A friend and fellow Advisor I know often poses this simple question to her clients: “You know what you’ve got planned for your employer. But do you know what your employer’s got planned for you?” Typically she asks this in the context of losing Group Drug benefits but - as recent events have shown - it can be applied to any employer benefit.
If you were one of the public sector retirees notified last week that you owed your former employer anywhere from $300 to $50,000 in pension overpayments, you’d quickly realize that their plans and yours may differ quite a bit.
Just imagine. Years on a fixed pension and then - one day (April Fool’s Day, no less) - your phone rings and the voice on the line says, “So, turns out we’ve been overpaying you for a few years. Twenty years, actually. And we’d like that money back… please and thank you.”
Can you imagine being the poor bureaucrat who had to make that call? Epic game of “Rock, Paper, Scissors” before that call, I’d say.
Someone (or some system) screwed up. Big time. And these things do happen. In fact, if you google “Pension Plan Mistakes and Miscalculations,” you’ll see they happen all the time.
“To err is human,” after all.
But here is another thing that is human: To spend to our maximum income level.
I am willing to wager none of the people who got that call realized they had more money than they were entitled to.
And I’d bet money that none of them were spending less than they were receiving on the off chance someday, someone would call and ask for some of it back.
The Sad Truth
With defined contribution pensions, you and your employer contribute an equal percentage of your overall salary into an RRSP. But how those dollars are invested – and ultimately how that investment works out – is all on you.
With defined benefit pensions - like the one that public sector employees enjoy - theoretically all the investment risk is on the employer. You pay your money, you work your years, and you are guaranteed a defined pay check in retirement.
Nice work if you can get it.
But sometimes they fool up. Make “clerical errors.” Sometimes they use the money for other things and neglect to put than money back when they are done with it.
And sometimes things go exactly as planned but it’s still not enough to pay the bills when an oil boom causes rapid inflation and the cost of heating your home goes through the roof…taking the bulk of your pension right along with it.
So what can we learn from this latest retirement headline?
Expect the unexpected. And plan accordingly.