Taxonomy, the classification of things or concepts, isn’t just for dusty old biology textbooks. Only by grouping things together or separating them out can we make sense of our world. When it comes to the naming of pension plans, pension thought leaders—and legislators—could learn a thing or two from the old-fashioned principles of classification.

Just as most Canadians—at least those of us lucky enough to have a pension plan—are finally beginning to sort out the basic differences between a DB plan and a DC plan, we find ourselves inundated with a new wave of unfamiliar (and sometimes misleading) acronyms and terminology. Not that we shouldn’t move beyond DB and DC. But when it comes to sorting out a target benefit plan (TBP) from a multi-employer plan (MEPP), or a shared risk plan (SRP) from a jointly sponsored pension plan (JSPP), even some industry insiders seem to get it wrong.

While it may not be obvious from their names, MEPPs, TBPs, SRPs and JSPPs all belong to the same genus and, arguably, the same species. All provide DB-type pension benefits based on a “target” formula, and all involve shifting varying degrees of risk from plan sponsor to plan member. Because of this, they typically adopt a governance structure—often in the form of a board of trustees—that facilitates member representation. But, just as differences can be found in different species under a particular genus, each type of target plan has its own unique characteristics.

Multi-employer pension plans were established in Canada in the 1940s and have proven to be a highly effective vehicle for delivering a predictable, secure lifetime pension. These plans combine a DB approach to providing benefits with a DC approach to funding those benefits—thereby eliminating the sponsor risk associated with DB plans and significantly reducing the member risk associated with DC plans. If the pension formula turns out to be too low based on actual experience, benefits can be increased. If the formula turns out to be too generous, benefits (including those already earned) can be reduced. The goal is to maintain a stable formula that provides predictable benefits for plan members across generations.

Target benefit plans are, essentially, MEPPs for single employers. So far, they are found only in certain industries in Quebec. Alberta, B.C., Ontario and Nova Scotia have all passed amendments or legislation enabling target benefit plans, but nothing has actually been proclaimed in force.

Shared risk plans are TBPs with highly prescribed risk management strategies and strictly monitored funding and investment policies. Contributions are fixed within a narrow corridor. Past and future benefits can be increased or decreased based on priorities established in the plan’s formal funding policy. To date, New Brunswick is the only province to introduce shared risk plans.

Jointly sponsored pension plans share similarities with target plans but provide a “guarantee” more than a “target” because earned benefits can be reduced only in the case of a plan windup. Future plan costs and deficits are shared between the plan sponsor and plan members (not necessarily equally), and future benefits can be adjusted up or down.

These plans aren’t the only pension models currently under discussion, but they illustrate a key point. Pensions are complex enough without the added layer of opaque terminology. As we look for new ways to tempt employers back into offering secure and sustainable retirement incomes, we should recognize just how far the adoption of a simple, intuitive and consistent pension taxonomy might go to help both employers and employees understand their options—and, ultimately, make better choices.

Susan Deller is a principal with Eckler Ltd. and specializes in benefits communications consulting.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2017 Transcontinental Media G.P. Originally published on benefitscanada.com

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