On April 24, 2014 the Federal Government announced it is considering changing the federal pension legislation (Pension Benefits Standards Act) to permit “target benefit plans” (TB Plans) as an option for federally regulated private sector employers and Crown corporations . The announcement has people thinking about TB Plans, and whether they are the answer:
- TB Plans. TB Plans are a middle ground between defined benefit plans and defined contribution plans, providing for fixed contributions, investment pooling and longevity risk, and no solvency payments.
- TB Plan Benefits. Part of a post-2008 trend, TB Plans aim to increase the availability of pensions at a more certain cost for employers and provide greater benefit security than defined contribution plans – and are under increasing use and consideration in Canada and the world.
- Implementation. Existing plans could convert, but there are lots of unanswered questions.
PROPOSED TB PLANS
The framework the Federal Government will establish under the federal Pension Benefits Standards Actwill create a middle ground between:
- defined benefit (DB) plans, which offer a guaranteed pension backed by the pension fund and the employer’s financial position, and
- defined contribution (DC) plans, which provide a benefit that relies on current service contributions and the investment returns in the member’s accounts..
Fixed Contributions. TB Plans provide for fixed contributions by employers and employees. The contributions may be fixed absolutely, or allowed to vary within an agreed range. If the contributions aren’t sufficient to fund the targeted benefits, then benefits (accrued and future) may be reduced.
Investment Pooling and Longevity Risk. Significantly, TB Plans continue to permit pooling of investment and longevity risk – a major benefit to employees over defined contribution plans. However, the employer’s contribution risk under the defined benefit plan is now limited to the fixed contribution rate, together with any agreed upon variances.
No Solvency Payments. As a result, TB Plans allow benefits and contributions to be adjusted to respond to a pension plan’s financial position, instead of requiring solvency payments.
Additional Information. The Federal Government included additional information on TB Plans with its announcement:
- A Consultation Paper entitled Pension Innovation for Canadians: The Target Benefit Plan and a Frequently Asked Questions information sheet. Click here to read both.
- A March 2012 paper published by the Association of Canadian Pension Management. Click here to read the paper.
TB PLAN BENEFITS
TB Plans are part of a trend that emerged after the 2008 financial crisis and resulting low interest rates. The notion that a TB Plan will provide adequate and secure retirement income is an attractive one, particularly in the current economic environment.
More Pensions. The aim in making TB Plans available is to preserve and increase the number of employers that can offer employees an affordable workplace pension plan with a predictable retirement pension.
Greater Benefit Security Than DC Plans. TB Plans offer a new, sustainable and flexible pension option that provides a high probability of benefit security (where benefits are “targeted”) for plan members and retirees during both favourable and adverse market conditions. The TB Plan’s framework’s design and development will be guided by a set of broad objectives and principles: pension sustainability, benefit security, transparency and equity.
TB Plans Elsewhere. TB Plans are not new in Canada; other Provinces have implemented changes to allow them, and still more Provinces – and countries – are considering it:
- NB already makes a form of TB plan (the shared risk plan) available under its pension legislation
- NS and PEI have implemented TB plans in certain public sector plans, and other Provinces are considering them.
- The federal government joins a number of other Canadian Provinces that may soon allow TB Plans, including Alberta, BC, Ontario and NS
- The UK is actively considering TB Plans (called “defined ambition” plans in the UK).
When – and even whether – the Federal Government will change the federal pension law to permit TB Plans for federally regulated private sector employers and Crown corporations is not yet determined, and the decision is likely well down the road.
Impact on Existing Plans. Under the proposed TB Plan framework:
- Existing DB and DC plans could convert to a TB Plan if all parties agree.
- Members, retirees, and unions will participate in establishing contributions and benefits, and be represented on the Board of Trustees established to administer the plan.
Questions. Of course, implementing TB Plans always leads to a number of key questions – as yet unanswered – including:
- What is the required funding level to support the targeted benefit?
- How will active members, retirees and unions be involved in plan governance?
- Under what circumstances may benefits be reduced – a key provision of such plans?
- Should the rules be prescriptive, as in NB, or will the parties be able to take into account their particular circumstances?
- On conversion of a defined benefit plan, what is the treatment of existing benefits?
- How do you ensure members understand the TB plan?
Consultation. The Federal Department of Finance has asked for input from interested stakeholders byJune 23, 2014. It is hoped that the consultation process will provide useful answers to the questions that implementing a TB Plan raises.