This is my second blog post in a series regarding target benefit
plans (TBPs) (for Part I, which provides a general overview of
TBPs, see my March 10, 2014 post). In this post I will
focus on New Brunswick, as the first jurisdiction that has
implemented comprehensive target benefit legislation.
In 2012, New Brunswick introduced legislation and regulations for shared risk plans (SRPs), a
type of TBP. New Brunswick's approach was to introduce SRPs as
a design option outside of traditional defined benefit (DB) and
defined contribution plans. The legislation could apply to public
or private sector plans, single or multi-employer plans and in a
unionized or non-unionized environment. There have been several
plans in New Brunswick, both in the public and private sector, that
have converted to shared risk under the new legislation.
As a type of TBP, an SRP includes the following features:
benefits are"targeted" DB-type benefits (usually
contributions to the SRP are fixed (subject to a narrow
pre-determined range); and
benefits may be adjusted.
The ability to adjust all benefits (including past benefits) is
another lever that SRPs and other target benefit plans can use
where a pension plan has funding issues. In a traditional DB plan,
where a plan has funding issues, generally, additional
contributions may be made and/or future benefits may be impacted.
This means that in a traditional DB plan the impact is borne by the
employer and/or the current and future employee groups.
SRPs have funding policies that set out the roadmap for how
benefits will be managed. SRPs are designed to be flexible and
adapt as plan and economic circumstances require. If an SRP fails
the prescribed funding test set out in New Brunswick's rules in
two consecutive years, depending on the priorities in the
plan's funding policy, accrued base benefits for all members
(including retired members) could be reduced. However, in years
where the plan has excess funds cost of living adjustments, or
COLA, can be paid, employer and employee contributions may be
reduced (within a narrow pre-determined range) and other benefit
enhancements may be granted in accordance with the plan's
Under an SRP, COLA is generally provided on a conditional basis.
That is, COLA is only paid in a given year if the plan can afford
it. And when such COLA is paid, the base benefits for all plan
members are augmented.
The legislation in New Brunswick also includes prescribed risk
management. SRPs are subject to certain testing to help ensure that
base benefit reductions are unlikely and plans can respond to any
funding issues in a timely manner. There is testing that SRPs
undergo at establishment to help set the contribution levels such
that there is a very strong probability of base benefits not being
reduced. Annual stress testing is also required to determine what
actions must or may be taken under the plan's funding policy in
the year based on the open group funded position of the plan.
New Brunswick's legislation specifically permits the
conversion of accrued benefits. That is, if for example, a DB plan
is converted to an SRP, the accrued DB benefits at the time of
conversion become base benefits under the SRP as at conversion and
subject to the SRP rules. This has been the most controversial
aspect of the SRP design.
While New Brunswick has taken this laudable step to expand
target benefits outside the multi-employer arena (as are currently
permissible in most provinces) and provide SRPs as a design option,
employers are awaiting movement from other jurisdictions. In my
next blog post, I will address the status of single employer target
benefits in other 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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