It’s not often that a new pension plan structure, however innovative, makes headlines. But that’s just what happened in June when the Regina Police Service unveiled its new target retirement income plan (TRIP), a landmark pension plan that will provide post-retirement income security to nearly 500 employees for many years to come.
What got everyone’s attention was the fact that the TRIP is a so-called "target benefit plan," an evolving model in the Canadian pension landscape with features that give the plan the flexibility to remain sustainable through market fluctuations as well as changing demographics and economic circumstances.
As nearly every jurisdiction in Canada considers regulatory reform to help improve pension plan sustainability, the Regina story is an example not just of how a target benefit structure can create that sustainability but also how co-operation, flexibility and a mutual commitment to finding solutions can work for pension sponsors, participants and regulators alike.
Not so long ago, the future of income security for Regina Police Service employees (sworn officers along with civilian employees) seemed uncertain. In 2009, when Aon Hewitt, as actuary and advisor, conducted a valuation of the existing defined benefit (DB) pension plan, it was clear a different kind of pension solution was necessary. The existing plan was in severe deficit, with the parties facing a total contribution rate of about 34 per cent of pay. Faced with those realities, both sides came to a consensus the existing plan was unsustainable.
What followed was a laborious but firmly committed process of education, debate and evaluation that, in the end, took more than four years to reach its conclusion.
In January 2010, an employee-employer working group was established. The first step was agreeing on objectives, particularly the mutual commitment to collaboration and the definition of a pension solution that would be sustainable, affordable and fair.
The working group quickly decided the problem needed to be split into two separate pieces: past service and future service. In terms of past service, the options were to close the existing plan, wind it up over time or implement a "soft freeze" where members would stop accruing service in the existing plan, but salary and service for the purposes of retiring early continue to increase, up until termination, retirement or death.
For future service, the working group looked at a number of options: defined contribution (DC) plans, a new DB plan or alternative, and hybrid designs that have characteristics of both DB and DC plans (one of which was a target benefit structure).
The working group felt DC plans left members with too much uncertainty, while the DB design did not provide the flexibility needed to ensure long-term sustainability. The target benefit plan, however, allowed for a middle ground, with fixed contribution rates along with reasonable benefits. The benefits vary depending on periodic affordability testing, but all changes are subject to mutually agreed guidelines so there are no surprises.
Unlike DB plans, where sponsors assume most of the risk, or DC plans, where employees individually take on all the risk, the target benefit scheme means plan members collectively share the risk.
In the end, all parties agreed to two key steps forward. First was to place a soft freeze on the existing plan, with the employer assuming responsibility for the past debt; the second was to move all members to a target benefit pension plan for future service. And so the TRIP was born.
In many ways, the TRIP resembles a traditional DB plan. Employee and employer contribution rates are fixed and the plan defines a lifetime pension formula. But one of the key design aspects of the TRIP that sets it apart is the set of pre-determined benefit levers that can adjust benefits upward or downward depending on plan experience. These can only be triggered through an annual affordability test (assets over liabilities) that falls outside the pre-determined affordability range. The range is fairly wide as benefit stability was a key objective for all parties.
Overall benefits look and feel similar to the old plan, though some have been reduced; for example, guaranteed cost-of-living indexing has been removed and there are less accommodative procedures for early retirement.
On the contribution side, there are substantial comparative gains. The combined contribution rate to the TRIP will be 17 per cent of salary, shared equally by employers and employees, while maintaining the existing plan would have required a 34 per cent contribution rate.
The deal would not have been possible without the co-operation of the regulator and provincial government — secured at the outset and engaged every step of the way — whose pragmatic views helped to enact the necessary legislative changes to finalize the deal.
At the end of the day, this was a case study in co-operation and dedication. Throughout the process, the parties remained committed and were an example of what can be accomplished when all parties, faced with significant challenges, work together to find solutions.
Troy Milnthorp is an associate partner in the Saskatoon office of Aon Hewitt. He can be reached at (306) 934-8698 or email@example.com.