The biggest challenge for DB pensions isn’t the cost, but the volatility.
“The solutions going forward probably should be thinking about volatility, not so much about the cost or the spend,” said Kevin Sorhaitz, a partner with Morneau Shepell, at an International Society of Certified Employee Benefit Specialists event in Toronto on Thursday.
The cost and the expense are a result of the volatility, he explained. And with people living longer, it gives more ammunition for a new model.
Target benefit plans land roughly somewhere in the middle of a DB and DC plan. While it’s no silver bullet, there are pros and cons with target benefit plans, said Paul Lai Fatt, a principal with Morneau Shepell.
“Essentially it works like a DC plan,” he said because there’s cost stability. “On the other side you don’t get contribution holidays.”
In New Brunswick, the shared risk model is being used by a number of plans. If a plan has to cut benefits, the legislation forces plans to restore benefits when there’s a surplus.
While target benefit plans aren’t available across the country, plan sponsors could begin conducting a feasibility study to see whether they’d be appropriate.
“I think we’re going to see shared risk plans,” said Sorhaitz. “Target benefit plans are going to be a better model and the way of the future.”
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