Feds propose voluntary target benefit retirement plans for federally regulated businesses, Crown corporations
Of late, the chatter surrounding pension reform has been nothing short of contentious. The ever-raging defined benefit (DB) versus defined contribution (DC) rubric — as well as sustainability and predictability — has left key players across the labour field up in arms.
At the end of April, the federal government doused this blazing pension fire with gasoline. The finance department announced the launch of a target benefit pension plan framework, and opened up a 60-day consultation period to the public.
As part of the proposal, target benefit plans, otherwise dubbed shared-risk plans, would be made available as a voluntary option for employees in the federally regulated private sector and Crown corporations.
A middle ground
The idea is that target benefit rubrics establish a middle ground between the much-maligned traditional DB (which guarantees a pension backed by the financial position of the employer) and DC plans (which provides a benefit that relies on investment returns).
The target benefit framework would be made available to both existing and new pension plans and, should this be the preferred route, would require a consensus between employees and their employers.
After introducing the plan, minister of state for finance, Kevin Sorenson, said the timing has never been better for the introduction of such schemes.
"Private pension plans across Canada are facing increasing challenges in providing the secure and predictable stream of income to Canadians in their retirement," Sorenson explained. "Traditional defined benefit plans are having difficulty adapting to people living longer and to a fragile global economic environment with relatively low interest rates. And defined contribution plans are exposed to financial market volatility."
A target benefit plan puts the investment risk on all contributing members, who are able to share collectively risks relating to longevity and mortality.
According to the federal government, target benefit plans combine the best traits of DB and DC plans and form a sustainable hybrid for both employee and employer. The key, of course, being predictability and levelling the playing field.
"Unlike defined contribution plans, target benefit plans would offer a more predictable stream of benefit payment and a high benefit security, since the target benefit would be based on a predetermined formula," Sorenson went on to say. "Members and retirees would benefit from the pooling of longevity risk, which is not a feature of defined contribution plans."
Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), said the hybrid model combines facets of both DB and DC plans and effectively takes a medium-sized step towards wider pension reform.
Target benefit plans could also provide an alternative for private sector operators, which may stem the rush away from DB pensions.
"Companies are dumping (DB plans) very fast because of the risks associated with them, the financial risks to the organization and the costs associated with defined benefit plans. They’re moving quickly to having no plan at all, or having some form of defined contribution plan," Kelly said.
Where this situation rings true, a target benefit plan might serve as a fail-safe for employees in danger of losing a retirement plan altogether. Something is always better than nothing, Kelly noted.
He cited Canada Post as the poster child for what not to do. With its colossal unfunded pension liabilities tallying billions, stakeholders are scrambling for a way to revive the beleaguered white elephant.
"This may be a way out of jail — a move to something that is a little more affordable, a little less risky to taxpayers," Kelly said.
But this latest move favours one breed of employer over the other, according to Clare Pitcher, a senior consulting actuary and shared-risk pension pundit with PBI Actuarial Consultants, headquartered in Vancouver.
Because DB plans are going the way of the dodo in the private sector, a target benefit plan — with fixed contributions and no limit or liability beyond that — functions much like a DC plan.
"Where it doesn’t work so well is if you’re in the public sector pension defined benefit plan. Why would you want a target benefit plan where you’re on the hook?" he said. "It’s a collective risk, you’re going to be on the hook for the risk, rather than the government or the employer."
Ontario goes it alone
On the heels of Sorenson’s announcement, Ontario’s provincial government gave teeth to its plans for a its own retirement program.
While the nitty-gritty details are still forthcoming, the Ontario Retirement Pension Plan would see workers without pension plans contributing up to 1.9 per cent of their salary — to be matched by employers — into a retirement savings program.
With pension reform a hot button issue for most administrations, danger looms.
Or as the old adage goes, too many cooks can spoil the soup.
"We have to be careful not to over-regulate and over-structure these things," said Pitcher. "Over-regulation will be the killer of these plans, even before they’re started. They have different mechanisms."
