Last week, we began a blog post series that considers some of the common myths surrounding target benefit plans (TBPs). In this post, we respond to the suggestion by some that if you do not offer employers the option of implementing a TBP, they will simply choose to continue their existing traditional defined benefit (DB) plans.

One of the key flaws with this suggestion is that it appears to overlook the fact that the private pension system is a voluntary one. Subject to notice requirements and/or applicable collective agreements, employers can generally prospectively change or eliminate benefits provided to employees, including pensions as long as accrued benefits are preserved. Employers have been exiting traditional DB pension plans in droves over the last few decades. This shift has been as a result of numerous factors, including employers’ desire for cost predictability, concerns over funding volatility and long term affordability given escalating longevity risks. For single employers, most pension standards legislation provides only one other pension design option for an employer wishing to change from DB – defined contribution (DC) pension plans. Often times negotiations will result in the preservation of DB plans for those employees who have them, with new employees being placed in a DC plan. Sometimes employers will exit the registered pension plan regime altogether in favour of Group RRSPs for new hires.

Shouldn’t there be an alternative to DC plans where an employer decides to exit the traditional DB model in favour of a less volatile pension arrangement? In the right circumstances, isn’t a targeted DB pension for the entire workforce better than a “guaranteed” DB pension for some and a DC for future service and new hires?

Permitting TBPs as a design option means that there is another viable option for employers with non-union workforces to consider and for employers and unions to negotiate in respect of unionized employees. In the context of unionized workforces, employers would still have to negotiate the establishment and terms of any TBP with employee bargaining agents.

Pension legislation that permits plan design options other than the traditional choices should be encouraged as a progressive alternative that could, in many circumstances, be preferable to exiting DB for future service and/or future hires, creating an ongoing DB legacy issue for the sponsor and intergenerational benefit differences among members.