: it's in someone else's hands to manage. You do not know what security is backing your pension. It could be a U.S. Treasury T-Bill (or the equivalent), but it could be something else. It could be investments that subsequently perform poorly and leave the pension in an underfunded state; only to have your employer go insolvent afterwards. Where is your dependability, your predictability now?

Please understand, I fully acknowledge that this does not happen often. But there are 35,000 employees at Air Canada who will assure you that even once is too much. It's true that there is risk in any forward-looking financial endeavour, be it a DC plan or a DB plan. I simply say, this particular risk is associated only with the DB plan and it's one that employees should take into consideration, perhaps more so than we have done in the past.

Your points about the uncertainty of the income you can generate from your DC pension funds on retirement are entirely valid. If you wish to ameliorate that uncertainty, then plan conservatively. Consider using a long-term benchmark as your predicted rate of return. If rates are somewhat lower than that upon your retirement, don't lock in. Wait for the rates to come back up to historic levels, and then fix your income.

I think it's great that people speak out about the potential pitfalls and advantages of both kind of pension plans. The more information people have, the better equiped they will be to make informed choices, when a choice is available. I'm pretty sure that for many of us, it's a grass is greener on the other side kind of issue. If our plan is doing well, we don't think much about it. If it does poorly, we cast longing glances at the other side of the fence.

I'll leave the RRSP headroom issue for that beer that you kindly offered to buy.

neo

[IFG]

Re: the ((B), neo, hopefully sooner rather than later. I get to YLW couple of times a year, I'll give you a shout and maybe we'll figure out how pension plans work.

This pony's may be dead already, but I'll get in a couple more flogs anyway . Pension funds operate under pretty conservative guidelines, so I think you may be focusing a bit too much on the risk of poor investment strategy by the employer's fund manager (tho' I don't say never - it can be screwed up). The greater DB concern IMO is just what happened to your plan, where the contributions were not maintained, and that should be a far more straightforward and simple matter to oversee than trying to second-guess investments.

There's one other aspect of mature DB plans you might consider, which is that with all the various cohorts at their different stages of the game, there's a fair capacity to ride out periods where the investment strategy goes a bit awry, as yours would likely be doing if the contributions had come in. A big DB plan can be like a supertanker plowing through all but the very roughest seas (assuming the captain keeps it fueled!), where the individual is in his little cruiser bobbing up and down the swells.

One small clarification: I think you might be mistaking my harping on an inability to calculate or plan on a certain income for some obsession about ensuring preservation of capital at any cost (hence the T-Bill suggestion). That's not it, and my own investments over the years have usually been around or about the normal ranges of asset allocation (it'd be a pretty grim retirement funded by T-Bills). Nor is the issue that on retirement day I won't know my income. At that point, the options for a consistent payment actually become clear if I want to go that route, say with an annuity, altho' the actual amount is substantially beyond my control. It is about the reduced capability to plan out the whole package - saving, withdrawal & hopefully something left for the kids.

I hope that some of you have not so taken for granted the calculability and predictability of your pension, that as a result of a small dose of the sort of uncertainty that faces the rest of us all the time, you'd hastily ditch what seems to me a pretty good arrangement. As you suggest, some may see the grass as greener doing it the way I have to do it. I'm standing on that grass. Of course it's you guys' decision, and who knows what adjustments may emerge from CCAA, but all I'm saying is whoa! careful what you ask for...

Also, considering the interests of all your colleagues, are you really wanting a change from a system that almost assures everybody some kind of reasonable retirement, to one that sets up winners and losers arbitrarily ('skill' won't be the only factor by a long shot), at a vulnerable time of their lives?

IAC, the most serious risk facing us all may be the US economy that we have no control over, rather than any specific retirement planning structure. Good times might be around the corner, but OTOH maybe troubles are just beginning. Stock bubble is popped, real estate is pretty puffed up, almost no cutting room left for rates, budget surplus turned into deficit, and GWB looks like he may be about to let the currency devalue to goose his export economy. The historical record for that strategy is not good. A prolonged stagnation in all sectors (ala Japan, or dirty thirties) will beat the hell out of just about any individual investment strategy but that occasional long-odds swashbuckler that doesn't lose his shirt, and even overcome the cross-cohort risk-sharing and tinkering that somewhat insulates the large DB plans.

With the happy thought that hopefully that $&!# won't happen, gotta run, I've prattled on longer than I intended - again.

Cheers, IFG

[IFG]

Re: the , neo, hopefully sooner rather than later. I get to YLW couple of times a year, I'll give you a shout and maybe we'll figure out how pension plans work.

This pony may be dead already, but I'll get in a couple more flogs anyway . Pension funds operate under pretty conservative guidelines, so I think you may be focusing a bit too much on the risk of poor investment strategy by the employer's fund manager (tho' I don't say never - it can be screwed up). The greater DB concern IMO is just what happened to your plan, where the contributions were not maintained, and that should be a far more straightforward and simple matter to oversee than trying to second-guess investments.

