There is increasing awareness of the need to move beyond the DB versus DC debate to include a middle-ground option that incorporates some of the positive attributes of both designs, according to a report.
The C.D. Howe Institute report Target-Benefit Plans in Canada – An Innovation Worth Expanding calls for the changing of pension standards legislation to accommodate single-employer target benefit plans (TBPs).
The authors—Jana Steele, Angela Mazerolle and Mel Bartlett—feel that TBPs combine elements of both DB and DC plans in a way that addresses the limitations of each.
“DC plans leave complicated investment decision-making to plan members, who frequently have no investment expertise,” they state. “Furthermore, while risk and reward may be aligned, DC is not a completely economically efficient model because it fails to capture substantial value available from the pooling of risks and costs among plan members.”
Steele, Mazerolle and Bartlett also note that, due to extremely low interest rates and the volatility of equity markets over the past several years, many DB plans have suffered from significant solvency deficits. Additionally, “the longer-term trends of increasing life expectancies and maturing pension plans have also constituted a rise in DB funding costs.”
Designed to be flexible and adaptive, the authors describe TBPs as having the following:
- fixed contribution amounts;
- plan members receive a targeted DB-type pension at retirement; and
- benefits may be adjusted, both up and down, to balance the plan’s funding; this, according to the authors, is a TBP’s defining characteristic.
Using the recent New Brunswick share-risk pension legislation to draw lessons that can be applied to the design of similar TBP legislation elsewhere, the authors recommend that pension standards legislation must be changed to accommodate single-employer TBPs.
The report also calls for clear and logical accounting guidance for TBPs to be established to facilitate the emergence of such plans as well as changes to the tax rules.
The authors reiterate the fact that there are some issues with existing DB and DC pension design options, necessitating plan design alternatives.
“Accordingly, policy-makers should be encouraged to move outside the pure DB versus DC debate and permit other design options,” concludes the report. “Pension standards laws across the country will have to be changed in order to permit such other design options.”
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