Despite having been available for decades, target benefit plans (TBPs) will continue to be resisted by federally regulated employers unless a legal flaw is fixed, according to a report.
The C.D. Howe Institute report, Target Benefit Plans: Improving Access for Federally Regulated Employees, finds that TBPs are rarely adopted by federally regulated private sector employers because federal pension law casts doubt over the ability of employers to limit their financial exposure, a key attribute of TBPs for employers.
“The essential goals of a pension system—namely, to provide adequate retirement income security, to ensure fiscal sustainability, and to maintain or improve workforce productivity—can be achieved by taking steps to better accommodate TBPs,” says author Randy Bauslaugh, leader of McCarthy Tétrault’s national pensions, benefits and executive compensation practice.
He elaborates that these plans promise improved pension outcomes with improved sustainability and also combine many of the advantages of the DB plans currently favoured in the public sector with those of DC plans prevalent in the private sector.
Despite the inherent advantages of TBPs, the report points out that in federally regulated industries, such as banks, airlines and telecommunications, the pension standards regulator has a veto over the plan administrator’s fiduciary decision to reduce benefits.
“Unlike a plan administrator, who has a legal duty to balance employer and employee interests, the federal regulator is legally required to ‘strive’ to protect the interests of plan participants,” states the report.
Benefit reductions are rarely in the interest of plan participants. As a result, there is a significant risk that the federal regulator will not approve a reducing amendment, with the result that an employer could be required to pay more than it bargained for. Unless this fundamental flaw is addressed, federally regulated employers are likely to continue to resist TBPs.
Bauslaugh recommends that, in the context of TBPs, the federal government should:
- allow the Office of the Superintendent of Financial Institutions to rely on the decision-making of a trust-based fiduciary;
- provide the superintendent the same even-handed perspective as the administrators he or she supervises; and
- consider modifying solvency rules to prescribe mandatory testing but leave the manner of addressing solvency concerns to the discretion of trust-based fiduciaries.
The report concludes that as long as the superintendent has the ability to second-guess trust-based fiduciaries and ignore contractual or trust-based limits on funding, the reality is that TBPs will continue to be avoided by federally regulated employers.
“The repairs required to make what is already a tantalizing landscape a reality are easy to make—and certainly within reach,” says Bauslaugh.
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