Are Target Benefit Plans the Solution to Defined Benefit and Defined Contribution Plan Problems?
Target Benefits Plans are gaining some traction in Eastern Canada and allow plan sponsors to create a pension plan that is easier to administer and cost effective
TORONTO, Nov. 28, 2013 /CNW/ - Morneau Shepell (TSX: MSI), the largest administrator of retirement and benefit plans in Canada, points to target benefit plans (TBPs) as the possible answer to many problems facing pension plan design. This is according to the latest issue of the company's Visions newsletter titled: Target Benefit Plans, Game-Changer or Non-Starter?, written by Fred Vettese, Morneau Shepell's Chief Actuary. With plan sponsors looking for cost effective and easier plans to administer, Vettese makes the case that TBPs, while not new to multi-employer plans, can work well for single-employer plans looking to make changes.
"In its most basic form, a TBP is a pension plan that aims to provide a defined benefit (DB), but with fixed contributions," said Vettese. "To plan members, it is virtually indistinguishable from a regular DB plan except that accrued benefits are subject to reduction if the funding level falls below a given threshold. TBPs are promising because they eliminate the risk of rising costs inherent in DB plans while offering a better solution for most employees than most defined contribution (DC) plans."
How do TBPs achieve this? Vettese noted several inherent design elements that make the model work: TBP contributions are fixed, the assets are pooled for investment purposes, the accounting applied to TBPs can be less expensive and less complicated than for DB plans, pension adjustment calculations are simplified by looking at contributions made, and TBPs are monitored as going-concern valuations rather than solvency valuations, which has, itself, damaged the solvency of many companies.
New Brunswick, which created a Shared Risk Pension Plan (SRPP) similar to TBPs, is a prime example. Rather than being entirely fixed, employer and employee contributions fall within a range of between eight and 10 per cent of pay depending on the funded status of the plan. The SRPP has been well received and deemed a great success since it brought long-term cost stability, and plan members benefited from the creation of a more sustainable plan that provides a good level of retirement security.
New Brunswick is currently the only province where TBPs can be implemented. Provinces, such as Ontario, Nova Scotia, Alberta, and British Columbia, have drafted legislation but have not yet enacted anything into law. TBPs might serve plan sponsors that are considering closing their DB plans because of sustainability issues but still want to provide their employees strong, long-term retirement security, Vettese explained.
He added, "TBPs are not perfect and payouts can be reduced if target benefits are less than 100 per cent. Within the sphere of employers who provide pension coverage now, however, TBPs will be an important new plan design that may ultimately replace DB plans in both the private and public sectors."
For information on TBPs, see the latest edition of Morneau Shepell's Visions newsletter written by Fred Vettese.
About Morneau Shepell Inc.
Morneau Shepell is the largest company in Canada offering human resources consulting and outsourcing services. The Company is the leading provider of Employee and Family Assistance Programs, as well as the largest administrator of retirement and benefits plans. Through health and productivity, administrative, and retirement solutions, Morneau Shepell helps clients reduce costs, increase employee productivity, and improve their competitive position. Established in 1966, Morneau Shepell serves more than 8,000 clients, ranging from small businesses to some of the largest corporations and associations in North America. With approximately 3,300 employees in offices across North America, Morneau Shepell provides services to organizations across Canada, in the United States, and around the globe. Morneau Shepell is a publicly-traded company on the Toronto Stock Exchange (TSX: MSI). For more information, visit morneaushepell.com.
SOURCE Morneau Shepell Inc.