This is our first post (in a four-part series) where we address
common myths associated with target benefit plans and defined
benefit pension plans. For more on target benefit plans see our
prior posts (
Part II and
Before we get started on the myths, it is important to
understand what target benefit plans (TBPs) are and how they differ
from, but also share the attributes of defined benefit (DB) and
defined contribution (DC) plans.
DB plans provide a pension payable for life at retirement and
the employer is responsible for funding the benefit, subject to any
fixed required employee contributions. Where there are funding
deficits in the plan, the employer is required to make additional
payments to address the deficiency.
DC plans are similar to group RRSPs and provide a capital
accumulation savings-type vehicle. Employer contributions (along
with any employee contributions) are fixed, but the ultimate
benefit for the employee is uncertain, being subject to
contributions and investment performance. Because longevity risk is
not pooled and each individual has to rely on his or her own
savings account, there is a risk of a member outliving his or her
Like DC plans, contributions to a TBP are fixed (or variable
within a narrow range). Like DB plans, target benefit plans provide
a DB-type pension at retirement and pool both longevity and
investment risks. However, under a TBP, benefits may be adjusted,
up or down, in response to the plan's funded position from time
to time. The goal of TBPs is to deliver the targeted benefit, but
at the same time ensure sustainability and maintain
intergenerational fairness. If there are insufficient funds in the
plan to deliver the targeted benefit, the benefits may be
decreased. Allowing benefit adjustment is another lever in addition
to payment of additional contributions where there are funding
Myth #1: Target Benefits are a New "Untested"
TBPs have recently been implemented in New Brunswick and Alberta, and the federal government has indicated that it also
intends to introduce legislation to permit these plans for
federally-regulated employers. In doing so, these governments
are providing a new pension design option for sponsors of single
employer pension plans. It is important to remember, however, that
target benefits have existed in other forms for many years.
Target benefits – while not generally permissible for
single employer pension plans – have existed for many years
in the multi-employer environment (i.e., plans in which two or more
unrelated employers participate). Multi-employer pension plans
providing target benefits, which are often sponsored by unions,
have been permissible and existed in most Canadian jurisdictions
for some time. These multi-employer plans are typically
administered by a board of trustees, at least half of whom are
representatives of the members.
What is new for target benefits is prescribed risk management to
help with benefit security. In New Brunswick, there are prescribed
risk management goals that have to be attained and risk management
procedures that must be followed. In Alberta, there are
requirements for a provision for adverse deviation as well as
stress testing. Some form of risk management for target benefit
plans is desirable.
In addition to multi-employer pension plans, in Ontario, there
are several large public jointly sponsored pension plans (JSPPs)
where costs are shared 50/50 between plan members and plan sponsors
– thereby, a category of target benefit plans that existed
prior to the recent changes to introduce target benefit plans in
certain jurisdictions. Some of these JSPPs are hailed as being some
of the best run pension plans in Canada.
Thus, while the introduction of target benefit plans as an
option for single employers is a welcome change, these types of
plans have been operating in the multi-employer context for some
In our next post, we will explore Myth #2: Limiting
Employers' Pension Design Options Means Continued Defined
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about your specific circumstances.
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