Hot Off the Web- January 25, 2009

Chris Farrell in BusinessWeek’s “Why you’ll work through your retirement”  says that you should forget retirement! The economic collapse has altered expectation of a retirement of leisure, which is out of reach for most retirees. Retirees are also living longer and are healthier, so many will be able to work longer. It is not just the shrinking of retirement assets in defined contribution plans, the rapid disappearance of DB pension plans (and those still around being significantly underfunded), but the collapse of the housing prices has also has reduced the possibility of counting on a significant asset boost from a home sale. Working longer, delaying retirement (i.e. fewer years of living off assets in retirement) and delaying taking Social Security will significantly lower the required assets for “normal life expectancy”. He concludes the article with the prediction that “the recession has made it clear that retirement and work will be woven into a new cloth for many Americans. The challenge for all of us—employees and employers—will be making the best of the situation.”

NYT’s Ron Lieber looks at how you should be “Preparing your budget for disaster”  Lieber discusses “financial fire drills”, suggested by financial planner Kevin McKinley, which look at dealing with worst case scenarios (e.g. one or both in a dual income family lose their job(s)). The various approaches suggested include: (1) “how you would cut back your spending if all or part of your household income disappeared”, (2) assess your borrowing capacity- “you borrow money when you can get it, then pay it back out of assets as slowly as possible”, (3) dial down to a more conservative asset allocation. “Driving old cars, running up credit cards, letting someone else live in your home — imagining it all is so disconcerting that the anxiety it produces hardly seems worth it….(But) the fire drill allows you to take control, to say, ‘I’ve figured this out already’ and not just be trembling at the computer terminal”

It’s about time! Rob Carrick in Globe and Mail’s “Online broker lets mutual fund investor unhitch from trailers” reports that Questrade Inc. will be refunding mutual fund trailer fees that typically go to investment advisers. However since do-it-yourselfers (with online brokerage accounts) don’t use this service, so they clearly should not be levied on them. If you still own mutual funds (not recommended- use low cost index ETFs) then at least explore this opportunity to reduce the fees associated with them.

Jillian Mincer reports in the WSJ that, with tightening credit and serious losses in retirement savings, “Demand for reverse mortgages climbs”  . This is not a desirable state of affairs (see my Reverse Mortgages blog) especially since property values have fallen, reducing the cash received. Also, one certainly shouldn’t do it too early and one should explore other available avenues to raise cash before resorting to reverse mortgages.

In the Financial Post’s “Jack Mintz: The unbearable heaviness of pensions” , Mr. Mintz talks about bond/equity returns being insufficient to fund generous pension plans. That may or may not be so, but it is irrelevant as far as past commitments are concerned. Many employees joined companies right out of university, they didn’t know about pensions, didn’t ask about pensions and couldn’t opt out of pension; pensions were part of the compensation plan, as employees were frequently reminded. Many couldn’t contribute to RRSPs because they were members of the pension plan, but they were counting on their pensions which are their deferred wages. Then their employer of 30 years goes into bankruptcy protection with a significantly underfunded pension plan, and the pensioners are up the creek without a paddle. Their employer failed them, but so have trustees, actuaries, investment managers, government regulations and the regulators. Mr. Mintz may be right; DB plans are fundamentally flawed and they may be history. However existing commitments are contractually binding. They should have equivalent priority in restructuring, with current wages. What is needed is legislation to insure that pensions receive the priority that they deserve in bankruptcy restructuring.)

And finally, some updates on the Nortel pensioners’ crisis. In “Worried Nortel pensioners seek news”  Bert Hill reports that hundreds of anxious pensioners attended overflowing information meetings in Ottawa held by Nortel Retirees’ Protection Committee (full disclosure- I am a member of NRPC) and Koskie Minsky a Toronto law firm specializing in pension/benefits protection in cases of bankruptcy reorganization. All previous Nortel employees who are members (current pensioners, deferred pensioners and beneficiaries) of the Managerial/Non-negotiated pension plan can sign up to participate by signing up at Koskie Minsky’s website.

A clarification is appropriate on Quebec pension guarantee legislation that was announced last week; it was too good to be true. ”Quebec government promises to protect pension plans”  clarifies that what the legislation “guarantees the pension payments at their underfunded level”. The protected, warm and fuzzy feeling is mostly gone.

Globe and Mail’s Avery and Grant report in “The shock of Nortel’s severed severance” that severance payments have been chopped. (It appears that retirement transition payments (TRA) and portions of pensions which do not have associated trust funds have been stopped (e.g. so called excess portions of the DB plan members). The status of health benefits is unclear to me.)

In the TimesOnline Marlow and Avery write that “Pensions hit by Nortel collapse”   The story is a mix of good news and bad news. The good news is that current UK pensioners are insured up to 100% by the PPF (Pension Protection Fund); the bad news is that current employees and deferred pensioners are only insured up to 28K pounds.

You might also find of interest Mark Anderson’s article in the Ottawa Citizen entitled “And the award for the world’s worst run company goes to…”  It is a scathing review of Nortel management failures over the past decade.


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