we began a blog post series that considers some of the common
myths surrounding target benefit plans (TBPs). In this post, we
respond to the suggestion by some that if you do not offer
employers the option of implementing a TBP, they will simply choose
to continue their existing traditional defined benefit (DB)
One of the key flaws with this suggestion is that it appears to
overlook the fact that the private pension system is a
voluntary one. Subject to notice requirements and/or
applicable collective agreements, employers can generally
prospectively change or eliminate benefits provided to employees,
including pensions as long as accrued benefits are preserved.
Employers have been exiting traditional DB pension plans in droves
over the last few decades. This shift has been as a result of
numerous factors, including employers' desire for cost
predictability, concerns over funding volatility and long term
affordability given escalating longevity risks. For single
employers, most pension standards legislation provides only one
other pension design option for an employer wishing to change from
DB – defined contribution (DC) pension plans. Often times
negotiations will result in the preservation of DB plans for those
employees who have them, with new employees being placed in a DC
plan. Sometimes employers will exit the registered pension plan
regime altogether in favour of Group RRSPs for new hires.
Shouldn't there be an alternative to DC plans where
an employer decides to exit the traditional DB model in favour of a
less volatile pension arrangement? In the right circumstances,
isn't a targeted DB pension for the entire workforce better
than a "guaranteed" DB pension for some and a DC for
future service and new hires?
Permitting TBPs as a design option means that there is another
viable option for employers with non-union workforces to consider
and for employers and unions to negotiate in respect of unionized
employees. In the context of unionized workforces, employers would
still have to negotiate the establishment and terms of any TBP with
employee bargaining agents.
Pension legislation that permits plan design options other than
the traditional choices should be encouraged as a progressive
alternative that could, in many circumstances, be preferable to
exiting DB for future service and/or future hires, creating an
ongoing DB legacy issue for the sponsor and intergenerational
benefit differences among members.
In our next post, we consider Myth #3: Unions and Employees are
Opposed to Target Benefits.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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