Sometimes clients raise questions about a DB plan based on their internal knowledge of their employer.wakashi1515/iStockPhoto / Getty Images
This article is part of a new Globe Advisor series, Pensions Unpacked, exploring how workplace pensions fit into retirement strategies, and the technical details and decisions that come with the plans.
At first glance, a defined-benefit (DB) pension plan is a rock-solid foundation for retirement, providing guaranteed income for life that may be indexed to inflation.
However, even after Bill C-228 gave “super priority” to the unfunded pension liability of federally or provincially registered DB plans, some clients may still worry about the possibility of losing their pension. That’s likely to become a bigger concern as threatened U.S. tariffs start to hurt Canadian companies that sponsor these plans. So, how can advisors shore up retirement income planning to ease that fear?
It isn’t a question in the abstract for Lorna Maughan, certified financial planner and investment funds advisor with Trinity Wealth Partners at Investia Financial Services Inc. in Bedford, N.S. One of her clients was working toward a DB plan offered by Halifax newspaper The Chronicle Herald. Then, in March 2024, the newspaper’s parent company, SaltWire Network Inc., sought bankruptcy protection.
A Nova Scotia Supreme Court hearing in August that approved Postmedia Network Inc.’s purchase of SaltWire confirmed the pension plan – 90 per cent funded and saddled with a $6-million unfunded liability – would be wound up.
“In this situation, [my client] will get offered a transfer value, but that value is probably not going to be anywhere near enough to secure the same level of income that he would have gotten from the DB plan had he retired [with it intact],” Ms. Maughan says. “What can he do? Nothing … You just get told the number you’re going to get and that’s that.”
In this case, planning will have to focus on making the best of the situation – perhaps investing a portion of the transfer value and purchasing an annuity with the rest.
One challenge is people with DB plans don’t always build up RRSPs. Ms. Maughan encourages working clients to accumulate savings in both RRSPs and TFSAs regardless of whether they have a DB pension plan. Tax-free withdrawals from the TFSA can help with tax planning when they start drawing income in retirement.
Even without the insolvency question, Ms. Maughan says there’s a risk a DB plan may stop offering a cost-of-living adjustment – as happened when the Nova Scotia government pension plan fell below 100 per cent funded as assessed in 2020. DB plans with conditional indexing on hold, or without indexing as a feature, require careful planning to fill in the extra income required as prices rise with inflation.
Sometimes, clients raise questions about a DB plan based on their internal knowledge of their employer or, if retired, former employer, says Marlene Buxton, principal fee-only financial planner of Buxton Financial For Retirement in Toronto.
If the client is losing confidence in their pension plan, and if Ms. Buxton sees that the plan’s funding numbers have slipped below 100 per cent, she’ll explore whether there’s an option to unlock the commuted value.
Depending on the plan, and on meeting certain conditions, it may be possible to take the commuted value and transfer the DB plan directly into an annuity with an insurance company. That preserves guaranteed income for life while mitigating the risks associated with the employer.
However, Ms. Buxton emphasizes it’s essential to work with an experienced specialist to avoid mistakes that can have significant tax consequences. Among the requirements are the annuity must be purchased with a single premium and there must be no material difference between the DB plan and the annuity.
Another reason Ms. Buxton may consider commuting a DB plan is if both members of a couple have one and they can keep one stream of guaranteed income for life while creating a second stream from funds they invest themselves.
Post-commuting, she leans toward converting locked-in funds into a life income fund (LIF) as soon as a client stops working, if allowed, and unlocking half and rolling that into an RRSP when possible.
“Half of it is more flexible, and the other half is LIF income, and then you take the maximum payment for life and you just let it go. That gives them that little bit of income spread out over their lifetime,” she says.
Diversifying income sources is especially important when clients have a DB plan and also hold their employer’s stocks. Ms. Buxton has seen cases in which clients build up those stock holdings gradually until they comprise 50 per cent of their investment portfolio. That’s another risk in need of mitigation, she says.
All that said, Lorna Eastman, president of Lorna Eastman Financial in Victoria, finds that clients with DB plans tend to feel relatively secure.
“People who have defined-benefit plans are so thankful. They certainly see how difficult it is for their peers who don’t have that kind of pension plan.”
She adds that only under exceptional circumstances would she recommend transferring out of a DB plan into a locked-in retirement account – for example, if someone had a short life expectancy. Otherwise, she describes guaranteed income for life as “a gift and a comfort.”
Ms. Eastman says clients should look at their DB plan statement to see how much money they and their employer have contributed compared with how much money they can expect to get from the plan when they retire and for the rest of their life. “That’s one pretty nice-looking calculation, let me tell you,” she says.