What is a Defined
Benefit (DB) Pensions?
Over 1.3 million Canadian retirees and their spouses rely on defined benefit pension plans.
A defined benefit pension plan is part of an employee’s total compensation package and is legally considered deferred compensation.
A defined benefit pension consists of deferred wages that are earned while an employee is working and collected when they retire.
The annual pension amount is calculated using a formula that reflects an employee’s salary, length of service and age.
Pensioners have planned their retirement based on their defined pension income.
Pension income is taxable in the hands of pensioners.
How Are DB Pensions Regulated In Canada?
The pension regulatory framework in Canada is very complex.
Canada has two tiers of legislation that impact pension security. Eleven different jurisdictions are responsible for pension legislation and regulation.
Federal insolvency legislation is the primary legislation. In the event of a conflict, it supersedes other pension-related legislation.
Pensions are also governed by additional federal and provincial pension benefit and corporate governance legislation.
What Is The Risk To Defined Benefit Pensions?
There are no real protections for defined benefit pensions when a company goes bankrupt.
The risk to defined benefit pensions occurs when a company becomes insolvent and its pension is underfunded.
When companies are in trouble but haven’t yet become insolvent, pensioners are powerless to intervene and secure their pensions. All other creditors can negotiate terms to protect their interests.
Insolvency law does not treat pensioners fairly. Unlike creditors, pensioners are not automatically able to negotiate their terms when assets are divided. They aren’t even allocated a seat at the table, unless the court grants them one.
An estimated 78% of defined benefit pension plans in Ontario are underfunded. In the event of an insolvency, those pensioners will not receive their full pension. This puts an estimated 850,000 pensioners at risk.