In this final post of our series on the myths surrounding target benefit plans (TBP) and defined benefit (DB) plans, we address probably one of the biggest myths surrounding DB plans – that their benefits are guaranteed.
What is truly guaranteed in life other than death and taxes?
The answer is “nothing”. The traditional DB pension plan – where the employer “guarantees” the pension benefits – may not be sustainable in some public and private sector cases and could lead to crisis situations that TBPs could help avoid. Generous DB plans may, in adverse circumstances, put both the members and the employer at risk. There have been many high profile instances over the last decade or so where the pension solvency issues threatened the continued operation of an organization. And, there have been other high profile instances where a company has gone under and pensions have been permanently reduced. Ultimately, the so called “guarantee” comes down to the employer’s willingness and ability to pay.
Maybe “guaranteed” by the employer is not the way all DB pension plans should operate. Maybe this so called guarantee has contributed to the general decline of occupational pension plans and the current concerns over declining private sector pension coverage. Perhaps design change that facilitates a flexible DB pension type vehicle is a more sustainable alternative for some employers and workforces. TBPs allow for adjustment of benefits as an additional lever to increasing contributions. That is, where a DB plan has funding issues, the only lever available in respect of past service is additional contributions. TBPs may permit a minimal contribution increase where permissible, but may also permit adjustments to ancillary and base benefits to address the funding concerns.
TBPs can provide a pension that has many of the DB attributes, without the “guarantee”. For some employers and workforces this may be a desirable alternative, and legislation across Canada should permit target benefits as a design option for all employers.