When British Columbia’s Pension Benefits Standards Act comes into force on September 30, 2015, employers that sponsor plans in British Columbia will have more plan design options available to them. Following New Brunswick and Alberta, both of which currently have comprehensive target benefit regimes in place, British Columbia’s pension laws will soon include provisions for target benefits plans (TBPs).
British Columbia is introducing sweeping pension changes with its new pension statute, many of which mirror changes to Alberta’s amended Employment Pension Plans Act and regulations that came into effect on September 1, 2014. The amendments, which are part of an effort by British Columbia and Alberta to harmonize their respective pensions laws, include the introduction of target benefit regimes.
Target benefits are a plan design option that include attributes of both defined benefit (DB) and defined contribution (DC) plans. TBPs have cost certainty for the plan sponsor, similar to DC plans. While similar to DB plans in many respects, including the pooling of longevity and investment risks, TBPs offer employers more flexibility to adjust benefits in response to a plan’s funded position. (For more on target benefit plans, see our prior blog posts on the ABC’s of TBPs.)
From the plan member perspective, a TBP may be preferable to a DC plan. Under a traditional DC plan, members generally bear the risks (including, for example, investment and longevity risks) and are often required to make complex investment decisions. A TBP will provide for a pension formula, similar to a DB plan. However, unlike a DB plan, accrued benefits under a TBP may be reduced if the plan’s funding level falls below a certain level. In this case, a plan amendment must be filed. Generally, the plan design will build in the remedial steps that have to be taken where a TBP fails the required funding test and the priority order in which such steps are implemented.
Similar to the Alberta rules, B.C.’s target benefit regime includes a provision for adverse deviation (PfAD) for funding and risk management purposes. The PfAD under the Alberta and B.C. rules is determined by two components: (i) a certain percentage based on the percentage of the fund that is invested in equities and (ii) the amount, if any, by which the assumed discount rate exceeds the benchmark discount rate. The regulations for both jurisdictions also require that stress testing be performed, in respect of elements that the actuary believes may pose a material risk to the TBP’s ability to meet the funding requirements. Such testing must be done in a manner satisfactory to the applicable regulator.
A distinguishing feature of the British Columbia legislation is the ability to convert certain accrued benefits to target benefit. Though B.C.’s new pension laws are similar to those recently adopted by Alberta in most respects, this is a crucial difference. In Alberta, a proposed amendment which would have permitted the conversion of accrued benefits was defeated. (See our prior blog post on Alberta’s Bill 10.) However, an Alberta DB plan may still move to a TBP for future service.
In contrast, British Columbia will soon allow conversion of accrued benefits for certain plans if there is union consent. B.C. passed Bill 10, Pension Benefits Standards Amendment Act, 2014, on May 9, 2014, which includes provisions for such conversion. As such, B.C.’s new Pension Benefits Standards Act will allow multi-employer, negotiated cost plans to convert DB provisions to target benefit provisions in a manner that reduces accrued benefits – if a trade union representing plan members agrees to the reduction.
Now that British Columbia has taken the laudable step of expanding plan design options in the province to include TBPs, we hope that other jurisdictions will follow. As pensions are voluntary, employers should be provided with choices – including TBPs – in providing pensions to their employees. B.C.’s new legislation is a step towards permitting alternative plan designs and encouraging the continuation of private sector pensions.