Canada: April 2014: Federal Target Benefit Plan Consultation

Now for something ... different: Federal government starts consultations on target benefit pension plans framework.

On April 24, 2014, the federal government released a potential framework for target benefit pension plans ("TBPs") and is seeking input on this additional pension plan option. The framework is discussed in a consultation paper and comments have been requested by June 23, 2014. The framework would apply to federally regulated private sector and Crown corporation pension plans under the Pension Benefits Standards Act, 1985 ("PBSA") and would not affect core public sector plans such as the Public Service Superannuation Act and other government plans. The government has also provided an FAQ.

What is a TBP?

A TBP is a "middle ground" between defined benefit ("DB") and defined contribution ("DC") plans. Benefits from TBPs are "targeted", but not guaranteed (or "defined"), and may be adjusted based on the financial status of the plan. Unlike plans under the current legislation, accrued benefits can be reduced. Required contributions are capped or fixed in accordance with the terms of the plan.

Why TBPs?

The government has been inclined to provide additional retirement savings options for employees and plan sponsors, rather than, for example, expanding the Canada Pension Plan. In this consultation paper, the government refers to the Pooled Registered Pension Plan ("PRPP") framework and notes this model is supplementing that option, particularly allowing for the conversion of DB and DC plans. It also acknowledges however that some DB plans have faced funding challenges as a result of factors such as low interest rates, volatile investment returns and people generally living longer. TBPs are intended to provide a more sustainable option in the new economic environment while still providing a reasonable level of benefit security.

Versions of TBPs have been in place for some time but new regulatory models are being introduced by the provinces including Nova Scotia, New Brunswick, Ontario, and Alberta. The New Brunswick "shared risk" model is the only one that is fully implemented and generally available. Implicitly acknowledged in the consultation paper is that a focus of TBPs is to provide an outlet for DB plans. Although the model will allow for conversion of DC plans, those plans are not subject to the same funding challenges as DB plans.

Proposal

The proposal sets out potential requirements for TBPs based on the objectives of pension sustainability and benefit security and the guiding principles of transparency and equity. The components include:

• Governance framework including the requirement for joint decision-making, such as through a Board of Trustees or similar body. Such a framework would include a governance policy providing for participation of plan members and beneficiaries;
• Funding policy, based on either:
  • a going-concern funding requirement with a Provision for Adverse Deviation ("PfAD"); – An example being a model based on the probability (e.g. 75% or 90%) of the plan remaining fully funded on a going concern basis in a 3 year timeframe.
  • a "probabilistic" approach; – this approach would be based on specific probabilities that benefits will not be reduced with a primary goal for protecting "base benefits" and a secondary goal for "ancillary benefits". This was the approach adopted in New Brunswick (the paper even refers to the respective 97.5% and 75% probabilities used in New Brunswick but over a 15 year period instead of 20), but acknowledges that different probabilities could be used (90% and 75% are mentioned).
• Contribution model based on either fixed or variable contributions to be established in the plan text. If variable, contributions would be capped;
• Two classes of benefits with a varying level of benefit protection:
  • base benefits could be reduced in cases where a funding deficit arises, but would have a high level of protection and would only be reduced as a last resort; and
  • ancilliary benefits would have a lower but reasonable level of protection and would be reduced before base benefits were reduced and could also be increased when the plan is in a surplus situation.
• Funding deficit recovery plan, incorporating the trigger for deficit recovery measures; timelines for implementing the measures; the description of all possible measures and order of priority; the minimum funding level to be reached through the measures; and the approval process; – The consultation asks for input on whether measures should be prioritized and how (e.g., in the legislation). For example, the New Brunswick legislation sets certain priorities. Alternatives include allowing the priorities to be determined by plan members.
• Surplus utilization plan, incorporating the trigger for surplus utilization measures; timelines for implementing the measures; the description of all possible measures and order of priority; any cap on surplus utilization; and the approval process; – Again, measures could be prioritized in the legislation as they are in New Brunswick.
• Disclosure provisions including requirements for the plan administrator to provide information to the plan sponsor, members and retirees upon enrolment, during membership, in the event of membership termination or death, and in the event of plan termination and wind-up;
• Termination provisions ensuring that federally-regulated DB plans under the PBSA do not seek to convert to a TBP so as to terminate under federal TBP rules and avoid DB solvency funding requirements upon wind-up; and
• Conversion of pension plans with consideration of the process and treatment of benefits and any funding deficits. Conversion from a DB plan to a TBP would require consent from plan members and retirees and address the funding required at the time of conversion. - The proposal suggests that plans be fully funded on a going concern basis upon conversion. As was done with conversion of the New Brunswick public service pension plan, the framework proposes that all accrued benefits at the time of conversion be treated as "base" benefits.

What this means to you

New TBP rules are coming, although this will take time. The federal consultation is open until June 23, 2014, after which draft legislation will be considered. This latest development may also help advance the introduction of measures in the provinces. Ultimately, having these additional options will be beneficial to plan sponsors, particularly those seeking to address challenges from their DB plans.

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.