Firings and layoffs continue in Canada, notwithstanding a generally improving job picture. Last week, the Canadian Union of Post Workers warned of job losses in Kitchener, stating that Canada Post planned to consolidate operations, shifting work to Toronto. Some job-threatened individuals in Kitchener, or those who lost their jobs earlier this year or last year, may have had anguished meetings with their financial advisors.
Taking stock of a fired or laid off client’s situation means doing or re-doing a risk analysis, explains Susan St. Amand, a certified financial planner and president of Ottawa-based Sirius Financial Services “We re-do their whole risk analysis …That’s the starting point,” said the 20-year veteran. “This means examining the client’s insurance, investments and income picture including effective strategies for deploying a severance package.”
In the insurance category, job loss means the client’s risk coverage has decreased if he or she lost long-term disability coverage provided by the employer, since typically, an individual cannot get long term disability unless working for a company or established as self-employed. That increases the emphasis on critical illness insurance, although LTD and CI provide different types of coverage.
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The employee may also have to supplement life insurance protection arrangements, she says, explaining that an employee may have had $1,000,000 in coverage through a company plan but that same plan may only allow conversion of up to $200,000 possibly leaving a shortfall of $800,000 in coverage. This may not be replaceable if the client has become uninsurable.
In the benefits category, medical and dental insurance may continue for a stated period after the departure and then have to be replaced. “Some of them, particularly senior executives might get up to a year of coverage continuing on that plan that the employer would still be funding,” she says.
After the extension, some plans allow the terminated employee to convert to an individual benefits package but contrary to popular belief these arrangements may not exactly replicate the group plan benefits, leaving another shortfall.
When the former employer’s plan does not allow for conversion from group to individual benefits, which leaves the advisor with the task of looking for an individual benefits package.
That can present problems if the employee has a medication history, especially if the drug or drugs are not covered, St. Amand says. That means checking to see whether the individual qualifies for government assistance or must pay for prescriptions from their own funds.
In the pension category, dealing with the company plan involves checking both plan terms and the former employer’s stability and the likelihood that it will continue operations or go into bankruptcy. “Given what’s happened with Nortel … (they) may just want to move it out into a Registered Retirement Savings Plan,” she says.
Whether the client’s plan has indexing is another urgent question to be checked before making any decisions, explains Robert McCullagh, a 22-year veteran of financial planning and an Associate at Calgary-based Benefit Planners Inc. “As an advisor it’s very hard to keep pace with the stability of the pension investment but it’s even harder to keep up with the amount of growth necessary to offset the inflation protection,” he says. That may mean leaving the pension plan intact in order to retain the indexing feature.
Severance pay represents another set of decisions and requires analysis in terms of both tax planning and income planning. Regulations allow rolling over into an RRSP an amount equal to $2000 for each year or partial year of employment prior to 1996 and an additional $1500 per year prior to 1989 that the individual was not a member of a Registered Retirement Plan, McCullagh explains. Where the employer provides more than that amount in severance pay, or where the employee’s history does not fit these parameters, the individual can only deposit severance monies into an RRSP to the extent that he or she has available contribution room.
Alternatively, the former employer may stagger payments over several years to reduce tax liability. That approach assists the advisor in allocating available funds, taking into account the client’s plans, such as early retirement, or taking a fulltime job or contract role, McCullagh says.
Revisiting the risk analysis also means revisiting the investment policy statement and possibly revising the asset allocation strategy. “It is extremely important that (the terminated person) reassess what their investment policy statement is for their assets even with their investment portfolio,” St. Amand says. “An earlier decision to have 80% equity and 20% fixed income may now feel more risky than previously.”
Debt loads also need re-examination, especially since interest rates appear likely to increase this year. St. Amand advocates paying down debt with the priority on non-deductible expenses and locking in rates to provide a clear picture of expenses.
Al Emid, a Toronto-based financial journalist, covers insurance ,investing and banking.