There's one other aspect of mature DB plans you might consider, which is that with all the various cohorts at their different stages of the game, there's a fair capacity to ride out periods where the investment strategy goes a bit awry, as yours would likely be doing if the contributions had come in. A big DB plan can be like a supertanker plowing through all but the very roughest seas (assuming the captain keeps it fueled!), where the individual is in his little cruiser bobbing up and down the swells.

One small clarification: I think you might be mistaking my harping on an inability to calculate or plan on a certain income for some obsession about ensuring preservation of capital at any cost (hence the T-Bill suggestion). That's not it, and my own investments over the years have usually been around or about the normal ranges of asset allocation (it'd be a pretty grim retirement funded by T-Bills). Nor is the issue that on retirement day I won't know my income. At that point, the options for a consistent payment actually become clear if I want to go that route, say with an annuity, altho' the actual amount is substantially beyond my control. It is about the reduced capability to plan out the whole package - saving, withdrawal & hopefully something left for the kids.

I hope that some of you have not so taken for granted the calculability and predictability of your pension, that as a result of a small dose of the sort of uncertainty that faces the rest of us all the time, you'd hastily ditch what seems to me a pretty good arrangement. As you suggest, some may see the grass as greener doing it the way I have to do it. I'm standing on that grass. Of course it's you guys' decision, and who knows what adjustments may emerge from CCAA, but all I'm saying is whoa! careful what you ask for...

Also, considering the interests of all your colleagues, are you really wanting a change from a system that almost assures everybody some kind of reasonable retirement, to one that sets up winners and losers arbitrarily ('skill' won't be the only factor by a long shot), at a vulnerable time of their lives?

IAC, the most serious risk facing us all may be the US economy that we have no control over, rather than any specific retirement planning structure. Good times might be around the corner, but OTOH maybe troubles are just beginning. Stock bubble is popped, real estate is pretty puffed up, almost no cutting room left for rates, budget surplus turned into deficit, and GWB looks like he may be about to let the currency devalue to goose his export economy. The historical record for that strategy is not good. A prolonged stagnation in all sectors (ala Japan, or dirty thirties) will beat the hell out of just about any individual investment strategy but that occasional long-odds swashbuckler that doesn't lose his shirt, and even overcome the cross-cohort risk-sharing and tinkering that somewhat insulates the large DB plans.

With the happy thought that hopefully that $&!# won't happen, gotta run, I've prattled on longer than I intended - again.

Cheers, IFG

[Guest neo]

Hi IFG,

You wrote: "Also, considering the interests of all your colleagues, are you really wanting a change from a system that almost assures everybody some kind of reasonable retirement, to one that sets up winners and losers arbitrarily ('skill' won't be the only factor by a long shot), at a vulnerable time of their lives?"

I had hoped I made it clear, but obviously I hadn't. I don't advocate one plan over the other: I have a personal preference. Were AC pilots starting a pension plan now, we might be lucky enough to have a choice in the matter. But how one would go about changing the current pension foundation to a different one at this point in time? I have no idea how you would go about doing that, or even if it's possible. At the least, I have to believe it would be a big headache and probably expensive. Nor would it address the underfunded state the plan is in. So any change at this point is questionable.

My comments were general, and not meant to propose or advocate a change at any particular company, and certainly not at Air Canada.

"...winners and losers arbitrarily..." Hmmm. I take it that you mean that under the DC plan, one employee could retire today and be handed say, $1,000,000, while another employee with the same length of service could retire next year and be handed $1,200,000? Is that what you mean by winners and losers? I guess I don't see it as winners and losers, and just that some employees will retire with even more of a good thing than others.

Or perhaps by 'winners and losers' you mean that some employees will take their retirement funds and invest wisely, while some might buy Florida swamp? I readily agree, that is a risk, but surely one that falls within the right of every individual to assume?

And just as surely, is it not time for employees to shuck off the 'date-of-hire to the grave, please look after me Mr. Employer' mentality? Isn't it time that we take responsibility for our own future, wherever possible? Why do we expect a business to look after us in perpetuity? My preference again, is to be a valued employee, have the employer match my contributions to retirement, have a cheque handed to me as I walk out the door, and make a clean break.

But, like I say... that's just my personal preference.

Best wishes,

neo

[Guest neo]

Hi IFG,

You wrote: "Also, considering the interests of all your colleagues, are you really wanting a change from a system that almost assures everybody some kind of reasonable retirement, to one that sets up winners and losers arbitrarily ('skill' won't be the only factor by a long shot), at a vulnerable time of their lives?"

