In our last post, we looked at two of the myths surrounding target benefit plans (TBPs).
This time, we look at myths involving unions’ opposition to TBPs and the DB “guarantee.”
Myth #3: Unions and employees are opposed to target benefits
First, as pointed out last week, unions have embraced multi-employer pensions plans, which often provide target benefits, for many years.
Second, although there are some unions or branches of unions that have recently voiced opposition to legislative changes to permit single-employer TBPs, it appears much of this opposition is directed at legislation that permits the conversion of past benefits to target benefits, as is permissible in New Brunswick. On a plan conversion from DB to shared risk in New Brunswick, all accrued benefits are converted to base benefits, which are afforded a higher level of protection than ancillary benefits, but which are, nevertheless, subject to the shared-risk rules.
Notwithstanding the opposition of some unions or union branches, there can be some advantages to members if past benefits are converted in conjunction with moving to a TBP.
Of course, from the employer’s perspective, conversion is preferable because it includes legacy DB benefits within the scope of TBP risk management and there would only be a single plan design to administer going forward. From the affected member perspective, all benefits are subject to prescribed risk management rules to help achieve improved benefit security and address potential intergenerational inequities. In addition, to the extent TBP conversion is linked to joint sponsorship/governance, members participate in plan sponsor and administration decisions through their selected representatives.
It is notable that the majority of the conversions from DB to shared risk in New Brunswick were done with the consent and support of the applicable unions.
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Myth #4: DB plans are “guaranteed”
And finally, we address probably one of the biggest myths surrounding DB plans—that their benefits are guaranteed.
What is truly guaranteed in life other than death and taxes?
The answer is: nothing. The traditional DB pension plan—where the employer “guarantees” the pension benefits—may not be sustainable in some public and private sector cases and could lead to crisis situations that TBPs could help avoid. Generous DB plans may, in adverse circumstances, put both the members and the employer at risk.
There have been many high-profile instances over the last decade or so where the pension solvency issues threatened the continued operation of an organization. And, there have been other high-profile instances where a company has gone under and pensions have been permanently reduced. Ultimately, the so-called guarantee comes down to the employer’s willingness and ability to pay.
Read: 5 pension trends to watch
Maybe guaranteed by the employer is not the way all DB pension plans should operate. Maybe this so-called guarantee has contributed to the general decline of occupational pension plans and the current concerns over declining private sector pension coverage. Perhaps design change that facilitates a flexible DB pension-type vehicle is a more sustainable alternative for some employers and workforces.
TBPs allow for adjustment of benefits as an additional lever to increasing contributions. That is, where a DB plan has funding issues, the only lever available in respect of past service is additional contributions. TBPs may permit a minimal contribution increase where permissible but may also permit adjustments to ancillary and base benefits to address the funding concerns.
TBPs can provide a pension that has many of the DB attributes, without the guarantee. For some employers and workforces this may be a desirable alternative, and legislation across Canada should permit target benefits as a design option for all employers.
Jana Steele and Ian McSweeney are both partners in Osler, Hoskin & Harcourt LLP’s pensions and benefits group. This article originally appeared on Osler’s Pension & Benefits Law Blog. The views expressed are those of the authors and not necessarily those of Benefits Canada.