It is proposed that the target benefit plans be governed by a board of trustees. Given that the board has the power to increase or decrease benefits, and that plan members are directly affected by these decisions, member involvement in governance is an essential element of target benefit plans. For this reason, the OECP Report recommends that the target benefit plan governing board include at least 50% representation from the plan member group, including retirees.
The board has no responsibility for establishing the level of contributions or other employment terms between an employer and employee. Its fundamental mission is to work with the established contribution level (whatever it might be) to design the plan and oversee its ongoing operations.
This includes investing the plan assets, managing the plan’s funding based on prudent long-term assumptions and making sure the plan is administered in compliance with the plan terms and applicable legislation.
Because employer-related concerns are not the only factors driving plan design, the resulting plan terms are also likely to be influenced by:
• member priorities (benefit accrual rates versus ancillary benefits, such as survivor benefits or early retirement); and
• equity issues between members (equity between different generations of members and different types of members).
In accordance with current governance best practices, the board has an overriding responsibility to promote full transparency around the operation of the plan and to communicate with members on an ongoing basis to ensure that they fully comprehend the risks and rewards of plan membership.
Employer perspective
The employer’s only obligations under a target benefit plan are to remit contributions on time and in the right amount, to provide data for plan administration and, perhaps, to facilitate required member communications. The employer may have representatives on the board, but is not required to (the only requirement is that the governing board include at least 50% representation from the plan member group).
There is no requirement for the employer to participate in the administration of the plan, as administration is the responsibility of the board and its agents.
The pension cost for financial statement purposes is simply the employer contributions remitted in the year (employer accounting costs are fixed). No liability or asset is recorded on the employer’s balance sheet (assuming that target benefit plans are treated in a similar way to MEPPs under current accounting standards).
There is no employer obligation to increase contributions to fund any shortfall in the plan or any benefit improvement that the board of trustees may wish to make. The employer is only obligated to remit the required contributions required under the plan. Any additional funding levels would need to be approved by the employer.
The employer has no claim to any “surplus” in the plan. Plan surplus is used for benefit improvements, as decided by the board. Also, the employer has less ability to use the pension plan as an employment management tool because it does not have unilateral control over plan design. The employer cannot, for instance, unilaterally decide to provide early retirement incentives in order to reduce its workforce. In a unionized environment, the employer must be willing to share plan governance with the union. Whereas in a non-unionized environment, the employer must be willing to facilitate the creation of some kind of democratic employee association to help govern the plan.
Employee perspective
From an employee perspective, a target benefit plan would be similar to a traditional DB plan in that it pays a lifetime benefit based on a formula, includes a 60% survivor benefit, and perhaps other ancillary benefits (such as early retirement). The key difference is that the benefit formula may be adjusted up or down during the course of the employee’s membership in the plan.
A pension adjustment (PA) would be reported annually for each plan member using a method that is standard for members of DB plans. This method tends to produce a PA that is higher than the actual contribution and, therefore, tends to reduce a member’s RRSP contribution room more than a DC plan.
The possibility that the benefit may be reduced may make the target benefit plan less attractive than a traditional DB plan. However, in cases where an employer can no longer afford a traditional DB arrangement—or is no longer willing or able to bear the potential cost fluctuations—a target benefit plan would likely have significant appeal over a DC plan. This is because a target benefit plan maintains the following DB plan advantages for its members:
