The federal government has unveiled a proposal for target benefit plans (TBPs), pension programs that share the risk between employers and employees.

“Traditional DB pension plans have difficulty adapting to people living longer and to a fragile global economic environment with relatively low interest rates. And DC plans are exposed to financial market volatility,” said Minister of State for Finance Kevin Sorenson, speaking on Thursday at a Toronto event organized by the Economic Club of Canada.

The voluntary pension arrangement would be available to federally regulated private sector or Crown corporations; it would not affect the core public sector pension plans, which are subject to a different type of legislation. Federally regulated industries include banking, transportation, telecommunications, and radio and TV broadcasting. Canada currently has 1,234 federally regulated pension plans.

The proposed framework would allow eligible employers to convert their DB or DC plans to TBPs, if all parties agree. The new structure would be available to both existing and new plans.

It would be up to plan sponsors, members and retirees to determine the different elements of plan design, such as contribution rates.

Hybrid structure
“Unlike DC plans, target benefit plans would offer a more predictable stream of benefit payments and high benefit security, since the target benefits would be based on a per-determined formula,” Sorenson said. “Members and retirees would benefit from the pooling of longevity risk, which is not a feature of DC plans.”

TBPs are essentially a hybrid between DB and DC plans because their goal is to collect defined contributions in order to secure a targeted benefit in retirement. “Pension benefits and contributions would adjust over time based on the performance of the plan,” Sorenson explained. If the returns are lower than expected, the plan would increase the size of the contributions and/or reduce the size of the benefits, without putting plan sponsors on the hook. If the returns are higher than expected, benefits could be increased or contributions could be reduced.

“This needs to be done”
“I definitely think this needs to be done,” said Karen Hall, associate partner and chair of the national target benefit plan task force with Aon Hewitt, in an interview. “Having a lifetime pension income is really important, and target benefit plans do [achieve] that,” she said. Hall added that many Aon Hewitt clients across the country have been interested in TBPs but so far they’ve been hindered by lack of legislation, so the proposed framework is good news for them.

Mel Bartlett, managing partner for Morneau Shepell’s Atlantic office, echoed that sentiment. The proposal is “a progressive move and a necessary step in the right direction toward federal pension reform,” she said in a press release. “It will have positive implications for pension plans in this country.”

However, not everyone is in favour of TBPs.

“Time and again this government has promoted ideas that would make it more difficult for Canadians to achieve retirement security. This latest announcement fits into that category,” said Canadian Labour Congress president Ken Georgetti. “The goal here is to allow employers more opportunities to dump defined benefit pension plans and existing liabilities and shift the risk to workers.”

Hall cautions that TBPs might be a hard sell for members of a DB plan who enjoy security of benefits; however, they’re a better option for DC plan members, who usually don’t know if they are saving enough and often face the threat of retirement income inadequacy.

Another TBP consideration is that “you have to be aware of the risk you’re taking on and your ability to meet the target benefit,” Hall said. Additionally, sponsors and members have to ensure that the governance structure of the plan makes it possible to take action before it’s too late, Hall explained. “That includes monitoring and setting affordable targets.”

Some provinces, such as New Brunswick, Alberta and Nova Scotia, have already introduced legislation that allows TBPs. New Brunswick even plans to extend the model to provincial public servants.

Meanwhile, Ottawa has just launched a 60-day online consultation, during which stakeholders can weigh in on the TBP consultation paper on the website of the Department of Finance.

The only disappointing aspect of that consultation paper is that it doesn’t touch upon tax issues, Hall explained. “That’s a bit surprising to me,” she said, adding that the introduction of TBPs requires a review of tax legislation.

Why not just expand the CPP?
Despite the fact that the Canada Pension Plan (CPP) will be sustainable for the next 75 years, increasing the size of CPP benefits now will not resolve the issue of Canadians not saving enough for retirement, according to Sorenson. “We know that the expansion of CPP at this time would hurt families, would reduce wages, would deter business and, in some cases, would eliminate jobs,” he said. “We share the views of many provinces, employees and employers that believe that now is not the time to hike payroll taxes.”

However, others argue that higher CPP benefits are the best and cheapest way to guarantee sufficient retirement income for all Canadians because the program is universal, mandatory, indexed to inflation, inexpensive to administer and dependent on equal contributions from employees and employers.

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Chris Young:

I agree with last paragraph in the article that states the reasons why the CPP should be increased. Also I believe that Target Benefit Plans will shift the liabilities and risk to the workers as is the case with DC plans.

Sunday, April 27 at 10:51 am | Reply

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