This is my first blog post in a series regarding target benefit
plans (TBPs) (also called defined ambition plans). In this post, I
will describe what TBPs are and why such plans should be permitted
under pension laws as a design option.
Most pension standards legislation in Canada currently permits
target benefits for multi-employer plans, but not for single
employer plans. Similar to defined contribution (DC) plans, TBPs
have fixed contribution rates (or contribution rates that are
variable within a narrow range). This provides costs certainty to
plan sponsors. Similar to defined benefit (DB) plans, target
benefit plans have a targeted DB-type pension benefit (often career
average). However, unlike DB plans, TBPs allow for benefits to be
reduced if there are insufficient funds to provide the targeted
A key element of TBPs is risk pooling. Similar to DB plans, TBPs
pool various risks including investment risk and, importantly,
longevity risk. In a DC plan members have to save sufficient funds
for their own lifetime and risk outliving their savings. By
contrast, in a TBP or DB plan, the longevity risk is pooled –
so some plan members will live longer and some will pass away
earlier than anticipated. This risk pooling is a key feature that
makes DB plans and TBPs more attractive to employees.
Outside the Province of New Brunswick (more on that in my next
post), single employers who wish to provide a pension plan to their
employees generally have the option of a DC plan, where virtually
all risks are borne by the employees, or a DB plan, where all risks
are generally borne by the employer. Arguably, pension standards
legislation should permit single employer plan design options, such
as TBPs, that are on the spectrum between DC and DB. Pension laws
should be flexible enough to permit innovative designs and to
encourage private sector pensions.
So you may now be wondering about a TBP as a potential pension
plan for your employee group because as a plan sponsor you will
have cost certainty, but plan members will receive a
"targeted" DB-type pension at retirement – a plan
design that contains elements of both DB and DC. However, due to
current pension laws TBPs are not widely available in the single
In my next blog post I will discuss New Brunswick's new
shared risk model, a type of TBP. And, in my third post in this
series I will address the status of single employer target benefits
in other Canadian jurisdictions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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