Amid economic volatility, Canadian target-benefit plan sponsors can ensure strong outcomes for members by balancing pension benefit stability and intergenerational equity, says George Ma, a retired actuary and author of a new report on target-benefit outcomes for the Canadian Institute of Actuaries.
He notes three fundamental elements underpin a well-structured target-benefit plan: sound design, clearly defined risk-sharing and adaptability over time.
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“The plan needs transparent rules that link contributions, investment returns and benefit levels, so members understand how and when their benefits might change. Second, there’s the trade-off between stability and fairness: prioritizing stable benefits may shift more risk to younger workers, while a more equitable sharing of risk could lead to greater benefit volatility for retirees.
“There’s no one-size-fits-all answer — sponsors must make these choices intentionally. Finally, plans need mechanisms to adapt — such as automatic triggers or scheduled reviews — to remain resilient as conditions evolve.”
In the report, Ma outlines a benefit adjustment mechanism that responds smoothly to changing conditions, along with a set of risk metrics that can help plan sponsors assess how well they are balancing benefit stability and intergenerational equity.
While he says Canadian target-benefit plan sponsors do a solid job managing risk within fixed contribution limits, they generally don’t use a formal metric to balance benefit stability with intergenerational equity.
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Most rely on plan-specific rules and funding thresholds rather than a unified measure that tracks how risk is shared across age groups. By contrast, countries like the Netherlands and Denmark have taken a more deliberate approach, he notes.
“The Dutch collective [defined contribution] model is designed to smooth gains and losses across generations, while Denmark’s ATP system uses buffer reserves and dynamic asset allocation to deliver highly stable benefits. Both systems show that it’s possible to build in mechanisms that protect long-term sustainability while also reducing year-to-year volatility and promoting fairness across cohorts. That’s a conversation Canadian plans are only beginning to engage with.”
The report was based on a model target-benefit plan invested in a balanced portfolio with 50 per cent in equities and 50 per cent bonds. When alternative investments are factored in, additional risks — such as illiquidity, valuation uncertainty and less-predictable cash flows — can influence both benefit stability and intergenerational equity.
“From a modeling standpoint, incorporating alternatives requires more complex assumptions about return behaviour, correlations and liquidity constraints,” says Ma. “Ultimately, the interaction between investment strategy and benefit adjustment rules is critical — what appears fair and stable under one asset mix may not hold under another.”
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