While the efforts of most provinces to stem the decline of DB plans haven’t gone beyond softening some funding requirements, New Brunswick has quietly taken the bold step of introducing a new pension model.
Based loosely on the Dutch model, New Brunswick’s shared risk plan (SRP) combines the DC approach to plan funding and the DB approach to providing retirement income.
For members, this translates into a pension that provides a more predictable benefit amount than the standard DC plan, without the same risks (the risks of members making poor investment decisions or outliving their savings).
For plan sponsors, the new model effectively eliminates the open ended financial risk associated with DB plans.
SRPs pay a base benefit funded from contributions and a conservative investment policy. This means that the base benefit doesn’t rely on stock market-driven investment returns. To further protect base pensions, SRPs are required to have strictly monitored funding and investment policies, and must apply stringent risk management strategies.
Enhancements, such as early retirement or bridge benefits, may also be provided under these plans—and cost of living increases may be granted for past periods when and if funding allows. But, there are no benefit guarantees.
Benefit amounts are targets, not promises. Like multi-employer pension plans, shared risk plans have the ability to reduce benefits for both active and retired members. And, as multi-employer plans have learned (many the hard way), when plans are allowed to make benefit reductions, transparency around plan operations becomes critical. More to the point, lack of transparency can create resistance, mistrust and lack of confidence in plan management.
Embracing shared risks and rewards
Recognizing how important it is that members fully understand the risks and rewards of plan membership, New Brunswick regulators have stepped up disclosure requirements for these pension plans.
Among other things, these plans are required to explain in plain language:
- that contributions are limited based on the funding policy;
- that benefits for both members and former members can be reduced;
- how current funding levels have been calculated; and
- the factors that would be used by the administrator when reducing or increasing benefits.
These disclosure requirements provide both the impetus and opportunity to cultivate an environment of full transparency and accountability. But this will involve more than a simple downloading of information to plan members (see Disclosure vs. communication: more than just semantics).
Plan sponsors will need to identify the information needs and expectations of members, test their responses to key messages, develop personalized member-centric materials, and establish benchmarks for measurable outcomes that can be tracked over time. All of this will take time! Communication is a process, not a one-time event. But there will be pay-offs: engagement, understanding, trust, good will and a fuller appreciation of the value of the plan. Add it all up and effective communication is not only a basic requirement but a key strength of the shared risk model.
Will others adopt this model?
A large number of employers see the merit of DB plans but can’t build a business case in today’s economic environment to justify them. Combine that with the persistent desire of members for benefit predictability, there’s no doubt that shared-risk pension plans present an appealing alternative.
How big a role SRPs will play in Canada’s future will largely depend on the success of the plans now being introduced in New Brunswick. That success, in turn, will largely hinge on the ability of plan sponsors to develop the communications needed to get member buy-in. And as they do, the rest of Canada will be watching closely.