Economic turmoil has dealth pension plans a hard blow in recent years, with both DB and DC plans struggling to deliver sustainable retirement benefits.
The solution, according to Aon Hewitt, is in target benefit plans. The firm has released a guide, Target Benefit Plans: The Future of Sustainable Retirement Programs, outlining the need for a new approach to retirement plans.
“Target benefit plans are fairly straightforward and leverage the best aspects of DB and DC plans, while at the same time minimizing the key disadvantages of each,” said Claude Lockhead, chair of Aon Hewitt’s Canadian investment consulting practice. “A key feature of our guide is that it provides several examples of sustainable pension plan designs from around the world, while highlighting two perfect examples of major organizations we work with in Canada that have adopted the target benefit approach.”
With target benefit plans, contribution levels are set first—at a fixed level—and benefits are derived from what can be afforded collectively by that contribution level, with the ability to adjust benefits as experience develops. Target benefit relies on a funding policy that prescribes in advance the methods for varying benefits based on affordability, should such adjustments be required, with pre-set reserve levels and a pre-determined order of benefit adjustments.
Support for the target benefit approach is growing across the country, says Aon Hewitt, with several provinces having already passed target benefit legislation. Other provinces are expected to follow suit in the coming months.
“We actually have the tools in place—we just need to use them more effectively and permit more flexibility in their application. TB has great potential to achieve what we are all looking for: sustainable retirement income,” said Barry Gros, associate partner at Aon Hewitt, and one of the guide’s primary contributors.