Canadian Capitalist wrote a very interesting post yesterday highlighting the fact that there are some disabled former Nortel employees that paid into the “self-insured” LTD (long term disability) plan offered by Nortel and now might lose their benefits. As Thicken My Wallet pointed out in the comments – this basically a loophole in the law – the contributions made by the employees that were in the LTD plan did not belong to Nortel and shouldn’t be considered part of the assets available to creditors.
Ram correctly points out that the government should fix this – I find it ridiculous that they were able to change the RIF minimum payment rules last year thanks to CARP’s constant nagging which was a complete waste of time yet something important like this can’t get changed. Even though I said differently in the comments (since I didn’t fully understand the situation prior to TMW comments) I agree that the government needs to help those people and fix the rules on this matter.,
That said – I still want to talk about government bailouts of company defined benefit pensions!
One of the big problems with government bailouts of company pensions is that is that those are private contracts or “deals” between the employee and the company – often via a union. It has nothing to do with you or me or the government.
Technically it’s not anyone else’s responsibility to help someone who made a private deal with a company and it didn’t work out. It’s the same thing as if someone had all their investments in their own company stock and it goes bankrupt. Anytime you make a long term deal with someone else then you face the risk of the other party not fulfilling their end of the bargain. Whether it’s your pension or a lawn care contract – it’s your responsibility.
Now I’m not so hard-hearted that I think these people shouldn’t be helped at all – I would have no problem with the government helping them out if necessary. But what I would really like to see are some changes for the future to prevent it from continuing to happen.
Outlaw employer-run defined benefit pensions.
This is a bit extreme but it does take care of the problem where employees base their financial planning on an expected pension and run into trouble if the pension is reduced (especially if it reduced to zero). Most workers use some combination of rrsp, tfsa, CPP and OAS for their retirement so it’s not like there aren’t alternatives to defined benefit pensions.
Allow opting out of defined benefit plans.
One problem that exists now is that normally someone working for a company that provides a defined benefit plan has to participate in it. This doesn’t give the worker any choice in their pension since the contributions made by the employer and employee count against any RRSP contribution room so the employee might not be able to save enough outside the company pension. Allowing the employee some choice will give the employee more responsibility and will reduce the obligation for the government if things go bad.
Only have government run DB plans
In this case companies would not be allowed to run their own plans but could participate in a government run (the CPP would run it) pension plan. The main difference is that the liability would be on the government so everyone who participates in these plans would be on equal footing. These plans would also be fairly conservative so they might not be as overly generous (and risky) as some existing pension plans.
I think this one is a complete pipe dream but if you could educate the employees that:
1) Their pension plan is only as solid as the company and the pension management and things don’t always work out. The pension might not be there for them in the amounts promised.
2) Saving outside their pension might be a good idea.
3) Buying company stock is very risky because they work there too.
Don’t allow employees to own company stock
This one has nothing to do with pensions but always seems to come up when public companies such as Enron go out of business. This is too hard to regulate and really falls under the category of “education” but it would be one way to force employees to diversity – Bad Money Advice had an excellent article regarding the follies of owning company stock. Bottom line is that you shouldn’t own any – if you do have some because of special deals/payments etc then sell it as soon as you can.
While I do feel bad for employees and retired employees who have retirement plans go bad – bailing out each group when they run into problems isn’t the answer. Leaders of public companies have shown that they manage for one reason and one reason only – for the mega-bonuses they can get if the company outperforms. They generally do this by taking extra risks – worst case scenario is that they get let go with a big severance package. Or sometimes they just cook the books to make more money for themselves.
If you favour more regulation then don’t let these companies be responsible for the future of their employees. If you favour less regulation then give employees some education on the risks of having a company pension plan and allow them to opt out.