While proponents are expressing concern about the absence of any mention of target-benefit pension plans in the recent federal budget, the omission doesn’t mean Ottawa has lost interest in the issue, according to the Department of Finance.
“The development of a [target-benefit plan] framework for Crown corporations and federally regulated private sector pension plans remains a priority for the government,” the Department of Finance said in an emailed statement.
Canada has about 1,200 federally regulated pension plans in industries such as banking, transportation, telecommunications, and radio and TV broadcasting.
Target-benefit plans “would support the government’s commitment to a private pension landscape that supports a greater availability of pension savings vehicles, promotes plan sustainability, enhances benefit security, and protects the retirement savings of Canadians,” the Department of Finance added in its statement.
But their omission from the recent budget despite references to other pension regulatory issues has disappointed supporters of target-benefit plan who see the model as a source of greater retirement income security at a time when many Canadian employers, including some in the public sector, are closing their defined benefit pension plans and shifting to defined contribution arrangements for lack of an alternative in most provinces.
“I’m disappointed that an opportunity has been missed,” said Ron Olsen, senior vice-president and consulting actuary at the Segal Group, a pension and benefits consulting firm. “A prime minister that has as his goal strengthening of the middle class, that clearly understands the importance of retirement risk pooling, has really no reason to not pursue a policy of permitting and encouraging the development of target-benefit pension plans in our country.”
Target-benefit plans, which share the risk between employers and employees, are a hybrid between defined benefit and defined contribution schemes: the goal is to collect defined contributions in order to secure a targeted benefit in retirement.
The pension benefits and contributions adjust over time based on the performance of the plan. If the returns are lower than expected, the plan can increase the size of the contributions or reduce the benefits without putting plan sponsors on the hook.
Canada already has active target-benefit legislation for single-employer plans in several provinces, such as New Brunswick, Alberta and Nova Scotia.
Olsen would like to see the government act on target-benefit plans at a national level because, he says, strong federal support for the model would provide greater impetus for the provinces to adopt their own legislation.
Like Olsen, Jana Steele, a partner at Osler Hoskin and Harcourt LLP, was also surprised that target-benefit plans were absent from this year’s federal budget. She says she would have liked to see talk about changes to the federal Pension Benefits Standards Act that would allow federally regulated employers to adopt target-benefit plans.
“Ideally, there would be a fulsome target-benefit regime in that statute to facilitate target-benefit plans for federally regulated employers,” she says.
Steele would also have liked to see mention of changing tax rules that currently don’t take target-benefit plans into account. “The tax regime is designed around defined benefit, defined contribution and specified multi-employer plans. Unless you fall into one of these, you’re making a square peg fit in a round hole,” she says.
But not everybody wants the federal government to back target benefit plans. Some, such as The Public Service Alliance of Canada, have said in the past that making these plans available could encourage employers to abandon their defined benefit schemes.
“The introduction of target pension plans in the federal sector opens the door to other legislative changes and puts all defined benefit pension plans at risk,” the alliance said on its website in 2014 when the Conservative federal government proposed legislation that would make target-benefit plans available, on a voluntary basis, to federally regulated private sector or Crown corporations.
The Tories’ proposal called for allowing eligible employers to convert their defined benefit or defined contribution plans to target-benefit schemes if all parties agreed. The proposal said it would be up to plan sponsors, members and retirees to determine the different elements of plan design, such as contribution rates.
Steele disagrees with critics who say that type of legislation would encourage more defined benefit plan sponsors to abandon their plans. “If someone’s going to shift out of a defined benefit plan, and we’ve seen a lot of sponsors do it over the last 10 or 15 years, currently the only option is defined contribution under a lot of jurisdictions,” she says.
“Wouldn’t it be preferable from the point of view of plan members to have a target-benefit plan, if there’s going to be a change, as opposed to defined contribution because at least then you have the risk pooling that a target-benefit plan provides?”
According to Olsen, anybody who thinks target-benefit plans threaten the ironclad guarantees provided by defined benefit pensions simply doesn’t understand defined benefit pensions. “Those benefits are not guaranteed. Those benefits are only guaranteed to the extent that the plan sponsor continues to exist.”