This is my first blog post in a series regarding target benefit plans (TBPs) (also called defined ambition plans). In this post, I will describe what TBPs are and why such plans should be permitted under pension laws as a design option.
Most pension standards legislation in Canada currently permits target benefits for multi-employer plans, but not for single employer plans. Similar to defined contribution (DC) plans, TBPs have fixed contribution rates (or contribution rates that are variable within a narrow range). This provides costs certainty to plan sponsors. Similar to defined benefit (DB) plans, target benefit plans have a targeted DB-type pension benefit (often career average). However, unlike DB plans, TBPs allow for benefits to be reduced if there are insufficient funds to provide the targeted benefit.
A key element of TBPs is risk pooling. Similar to DB plans, TBPs pool various risks including investment risk and, importantly, longevity risk. In a DC plan members have to save sufficient funds for their own lifetime and risk outliving their savings. By contrast, in a TBP or DB plan, the longevity risk is pooled – so some plan members will live longer and some will pass away earlier than anticipated. This risk pooling is a key feature that makes DB plans and TBPs more attractive to employees.
Outside the Province of New Brunswick (more on that in my next post), single employers who wish to provide a pension plan to their employees generally have the option of a DC plan, where virtually all risks are borne by the employees, or a DB plan, where all risks are generally borne by the employer. Arguably, pension standards legislation should permit single employer plan design options, such as TBPs, that are on the spectrum between DC and DB. Pension laws should be flexible enough to permit innovative designs and to encourage private sector pensions.
So you may now be wondering about a TBP as a potential pension plan for your employee group because as a plan sponsor you will have cost certainty, but plan members will receive a “targeted” DB-type pension at retirement – a plan design that contains elements of both DB and DC. However, due to current pension laws TBPs are not widely available in the single employer context.
In my next blog post I will discuss New Brunswick’s new shared risk model, a type of TBP. And, in my third post in this series I will address the status of single employer target benefits in other Canadian jurisdictions.