In parts of Alberta where the stubbornly low price of oil has thrown thousands of people out of work, the atmosphere is dismal.
“One client told me it’s scary when he looks out the window of his office,” says certified financial planner Peter Ficek. “He said: the building that I can see right across from me used to be 90% lit up – now it’s 90% dark.”
Ficek, of Calgary-based TERRA FIRMA Financial Inc., can rhyme off a number of Alberta residents, most of them in the oil industry or companies related to the oil industry who have come to him in a panic as the lights of their offices are dimmed and the doors locked.
Unemployment rate up
In April, Statistics Canada announced the once-proud province’s low seasonally adjusted unemployment rate in March rose to 7.1%, up from the 5.6%-rate a year earlier, but down from February’s rate of 7.9%. The provincial government said this compares to a national unemployment rate of 7.1% in March, up 0.3% from last year’s rate. Alberta’s youth unemployment rate increased to 11.0%, compared to 10.3% in 2015. Both male and female unemployment increased from last year, to 7.7% and 6.3% respectively.
Financial advisors in the province are meeting with these highly qualified clients, many of whom are inundating recruiters with resumes for jobs that pay half their previous salaries – if they can get them.
Ficek tells the story of a 56-year-old female client who made $93,000 annually in an oil-related job who discovered that the chances of finding a similar job were as low as the oil prices themselves. (The price of West Texas Intermediate crude oil, the industry standard, stood at almost US$100 a barrel five years ago; in mid-April the price was about US$42 a barrel ahead of a major OPEC meeting.)
The client, who had a LIRA and an RRSP, as well as life insurance and health and dental benefits with her previous company, did find a job – at half the pay. She became so stressed that she packed up and moved to British Columbia where she is currently stocking shelves in a supermarket.
While some Albertans have gone through this before, many say this is the worst, says certified financial planner Sterling Rempel, a wealth and estate planning specialist in Calgary.
Six areas of financial planning
Rempel says when his clients find themselves out of work and deeply concerned about their financial status he reviews six areas of financial planning with them:
If laid off from an oil company, most former employees lose their group benefits and have a 30-day window to convert their firm’s life insurance policy to an individual permanent plan, says Rempel. There is a $200,000 limit in most cases and premiums will be higher than they enjoyed under the group plan. “But they don’t have any other option because they [might be] uninsurable if they have a medical issue,” he says.
Some of the bigger insurers offer health and dental plans without any medical, but people have to apply within 60 days of termination. As with life insurance, health benefits usually have lower limits and higher premiums.
“Very often these people come in panicking because they have not made any decision – in some cases not until a week prior to the deadline,” says Ficek. “You have to revisit their entire life in the light of these deadlines.”
Many laid-off clients also begin to consolidate their investment accounts, bringing their (former) company plans into their personal accounts. This can actually benefit them because many advisors offer preferred pricing and lower investment management fees. Rempel’s company, for example, has options at $250,000 and $500,000 and above.
Some companies in the oil industry offer employee share purchase plans. But the problem here is that the stock value is probably down and clients now have to make the decision as to whether they should wait to see if the stock price rebounds or sell the stock and diversify out of the oil sector. “So much of this depends on their risk tolerance and how much time they have until retirement,” says Rempel.
Reviewing cash flow
The biggest concern of these clients is how they will live for both the short and long term. Rempel says the majority of the people he sees have a sense of their cash flow – some even have their own spreadsheets or Quicken programs. For those who don’t, information is key. “With knowledge they can monitor and adjust,” he says. “They can also look at ways on how to consolidate and or refinance debt.”
Former employees who are offered a buyout might want to think of using those funds to maximize their TFSAs. At the same time, if they have some cash they could buy into a lower stock market that gives them opportunities for future long-term growth, depending on their timelines and risk appetite, says Rempel.
Clients also come to Rempel to get his opinion on whether they have enough savings to retire or if they should look for something part time. Those close to retirement wonder if they should start withdrawing from their RRSPs, especially if they believe their income will be low and therefore taxed at a lower rate. But Rempel warns that a spousal plan may not prove to be a wise decision if it’s the lower-earning spouse who has lost the job. He says if higher-earning Spouse A contributes to Spouse B’s RRSP, Spouse A will be taxed on it because, according to the tax rules, this partner contributed to the plan in the preceding three years.
While this is always an ongoing process, Rempel says now is a good time to look at investment portfolios that may be lower in value than they were previously. Financial advisors can help determine if the portfolio has enough liquidity to pay final taxes and deal with the costs of the estate.
Ficek says those employees who had a defined benefit pension plan with their former employer have a number of options which vary with the client’s age. (Generally, they can only transfer out the commuted value of their pensions if they are not eligible to retire on their dates of termination. Otherwise, they would receive a deferred pension.)
At these times, says Ficek, financial advisors need to show both empathy and sympathy and be aware of major legal and tax issues.
“And be prepared to receive a lot of emails from distraught people,” he says. “You will see what goes through a person’s mind…and you end up revising their way of thinking about their life.”
Editor’s note: At press time, wildfires were raging in Alberta leading to the evacuation of Fort McMurray. In an upcoming edition, The Insurance and Investment Journal will follow up with an article on how advisors can help in disaster situations.