While all existing target-benefit plans (TBPs) in Canada are different, there are common lessons DB plan sponsors can keep in mind if they decide to convert their own plans to TBPs.
That was one of the main messages of Troy Milnthorpe, an associate partner at Aon Hewitt, speaking at Benefits Canada’s 2015 Benefits and Pension Summit.
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TBPs are hybrid pension plans incorporating both DB and DC elements. “What it’s trying to do is take the good things from both of them and put them in one spot,” Milnthorpe said.
“If the plan is not affordable, then the benefits have to be adjusted,” he explained, adding that this could include even past service benefits if the deficit situation is severe.
One of the main things DB sponsors considering a TBP structure should keep in mind is the importance of communicating their intentions to plan members.
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“We spent a lot of time [on] communication,” Milnthorpe said, referring to the time a few years ago when he helped the Regina Police Pension Plan switch from DB to a brand new TBP which started with no assets and no members.
“We did many different employee sessions—these were shift workers,” he explained. “Everybody needed to become maybe not a full actuary, but to understand where we needed to go.”
Having a good relationship with the provincial regulator can also help make the transition smoother, Milnthorpe added.
And, of course, it’s important to carefully craft the design of the plan, defining what levers will have to be pulled, in order of priority, in case of a deficit, he explained.
In the case of the Regina Police Pension Plan, reducing past service benefits was a measure of last resort, he said. “We wanted this plan to look and feel very much like the old plan,” Milnthorpe explained, adding jokingly, “these were police officers standing at the back of the room with guns.”
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Also, it’s important to remember that the size of the DB plan matters when doing the conversion. “The bigger the plan, the better […] because the bigger the risk pool, the better,” he explained.
Plan sponsors also need to be aware that transitioning to a TBP can take a long time. “It took us four and a half years,” Milnthorpe said of the Regina Police Pension Plan’s transition. “You’re taking about collective arguing […] things can be contentious.”
Finally, he said, it’s important to remember that a TBP may not make sense in all circumstances. “This is not going to work for everybody. I’m not going to say you should all go back and change your plan from DB to TBP.”
All the articles from the event can be found in our special section: 2015 Benefits & Pension Summit Coverage.