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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

Federal Government Announces Target Benefit Plan Consultation

Posted in Canada Pensions & Benefits Law, De-Risking, Innovation & Plan Design, Plan Conversions, Target Benefit Plans

Earlier today, the Minister of State (Finance), Kevin Sorenson, announced that the federal government is launching consultations on a potential federal framework for Target Benefit Plans, or TBPs. TBPs would be a new, voluntary, sustainable and flexible pension option available to federally regulated private sector employers and Crown Corporations.

The government followed up the announcement with the release of a consultation paper, which seeks input from stakeholders on a number of issues relating to the parameters of the proposed TBP framework. This is a welcome initiative by the federal government.

Background

The federal government noted certain challenges associated with traditional defined benefit (DB) and defined contribution (DC) pension plans, including:

  • recent low interest rates, volatile equity markets and increasing longevity have put significant cost pressures on some plan sponsors to meet the funding requirements of DB plans; and
  • DC plans are subject to ongoing market volatility which makes it difficult for employees to achieve a predictable and sustainable pension.

In an effort to promote pension plan sustainability through innovation, the federal government is proposing TBPs as a new option for federally regulated employers and employees in the private sector we well as for Crown Corporations. (Note: the proposal would not apply to core public sector pension plans which are governed by statutes such as the Public Service Superannuation Act, the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act.)

What is a TBP?

TBPs provide for: fixed or capped contributions, a targeted “DB type” pension formula and the flexibility to adjust benefits as needed to ensure the plan remains sustainable for all participants. The ability to adjust accrued benefits is a distinguishing feature of TBPs and requires specific legislation. For more background information on TBPs and their status in other Canadian jurisdictions (including New Brunswick where several plans have already converted to this new design), see my prior blog posts on the “ABCs of Target Benefit Plans”.

Federal Government’s Proposal

In its consultation paper, “Pension Innovation for Canadians: The Target Benefit Plan”, the federal government has proposed a TBP framework, which would be incorporated into the federal Pension Benefits Standards Act (the PBSA). This framework would provide another plan design option for new federally-regulated plans. In addition, it is proposed that the conversion of pre-existing single-employer and multi-employer DB and DC plans into TBPs would be permitted. The framework, includes the following features:

  • Consent: conversion to a TBP would require consent from plan members and retirees (whether in unionized or non-unionized workplaces);
  • Joint Governance: a Board of Trustees or similar body would be required as would a governance policy providing for the participation of plan members and beneficiaries;
  • Funding Policy: based on either a going-concern funding requirement with a Provision for Adverse Deviation or a probabilistic approach, similar to the stochastic model that has been adopted in New Brunswick;
  • Contributions: either fixed or variable contributions to be established in the plan text, with the latter being subject to a cap;
  • Two Classes of Benefits: (i) base benefits could be reduced in cases where a funding deficit arises, but would have a “high level” of protection; and (ii) ancillary benefits would be reduced before base benefits, would have a lower but “reasonable” level of protection, and could be increased when the plan is in a surplus situation;
  • Funding Deficit Recovery Plan: a plan which would include 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;
  • Surplus Utilization Plan: a plan which would include 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;
  • Disclosure: the plan administrator would be required 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; and
  • Termination: federally-regulated DB plans would not be permitted to convert to a TBP in an effort to avoid DB solvency funding requirements upon wind-up.

The paper identifies the objectives that will apply to the legislative framework, specifically: pension sustainability and benefit security. The paper also specifies that the federal government will be guided by the principles of transparency, requiring open communication about the risks and rewards of TBPs, and equity, preventing any generation from unduly subsidizing another. The stated objectives and principles are similar to those adopted by the province of New Brunswick when the shared risk model was established.

Consultation

The paper solicits input from stakeholders on a number of issues arising in relation to the features listed above. Comments are due within 60 days and must be submitted by June 23, 2014 via email to: pensions@fin.gc.ca.

Comment

While much of the framework is yet to be developed, we view this as a welcome (and much needed) development for federally regulated pension plans. While the TBP may not be the right solution in all cases, the government’s TBP proposal is an innovative idea that provides greater flexibility in plan design and, therefore, an enhanced ability to manage risks and costs – both of which should promote pension sustainability, coverage and adequacy. The voluntary approach to TBPs that has been put forward should result in stakeholder collaboration to produce more effective pension plan designs. Governments should continue to be encouraged to make legislative changes to permit plan design options outside of traditional DB and DC plans such as TBPs.