The target benefit plan (TBP) is a new pension model gaining both attention and momentum in Canada for its potential to provide plan members with sustainable retirement benefits and plan sponsors with better cost certainty. But while jurisdictions across the country have taken initial steps to allow for TBPs, more work needs to be done to make them a reality for Canadian employers.
TBPs follow a DB pension formula, but contributions are fixed, or limited, similar to a DC plan. Contribution rates and the range in which they can vary are established with the goal of meeting the DB pension promise. However, the formula is only a target; if plan funding is insufficient, benefits may be reduced.
The Legal Landscape
In Canada, TBPs are not new in the multi-employer environment. However, pension standards legislation has not traditionally permitted single-employer plans to provide target benefits.
Alberta, B.C., Nova Scotia, Ontario and P.E.I. have introduced legislation recognizing TBPs. But only Nova Scotia has enforced its legislation. Quebec introduced a “member-funded” TBP in 2007 with fixed employer contributions for workplaces with collective agreements or employee associations.
The legislation in Ontario, P.E.I. and Nova Scotia sets an employer’s contribution obligation to a fixed amount as indicated in a collective agreement— therefore restricting TBPs to unionized workplaces. Alberta and B.C. legislation does not include this limitation.
New Brunswick introduced a model known as a shared risk plan (SRP) in 2012. This design contains elements of the target benefit design, such as a DB-type formula, fixed contributions (subject to adjustments in accordance with the funding policy) and the possibility of benefit adjustments. However, the province’s model also incorporates sophisticated risk management requirements to help ensure that the targeted benefits will be provided. Regulations require that SRPs have a primary risk management goal of ensuring that there is at least a 97.5% probability that base benefits will not be reduced over a 20-year period. There are also enhanced disclosure requirements for SRPs as well as strict governance and funding requirements tailored to these plans.
Tax Issues
Potential tax issues associated with single- employer TBPs will need to be addressed. Federal tax legislation is designed to accommodate only DB and DC plans in the single-employer environment. Also, DB tax rules are generally designed for a plan in which an employer assumes all funding risk. Pension adjustments (PAs)—which must be calculated each year by the employer (and which reduce members’ RRSP room)—do not consider the difference in value between different types of DB plans, such as plans that provide final- average benefits as compared to those providing career-average benefits. The Canada Revenue Agency would likely regard a TBP as a DB plan for PA reporting purposes.
Tax regulations also generally limit employee contributions to 50% of the pension cost in a plan that provides DB-type benefits. This may restrict plan design options, because if benefits under a TBP are reduced, an employee may effectively have contributed more than half where contributions are shared. New Brunswick has worked to address this issue by requiring that the employee contribution share not exceed 50% of the total amount of contributions.
Jurisdictions across Canada should move quickly to permit any employer to implement TBPs. A TBP model with robust governance and risk management processes—as seen in New Brunswick’s model—may be an important step to increasing pension benefit security for pension plan members and plan sustainability for employers.
Jana Steele is a partner and head of the pensions, benefits and compensation law group at Goodmans LLP jsteele@goodmans.ca