Frequently Asked Questions on Proposed Target Benefit Plan (TBP) Framework
What is a TBP?
The proposed TBP framework would establish a middle ground between defined benefit plans, which offer a guaranteed pension backed by the financial position of the employer, and defined contribution plans, which provide a benefit that relies on investment returns.
TBPs would offer a new, sustainable and flexible pension option in which pension benefits and contributions can be adjusted to respond to the financial position of the plan.
TBPs would provide a high probability of benefit security (where benefits are “targeted”) for plan members and retirees through both favourable and adverse market conditions.
TBPs are intended to preserve and increase the number of employers that offer employees a workplace pension plan with a predictable pension in retirement.
Who could access TBPs?
The proposed TBP framework would offer a new voluntary pension option available to all federally regulated private sector and Crown corporation pension plans under the Pension Benefits Standards Act, 1985. There are currently 1,234 federally regulated pension plans in Canada.
This would not impact the core public sector pension plans which are governed by statutes such as the Public Service Superannuation Act, the Canadian Forces Superannuation Act andthe Royal Canadian Mounted Police Superannuation Act.
The framework would allow defined benefit and defined contribution plans to convert to TBPs, should all parties agree, and would be available to any such pension plans created in the future.
How would TBPs be voluntary?
The framework would require all parties to agree to convert existing defined benefit and defined contribution plans to a TBP. TBPs would be available to both existing and new pension plans.
It would also be up to plan sponsors, members and retirees to determine the specific design of the plan.
What are the potential benefits of the proposed TBP framework?
This innovative approach is intended to preserve and increase the number of employers that can offer employees an affordable workplace pension plan that has a predictable pension in retirement.
The proposed TBP framework would promote plan viability through its ability to adjust benefits and contributions to help ensure that the target benefit is met, and to deal with surplus or deficit situations.
TBPs would not have a solvency funding requirement.
The proposed framework would allow all plan parties, including members and retirees, to participate in the design of the plan.
The proposed joint governance structure would reflect these risk sharing goals and ensure effective representation of employers, members and retirees.
These advantages would make TBPs an attractive option for those private pension plans governed by the Pension Benefits Standards Act, 1985 that are facing increasing challenges in providing a secure and predictable stream of income to Canadians in retirement.
How are TBPs similar to and different from defined contribution plans?
Similar to defined contribution plans, TBPs would involve pre-specified contributions for employers and employees which would be independent of the funded position of the plan. Plan members and retirees would also be subject to investment risk.
However, unlike defined contribution plans, TBPs would offer a more predictable stream of benefit payments and high benefit security, since the target benefits would be based on a pre-determined formula. Members and retirees would benefit from the pooling of longevity risk, which is not a feature of defined contribution plans.
How are TBPs similar to and different from defined benefit plans?
TBPs would have a number of features found in defined benefit plans, including a strong level of oversight, the pooling of longevity risk, and a high degree of benefit security and predictability.
However, TBPs would include a greater degree of flexibility in the plan design in order to enhance plan sustainability.
TBP benefit levels would be “targeted” rather than “defined” or “guaranteed”, as they are under a defined benefit plan, and benefits or contributions could be adjusted according to the financial position of the plan.
How would TBPs address the underfunded positions of defined benefit plans?
Under the Pension Benefits Standards Act, 1985, sponsors of underfunded defined benefit plans are required to make special payments to reduce their solvency pension deficits.
With TBPs, benefit levels would be “targeted” rather than “defined” or “guaranteed”, as they are under a defined benefit plan. As a result, TBPs would not be required to be funded on a solvency basis.
Instead of requiring solvency payments, TBPs would allow pension benefits and contributions to be adjusted depending on the plan’s financial situation in order to ensure the target benefit is met.
How would TBPs determine contribution rates?
Contribution rates would be established by plan parties and clearly set out in the plan text.
The proposed TBP framework would include legislation establishing a minimum standard for contributions. This standard would require plan parties to make annual contributions (i.e. percentage of salary) sufficient to cover the expected level of target benefits for members in that year.
Will TBPs result in higher or lower contribution rates than defined benefit plans?
Contribution rates would be established by plan parties and set out in the plan text.
The timing and triggers for reducing or increasing contributions and benefits would be set out in the deficit recovery and surplus utilization plans agreed to when the plan was set up.
The proposed TBP framework would allow for contributions to adjust based on the financial position of the plan.
Will TBPs result in higher or lower pension benefits in retirement than defined benefit plans?
The level of pension benefits in retirement would depend upon the terms agreed to by the parties, the financial performance of the plan, and the manner in which the plan manages deficit and surplus situations.
The proposed TBP framework would allow plans to classify benefits as either “base” benefits or “ancillary” benefits. Base benefits would have a high level of protection, and would only be reduced as a last resort in the unlikely instance that a plan deficit remained even after ancillary benefits were reduced.
The timing and triggers for reducing or increasing contributions and benefits would be set out in deficit recovery and surplus utilization plans.
Would plan members, retirees and unions have a say in increased contributions or decreased benefits under the TBP model?
Under the proposed TBP framework, plan members and retirees would participate in the plan text negotiations determining contributions and benefits. In unionized environments, unions would also participate through collective bargaining.
Once the plan text is established, the Board of Trustees would have the authority and obligation to implement the specified measures.
Plan members and retirees would be represented and have voting rights on the Board of Trustees.
Will the target benefit plan framework apply to core public servants?
No. The Government has already taken steps to ensure that federal public sector pension plans are more in line with the private sector.
TBPs would offer a new pension option exclusively to federally regulated private sector and Crown corporation pension plans that are governed by the Pension Benefits Standards Act, 1985.
These proposals do not relate to federal public sector pension plans, which are governed by their own respective legislation such as the Public Service Superannuation Act, the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act.