Pension Plans Take a Hit: The Chain Reaction that Follows
After the home, an estate’s most valuable asset is often the rights to a pension plan earned by the deceased during their lifetime.
To ensure that the value of a pension is not eroded by inflation, they are often indexed either to predominant inflation rates or tied to the consumer price index. Indexing is a well-known method of ensuring that asset values are not deteriorated over time due to the constant corrosion brought on by inflationary effects on the future value of money.
However, it appears that many public sector employers are considering an end to the practice of indexing defined-benefit pension plans. Over two-million Canadian plan members may be affected by such a shift in policy. Private sector employers are even more likely to consider such changes.
While benefits which have already accrued will not likely be affected, those companies and agencies which do adopt these changes will be subject to fewer obligations arising from future retiring plan members.
The reason for such a shift is clear: low interest rates, volatile markets and longer retirement years have placed a strain on pension plan viability, forcing many pension plans into deficit. In response, less benefits and greater contributions by plan members is being heralded as one of the only feasible solutions to this growing problem.
The effect will be that Canadian seniors will place greater reliance on their other assets during retirement years including savings and other investments, and the inheritance of remaining pension benefits may go the way of the dodo.
Consequently, as estate values dwindle in comparison to more lucrative times, estate litigation over fewer assets upon which beneficiaries may be increasingly reliant could escalate. Those seeking to craft a sustainable estate plan should be encouraged to take into account how such changes to the value of their largest assets affect their dispositions to loved ones upon their passing, especially when hoping to avoid a costly litigation over an already depleted estate.
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