Canadian Personal Finance Blog

Yesterday I spoke of the Class Action Suit against my current employer by employees who were part of the Pension Fund that the company discontinued this past year. Needless to say the announcement of this class action suit has caused a great deal of discussion in my company and I find the discussion points fascinating.

As background in the mid-90’s there was a great deal of discussion about how the Defined Benefit pension plan was useless to younger employees because all it did was constrict their ability to put money in their RRSP’s due to a very high Pension Adjustment (I sat on a study committee about this topic), and so there was a push to introduce a new pension plan that was less restricting in terms of Pension Adjustments. A new pension was brought in, which many people adopted, but I just never got around to changing.

Two years later another “investors” pension came in, where you could try this new pension which had an even lower pension adjustment or you could opt out effectively as well. Again, more people moved around, but this time, I wondered, why the company wants me out of the existing Pension? My answer was, it must be good, so I stayed in it.

Last year it was announced that the original pension program was going to be stopped and capped (i.e. the value you have in it now, is not lost, but nothing new can or will be added to it), along with the cancellation of any retirement health insurance and other benefits that were part of this retirement package (many older employees were exempted from this decision, anyone 52 and older at the time is what I remember).

The loss of the pension and the health benefits is a significant kick in my retirement plans, and with this class action suit not including me, as I wrote yesterday, I must rework my retirement plans due to this.

The interesting discussions that have started in the company is, “Why would you trust the company to take care of you when you retire?”.  Many current employees are complaining that they aren’t part of the class action and are thus out in the cold, and their comments are being answered with the, “Why did you expect the company to honour their agreement?”, which seems odd to me.

Do You Trust Your Company Pension

I guess my first reaction to this is, why wouldn’t I? If when I got hired, I was told there was a pension program in place that I would be part of, after 2 years, and that it is part of my benefits package, why would I assume that this was something I couldn’t plan around?

If I didn’t think I was going to be at the company for a long time (which I didn’t at the time) I might make other plans for retirement as well (assuming the pension would be small) but I certainly wouldn’t assume that it would be unavailable or changed in the future.

In Canada (I believe) private pensions are governed under fairly strict rules of conduct and funding, and it is unlikely that a private pension would “collapse” and be unavailable due to mismanagement (I didn’t say impossible, I said unlikely), and they are run as a 3rd party Entity from the company (thus if the company went bankrupt, the pension shouldn’t be an asset that creditors could plunder to get their money back). If I am incorrect in my assumptions, I assume one of my readers will correct me here.

I made the assumption (after being at the company for more than 8 years) that the pension might be a part of my retirement plans, and if I somehow made it to retirement age at the company, it would be very nice, however with this change in the pension, that is no longer the  case (I sill have a great deal of equity, but I have lost benefits and growth of the fund).

I guess my question to my readers is, what do you think of this?

1. Is it fair for a company to change their pension system to help them survive financially? This pension plan was a heavy strain on the company’s capital spending.
2. Is it correct for an employee to assume their pensions are “safe” and will not be changed because of the agreement of employment they signed when they were first employed by the company?

I have my opinions (which I think you can guess by my writing), but I am always interested to hear what my readers think as well.

Yesterday I found out that there is a class action suit that is being brought by a group of employees against my current employer.  I am unfortunately not part of the class, as I am still too young to join into the group, which is unfortunate, but it will be interesting to see if this group can extract a change with this suit. The suit has to do with the Pension changes made last year, where my employer changed from a Defined Benefit pension which had been in place for decades to a less expensive pension system.

Retirement Planning

This drastic change to my pension plans last year, meant that my assumptions at the time (though naive, because they assumed I’d make it to 55 or older with this employer) are now flawed.  I have been putting my RRSP money into a spousal RRSP, assuming that I would have a pension and my wife could then draw on the RRSP income thus creating an income splitting model, however, now that my pension will be drastically smaller, I will need to rethink that portion of my plan.

I also need to increase my RRSP inputs, which for the past 20 years have been debilitated by the Pension Adjustment that was in place (I could only put about $2000 a year into my RRSPs), the problem being all that growth that might have happened over the past 20 years is now lost to me, even if the CCRA gives back the RRSP room that I lost from the Pension Adjustment. This problem is kind of like my Golf Game, I need to go back in time and fix it about 20 years ago.

My other hope was an ability to retire earlier than 65 with this pension, but without it, those plans are much less likely, unless I find a new income source that can help compensate for this lost savings.

Would have been nice to have been part of that “Class”, but I must now re-think and re-plan.

But I need $520 for My Loan Shark

BMO has lowered the daily cash withdrawal limit to $500 to help combat debit card fraud (at ATM machines). Interesting idea, evidently the amount of ATM fraud last year was over $160,000,000 for BMO, and this is to slow this down. I don’t actually take large hunks of cash out these days, but more interestingly who ends up paying for this fraud? Does the Bank? The Consumer? Any horror stories from my readers that they care to share? The daily purchase limit is still around $2500 I believe.

No Fed Interest Drop?

That is the word, that in the U.S. there are no further interest rate cuts planned, which might be a very good thing given that Inflation is heating up. Canada has already held the line this month, so it shouldn’t effect the Canadian Dollar, but what might it do to stocks? We shall see.

After last week’s “show and tell” about Mortgage worksheet calculators, the next question to ask yourself is which is more important to pay into your Retirement Fund (RRSP or 401k) or pay off your Mortgage (and debts)? Since the U.S. model has tax implications for paying off your Mortgage, and I do not wish to mention the Smith Manoeuvre for Canada, let’s just concentrate on the Canadian model.

In a lot of cases this question is of no real value since a lot of people can only afford to pay for their living expenses and do not have free money to pay for their retirement or speed up their debt payments, for those folks, the job is hard enough, but I encourage you to find savings somewhere and do something more with your found money than “party” with it.

Arguments For Paying Down Mortgage

Some of the reasons I have heard and espouse for paying down your mortgage first would be:

1. Carrying debt is dangerous no matter what the economic times, and the sooner debt is removed from your plate, the sooner you can relax about your finances.
2. Once your mortgage is paid off then you can start saving for your retirement, knowing that you will not have that expense in your golden years.
3. Paying off your Mortgage is like investing in Real Estate, which is usually a good investment.
   • I don’t view my house as an investment, I view it as an essential of life, as in shelter is somewhere you live, not where you invest.
4. You are increasing your liquidity, by having more credit available to you, in case of emergencies.

Arguments For Retirement Money

The reasons to put money in your retirement funds are many as well:

1. Retirement saving is like Golf, the sooner you start doing it the better you will be at it later. Money saved at age twenty has much longer time to double than money invested at age 50.
2. With current interest rates, you can invest your money and make more with it, than if you pay off your Mortgage (typical Mortgage rate is about 6% whereas the Stock Market’s normal rate of return is about 7%, so you are ahead in the game).
3. You get tax money back for putting money in your RRSP, but you don’t if you put that same money into your mortgage. This is important since the major expense for most of us, is still taxes.

Best Choice?

That would be telling, I’ll write some more about this tomorrow, but I am open to discussion, pointers to good articles, and any other comments folks might have about what the right choice for them was and is (remember at the end of this, it is a personal choice on your part).