Jim Flynn, a trustee of the Nursing Homes and Related Industries Pension Plan and a former assistant regional director of the Canadian Union of Public Employees, remembers a time when the industry’s workers — predominantly women in precarious employment with physically demanding jobs — would retire without a pension plan.
“The need was great,” he says. “I was watching women — because, of course, the industry is predominantly women, by a large majority — who had worked for 30, 40 years and they would leave employment with nothing. If they had a little bit of sick leave, 15 days, that was basically what they were given, and then [the Canada Pension Plan] and old-age benefits and that was it.”
Today, as the plan turns 30, the majority of its monthly pension cheques are higher than $1,000. “It’s really nice to see,” says Flynn. “And we’re celebrating that we’re over the $2 billion mark [in assets under management]. But the main thing is to see that these women, after 30, 40 years, are leaving with a decent pension.”
In the beginning
While the NHRIPP, a multi-employer target-benefit plan, is registered in Ontario, it’s available to the health-care industry across Canada, including employees at nursing homes, special care facilities and retirement homes, as well as home care workers and those in other similar or ancillary services. Since it was established in 1990, it has been offered by more than 580 employers and currently has about 50,000 active members and 11,000 retirees.
In the late 1980s, the CUPE and the Service Employees International Union took their proposal for an industry pension plan to arbitration. On its second attempt, the unions were granted the right to establish a plan. Eventually, membership grew to include employees represented by the Ontario Nurses Association and Unifor.
In those early days, four or five trustees set up the plan and took care of all the major paperwork, says Flynn. Then it was up to the two founding unions to garner the acceptance of their members. “It very slowly started to grow. We added more trustees to the board. SEIU negotiated centrally, so they could put 20 or 30 homes in the plan at once. And CUPE had to go out and do them individually.”
As NHRIPP evolved over the past three decades, so did Canada’s pension landscape. “There’s been an evolution where multi-employer pension plans had similar traits to target benefits and now they’ve morphed into this concept of a target-benefit plan, but it’s definitely one of the few growing plans,” says Alain Malaket, chief executive officer of InBenefits, which takes care of the NHRIPP’s administration and plan management.
“At one point, I was a regulator with Ontario and we had 13,000 defined benefit plans,” he adds. “Now people have gone to the other extreme, where it became [defined contribution] and [registered retirement savings plans] . . . . And these target-benefit plans are almost finding a middle ground between the two options, where there is some pooling that allows members to benefit from these types of arrangements more effectively than a group RRSP or an individual RRSP.”
Indeed, one of the most significant advantages of a target-benefit model is the pooling of risk, he says, noting the NHRIPP manages longevity risk and reduces investment risk through diversification.
The plan’s benefit formula is tied to the contributions received on behalf of a member. For every $100 of contributions, the benefit provides $18.60 per year payable for life, assuming an average payout of 20 years, which translates into almost 400 per cent of contributions expected to be paid out.
For example, where a plan member works for 25 years with average earnings of $45,000 and contributions at eight per cent of earnings, the NHRIPP would have received $90,000 in contributions for that individual. The target pension benefit from the plan would be $16,740 a year. On average, a woman retiring at age 65 can expect to live to about 87 (a man can expect to live to about 84), so she can expect a payout of about $368,280 over her lifetime. That’s more than 400 per cent of the contributions received.
Doug LeFaive, a partner and pension lawyer at Goldblatt Partners LLP, believes these plans make a lot of sense. “If employers are retreating from single-employer [DB] plans, which they have been steadily for years, this is a better outcome for plan members than a DC plan.
“There are really no concerns for plan sponsors because their only obligation is to make the contributions under the collective agreement,” he adds. “They’re not responsible for any funding shortfalls that might develop.”
In Canada, a fully guaranteed pension plan is becoming rare, says Robert Brown, professor emeritus of actuarial sciences at the University of Waterloo, noting target-benefit plans are gaining popularity.
“The first thing that became target benefit was the cost of living adjustment. In B.C., the government negotiated with their public service to make the cost of living adjustment dependent upon the funding of the plan. In fact, the cost of living adjustment is funded by a defined contribution; the rest of the plan is traditional, pretty much fully guaranteed DB.”
In effect, target-benefit plans are DB plans, he adds. “But to then say there’s going to be a set contribution, it has to become a target benefit. . . . You want to have a very high probability of getting to what you’ve promised, but it can’t be 100 per cent guaranteed and still have, in effect, a defined contribution. You have to make some of the benefits contingent upon the funding health of the plan.”
Indeed, in a target-benefit environment, plan sponsor communication must be clear it isn’t a guaranteed benefit, says Malaket. “It’s a benefit that’s designed based on a formula with a number of financial models behind it. But there’s a disconnect between the financials of the pension plan and the funding mechanism. So in a target-benefit plan, you’re typically bound by a collective agreement that could be several years out, so if there’s a shortfall, unlike a single employer, you can’t simply say you need more money.
“If you get to a point where there’s a sustainability question, there could be a situation where there’s a reduction in benefits, prospective or accrued. Under the [NHRIPP] — knock on wood — there’s been no reduction since inception. There’s never been a change to the benefit formula. The accrual rate is still very generous — it basically took the Income Tax Act maximums and worked backwards to formulate the maximum benefit you could derive under the target-benefit environment.
“And the [NHRIPP] board is very cognizant of the financial requirements and risk mitigation, and always with an eye to the horizon to say, ‘Is this plan still sustainable? What can we do to make sure it stays that way?’”
While many types of target-benefit plans exist, federal and provincial pension legislation doesn’t fully address the nuances in design, says Malaket.
In terms of target-benefit regimes for multi-employer plans, British Columbia, Alberta, Saskatchewan and Quebec permit the option, “where they’re funded on a going-concern plus basis,” says LeFaive. “In Ontario, these plans have been funded only on a going-concern basis since 2008. . . . And they’ve floated target-benefit rules in the past. My understanding is they’re still working on it, but at some point they’ll be enacted [in Ontario] as well — for multi-employer plans.”
Indeed, in August 2018, the Ontario government published proposed regulations relating to the funding framework for certain multi-employer plans seeking to convert defined benefits to target benefits. Under the proposals, eligible plans won’t be required to fund on a solvency basis. However, they would still be required to provide solvency valuations determined on a DB basis, at least triennially.
“There are a number of pieces of legislation we’ve been waiting on,” says Malaket. “We’ve had exemptions from solvency regulations for a number of years. . . . The regulators recognize that solvency is not the metric to be used against these types of target-benefit plans. So we get these exemptions and we’re waiting for that final solvency relief.”
As the NHRIPP celebrates its 30th anniversary, the plan is investing in its system infrastructure to improve member support and communication, as well as improving automation for employers.
These investments include a rebrand, a new internal administration system, new websites and upgrades to its communications material. “We’re looking to make sure communication is a lot more effective,” says Malaket.
The new system also includes an employer focus group to provide feedback on the new tools. “We want to make sure the communication and transparency is there,” he says. “So, to the extent that the employers are comfortable with that information and are able to disseminate it, it helps everybody.”
The improvements will be rolled out in the coming months. In the meantime, the plan continues to grow. That growth is an important component of the success of this type of plan.
“Whether it’s target-benefit or not, the thing you want to do is get mass,” says Brown. “It’s sort of like peeling an onion, and after you’ve gone through all the elements you’re looking for, that’s what’s left. You have to be in a target-benefit world.”
Jennifer Paterson is editor of Benefits Canada.