We’re hearing a lot about problems with DB Pension plans in Canada… And not without good reason!
Problems with Defined Benefit pension plans are legion. Many companies in Canada are facing pension shortfalls. Unfunded pension liabilities have been exacerbated by extremely low interest rates and market volatility. This has constrained financial flexibility and weakened credit ratings for many of those firms.
DB Pension Risk
Extended mortality rates have increased longevity risk. With people living longer, payment steams must continue for longer periods of time.
Many companies involved in mergers & acquisitions and re-orgs, are looking for ways to annuitize their pension obligations and sterilize their risk, as are Canadian branch plant operations that have been spun off from their parent companies.
Many pension wind-ups lead to lump-sum buyouts to planholders, in-pay execs and employees, leaving them with a large tax bill, and impinging on the retirement benefits they were promised.
We are also seeing many DB pension wind-ups, with lump sum buyouts being offered to the planholders, as in the case of GM General Motors. This has left many of the plan members with large tax liabilities and a reduced pension promise.
Annuitize your DB Pension Obligations
Now, there are a number of popular solutions currently offered by Canadian pension consultants: These include ways to transfer risk, to annuitize pensions and include pension buy-ins, & buyouts & lift outs. These strategies are designed to transfer pension obligations to private insurance companies by purchasing huge group annuities to pay out benefits.
Such large transactions are celebrated in the media but are few and far between. Group annuity buyouts are prohibitively expensive, and best suited to Tier I Corporate Titans.
So, what is a mid-market corporation to do to annuitize in-pay DB pension obligations and get them off its books, as cheaply and efficiently as possible?
Well, it turns out that there is simple alternative mechanism that you can use to annuitize pension liabilities & de-risk your balance sheet, so you can surgically transfer risk to major insurance carriers.
Pension risk transfers to insurance companies (sometimes referred to as “pension lift-outs”) can be accomplished using copycat annuities.
DeRisking with Copycat Annuities
A copycat annuity is a payout annuity that meets the rules in Section 147.4 of the Income Tax Act.
If permitted by provisions of your plan, a copycat annuity can be used to mimic the existing plan, and provide the same or very similar options and guarantees, to retiring and in-pay executives and employees.
To accomplish this, plan holders commute their commuted value (“CV”) of their respective plans to a life annuity with a major Canadian insurance company.
The resulting plan remains registered, so there are no adverse tax consequences to the plan holder. This actually preserves & strengthens the pension for the employee, by providing a guaranteed monthly income for life, with no investment risk from a top financial institution.
So, copycat annuities allow you to perform select surgical lift-outs of in-pay defined benefit pensions to get them off your books.
Tax: Because the Copycat annuities mirror the existing plan, they remain registered, thus avoiding a massive tax hit.
ASSURIS Protection: The copycat annuity is protected by ASSURIS which provides up to $2,000 a month, or 85 per cent of the promised income benefit, whichever is larger in the event of failure of the life insurance issuer.
So, whether you are winding up or maintaining your ongoing pension plan, maybe you are not be getting the attention of pension consulting firms and are considering de-risking your DB plan, and perhaps you are not prepared to enter into a huge/expensive group annuity, copycat annuities might be worth investigating copycat annuities may be used to efficiently and surgically transfer risk of DB plans to a major insurance carrier.