I had hoped I made it clear, but obviously I hadn't. I don't advocate one plan over the other: I have a personal preference. Were AC pilots starting a pension plan now, we might be lucky enough to have a choice in the matter. But how one would go about changing the current pension foundation to a different one at this point in time? I have no idea how you would go about doing that, or even if it's possible. At the least, I have to believe it would be a big headache and probably expensive. Nor would it address the underfunded state the plan is in. So any change at this point is questionable.

My comments were general, and not meant to propose or advocate a change at any particular company, and certainly not at Air Canada.

"...winners and losers arbitrarily..." Hmmm. I take it that you mean that under the DC plan, one employee could retire today and be handed say, $1,000,000, while another employee with the same length of service could retire next year and be handed $1,200,000? Is that what you mean by winners and losers? I guess I don't see it as winners and losers, and just that some employees will retire with even more of a good thing than others.

Or perhaps by 'winners and losers' you mean that some employees will take their retirement funds and invest wisely, while some might buy Florida swamp? I readily agree, that is a risk, but surely one that falls within the right of every individual to assume?

And just as surely, is it not time for employees to shuck off the 'date-of-hire to the grave, please look after me Mr. Employer' mentality? Isn't it time that we take responsibility for our own future, wherever possible? Why do we expect a business to look after us in perpetuity? My preference again, is to be a valued employee, have the employer match my contributions to retirement, have a cheque handed to me as I walk out the door, and make a clean break.

But, like I say... that's just my personal preference.

Best wishes,

neo

[IFG]

So-o-o, there's life in the ol' pot o'glue yet

You're right, neo, you didn't advocate one plan or the other, and we're probably both lacking as much clarity as we'd like on a particularly tricky subject. You're likely correct about the prospects for changing the plan; a pension wind-up would be a huge mess. I'll tackle a couple of your points, tho'.

Re: "...winners and losers arbitrarily..." - if it was only a difference of $1M and $1.2M on retirement day, that would be one thing, but again it's not a game that ends with a prize the day you retire. At first, 'wise' investing doesn't always guarantee good returns (the potential spread between those prizes is probably more than 20% IMO), and secondly, 'wise' investing won't guarantee an acceptable income after you retire either.

I'll flesh out one of the examples I posed, with best guess #'s. Let's consider a 25 year savings plan culminating 5 years ago in 1998, that resulted in your $1M # in the DC plan at retirement. Consider another, exactly the same contributions and investment strategy culminating this year. Let's apply your own suggested difference of 20%. We'll call it "a little less of a good thing", but then consider the income difference. Subject to variation in the age we're dealing with etc, in '98 you'd probably have been able to buy an individual annuity in the upper $70K's/year with your $1M @ 7% or so; today, $800K will buy in the lower $50K's at 5%. Both #'s would drop quite a bit if you included 1/2 survivor (as most DB plans do) depending on their age. So you can see a shrinkage of about 1/3, between two guys who contributed and did basically the same thing; differences in strategy, talent, luck etc go on top of that.

I know, you don't have to buy an annuity when you retire etc, but the example shows the difference in potential income in different times, even using ultra-conservative strategy. Maybe when one is fortunate enough to deal with these sorts of "good thing" #'s, fluctuations of that sort should be taken in stride. I don't know how sanguine the average pilot is about pension variabilities in the 30-40% range (or more with aggressive strategies), but the current or imminent retirees seem pretty antsy. Are they looking at anything like a 1/3 cut (assuming you guys come out of CCAA intact, and I think and hope that you do)?

Re: "...please look after me Mr. Employer' mentality?" - that one cuts a little. (I'm the one on the DC plan, remember, and I count that "clean break" as one of the pluses, too - among some minuses in the big picture.) That's actually a completely different discussion, and one I wouldn't be arguing about it so much even if it does seem just a bit a bit Thatcherish. This dialogue hinged only on the economic comparison between DB and DC plans. If the marketplace or tough love requires that employees stop wanting DB plans, so be it, but let's not try to bamboozle folks that they wouldn't be forgoing a great collective benefit.

DC plans do have their advantages. For instance, I couldn't recommend one in good faith for my outfit, no matter how good it might be for those of us who'll likely retire out of here, because so many of the juniors are passing thru' and DB plans give nothing to younger guys who leave the company compared to a DC plan. I suppose the ideal would be to spend the first half of your career building up a DC nest-egg, then switch to a DB setup, since there's no comparison in the returns on your money for the last few years (unfortunately wouldn't work actuarily). I appreciate your preference for the DC concept, and IAC DB plans are dying out because employers won't take them on. IMO they are a good deal for the employee. Maybe too good?

:S

Cheers, IFG [PS Gotta admire your stamina for a topic like this one]

[conehead]

This is an interesting thread, and fits in with a discussion I was having with a colleague the other day. IFG, you state that with a DC plan, you don't have to buy an annuity when you retire. My question is, what are my options? Do I convert the fund to a RIF? I don't know much about these things, but am trying to learn, as I suspect we at AC may soon experience some changes in our pension scheme...

Thanks