Target benefit plans (TBPs) may be the answer to many problems facing pension plan design, according to a white paper.

In Target Benefit Plans, Game-Changer or Non-Starter?, Morneau Shepell chief actuary, Fred Vettese, writes that TBPs—while not new to multi-employer plans—can work well for single-employer plans looking to make changes.

“In its most basic form, a TBP is a pension plan that aims to provide a defined benefit but with fixed contributions,” he writes. “TBPs are promising because they eliminate the risk of rising costs inherent in DB plans while offering a better solution for most employees than most DC plans.”

Vettese notes that there are several inherent design elements that make the model work: TBP contributions are fixed, the assets are pooled for investment purposes, the accounting applied to TBPs can be less expensive and less complicated than for DB plans, pension adjustment calculations are simplified by looking at contributions made, and TBPs are monitored as going-concern valuations rather than solvency valuations.

He says TBPs might serve plan sponsors that are considering closing their DB plans because of sustainability issues but still want to provide their employees strong long-term retirement security.

“TBPs are not perfect, and payouts can be reduced if target benefits are less than 100%,” Vettese writes. “Within the sphere of employers that provide pension coverage now, however, TBPs will be an important new plan design that may ultimately replace DB plans in both the private and public sectors.”

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Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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