On April 24, 2014, the federal government released a consultation paper proposing a framework for target benefit plans (TBP), and seeking input from stakeholders on the parameters of the proposed TBP framework. The government’s initiative would incorporate TBP provisions into the federalPensions Benefits Standards Act, and would make TBPs available to federally regulated private sector employers and Crown Corporations. For a primer on TBPs, see our prior Osler series on TBPs.
There are a number of notable similarities between the proposed federal TBP framework and New Brunswick’s shared risk plan (SRP) model.
Administration and Governance
The proposed approach in the federal consultation paper is a joint governance structure that would require active member, retired member and other plan beneficiary participation, and permit plan sponsor and external representative (e.g., pension experts or professionals) participation. It is proposed that federally-regulated TBPs would be administered by a Board of Trustees or similar body with a fiduciary duty to the plan.
The SRP model permits administration by a trustee, board of trustees or not-for-profit corporation. The plans in the province of New Brunswick that have converted to SRP have, by and large, adopted a jointly sponsored Board of Trustees as the administrative body. The rules in New Brunswick do not specify the constitution of the Board of Trustees.
The federal framework proposes a 2-tier benefit structure: (i) base benefits that could be reduced where the plan is in a deficit position, but would have a high level of protection; and (ii) ancillary benefits with a lower, but reasonable, level of protection, that would be reduced before base benefits. The plan text would set out which benefits belong in each category.
The SRP model is also premised on two classes of benefits – base and ancillary – with different levels of protection. Under the SRP risk management goals, base benefits have a higher degree of protection. The design is such that at inception, there must be at least a 97.5% probability that base benefits will not be reduced over the next 20 year period.
The idea for both the federal and New Brunswick designs is that the base pension benefit would not be reduced if at all possible. Instead, the ancillary benefits would be the primary benefit levers that would be adjusted. Base benefits would only be reduced as a last resort.
The federal proposal would require a funding policy, just as the SRP design does. Also, the proposed federal rules would exempt TBPs from solvency funding, similar to SRPs.
The federal regulatory framework would be based on either a probabilistic or margin funding approach for risk management. The proposed probabilistic approach would include a going concern funding requirement and: (i) a primary risk management goal that provides a specific probability that base benefits will not be reduced; and (ii) a secondary risk management goal that provides a specific probability of delivery of ancillary benefits.
The probabilistic approach is the approach adopted in New Brunswick. The New Brunswick rules require certain risk management goals to be met at various times: (i) the primary risk management goal, that there be at least a 97.5% probability that base benefits will not be reduced over 20 years from the plan’s inception; and (ii) the secondary risk management goal, that there be at least 75% certainty that certain ancillary benefits will be paid over the 20 year period.
Another point of similarity between the SRP model and the proposed federal framework for TBPs is that the design would permit contributions for both the employer and employees to increase or decrease within a range.
Funding Deficit Recovery Plan
The federal proposal requires a funding deficit recovery plan, either as a standalone document or as part of the plan text. SRPs also include a funding deficit recovery plan, as part of the funding policy, which establishes an order of priority for corrective measures that the administrator must implement to address a plan deficit. Both jurisdictions contemplate that the administrator must take corrective actions where the deficit recovery measures are triggered, which are set out in the funding deficit recovery plan. The SRP rules provide for the trigger (i.e., the plan is less than 100% funded on an open group basis for two consecutive years), whereas the proposed federal rules appear to provide flexibility in developing the specific trigger.
The federal proposal provides that the funding deficit recovery plan for TBPs would include triggers for deficit-recovery measures, a description of the required measures and priorities, timelines for implementation of such measures, and the minimum funding level to be attained through the corrective measures. It appears that there may be some flexibility regarding these matters under the federal regime, however, there will be a requirement that they be addressed in the funding deficit recovery plan. The SRP rules are prescriptive with regard to certain requirements, such as the timelines for implementation of measures and the minimum funding level to be attained through the measures.
There are some similarities in the permissible deficit recovery steps in both the proposed federal TBP model and the SRP model, including: increasing contributions, reversing past benefit increases, and reducing past/future ancillary and base benefits.
Funding Surplus Utilization Plan
The federal consultation paper includes a requirement that plans have a funding surplus utilization plan, either as a standalone document or as part of the plan text. The funding policy of an SRP is required to include a funding excess utilization plan. Such plans describe the steps that may be taken where there are excess funds in the plan.
The proposed federal rules contemplate that the funding surplus utilization plan would establish a trigger for surplus utilization measures, and a description of such measures and order of priorities. The SRP regime is prescriptive with respect to the first priority steps that must be included in a funding excess utilization plan (e.g., the first priority must be the reversal of any prior base benefit reductions). In addition, the New Brunswick rules include a maximum amount of surplus that may be “spent” when the funding excess utilization plan is triggered.
Where there is a funding surplus, the administrator must or may take action in accordance with the funding surplus utilization plan. The proposed federal regime and the SRP model contain many similar permissible actions for use of funding excesses, such as improvement of ancillary benefits and reduction of employer and plan member contributions. One notable exception is that the proposed federal framework does not preclude employer entitlement to surplus in a plan (which is not contemplated under the SRP rules). The federal proposal indicates that the parties which will benefit from the surplus would depend on the surplus allocation measures included in the funding surplus utilization plan – this may include a refund to the employees or the employer.
Disclosure and Communications
The proposed federal rules include enhanced disclosure requirements. The plan administrator would be required to provide information to the plan sponsor, members and retirees upon enrolment, during membership, in the event of membership termination or death, and in the event of plan termination and wind-up. Similarly, the administrator of an SRP is required to provide enhanced disclosure to members on conversion, during membership and after each valuation.
Conversion to TBP Plan Design
New Brunswick’s rules allow that if a defined benefit (DB) plan is converted to a SRP, the accrued benefits can be converted (i.e., the conversion does not have to be done prospectively only). As in New Brunswick, the proposed approach in the federal consultation paper would permit conversion of accrued benefits. The federal proposal includes an employee and retiree consent component, the specifics of which are unclear. The consent component is not included in the New Brunswick legislation.
The termination value is the amount of pension entitlement a member may take from the plan in the event of his or her termination prior to retirement if the member exercises portability. In the federal proposal, the termination value of an individual’s pension entitlement would take into account the accrued value of the individual’s target base benefits , adjusted by the funded ratio of the plan at the time of the most recent actuarial valuation. Therefore, similar to the SRP design, the amount of termination value is connected to the overall performance of the plan at the relevant time.
The proposed federal framework contemplates TBPs in both the union and non-union environments, although the questions posed suggest that a different governance structure may apply. The proposed federal framework also consider to what extent the TBP provisions should apply to multi-employer plans. Similarly, the SRP design is flexible and may apply to multiple plan types and in various contexts: single employer/multi-employer, union/non-union environment, and public/private sector.
The proposed federal TBP framework is a welcome initiative, which has many features in common with New Brunswick’s SRP model. Legislative changes that permit other pension design options, such as TBPs, should continue to be encouraged. Providing plan sponsors with plan design choices that include DB-type pensions on retirement, such as TBPs, may hopefully slow or halt the recent trend to defined contribution or other capital accumulation type designs.