Target benefit plans – From New Brunswick to Ontario to the UK
In the most recent provincial budget, the Ontario government has signaled its willingness to expand its proposed target benefit framework outside the unionized environment. This is good news for the not-for-profit sector, and other non-unionized groups that may wish to establish a target benefit multi-employer plan. Changes to the legislation will be proposed to expand the target benefit framework. The Ontario Budget indicates that the government will continue to work with stakeholders as it further develops the target benefit framework.
It’s about time. As anyone reading this blog knows, I have been a proponent of the expansion of target benefit rules as a design option for plan sponsors for several years. These proposed changes are a step in the right direction. However, Ontario’s proposed changes don’t go so far as to permit single employers to offer target benefit plans. Let’s hope that’s next. There are strong arguments for allowing all employers to offer a target benefit plan if it is the right design for their organization and workforce. Many factors will come into this analysis from the point of view of the employer, but lack of legislation should not be one of them.
Target benefit plans (TBPs) have fixed (or variable within a narrow pre-determined range) contributions, similar to defined contribution plans. However, TBPs provide for a targeted defined benefit (DB)-type pension based on a formula, similar to DB plans. Like DB plans, TBPs pool longevity and investment risk. The key factor that distinguishes target benefit plans from DB plans is that benefits under a TBP can be adjusted. That is, if, for example, a TBP underperforms expectations and fails certain funding tests, the targeted pension benefit may be reduced for all plan members.
Although in many ways Canada has been a leader in the target benefit space, many jurisdictions in Canada either do not permit, or significantly restrict access to, TBPs. New Brunswick was the first province in Canada to introduce a comprehensive TBP regime (shared risk). Alberta and British Columbia subsequently implemented comprehensive target benefit rules. Quebec has TBP rules of limited application to certain employers in the pulp and paper sector. Saskatchewan has in place regulations to accommodate limited liability plans, which are a form of TBP for collectively bargained plans. Other Canadian provinces, such as Nova Scotia, have contemplated TBP legislation, but have not yet implemented a TBP framework. Ontario, Canada’s largest province, has been working toward the implementation of a framework for multi-employer target benefit plans, and has now announced that this framework will be expanded to include non-union multi-employer plans.
While many Canadian jurisdictions have been reluctant or slow to adopt legislation to generally enable target benefit plans as a design option, the UK is picking up steam. Last year, Royal Mail and the Communication Workers Union agreed that a collective defined contribution (CDC) plan (another name for a target benefit plan) met their needs. They agreed to work together to pressure the UK government to bring in legislative changes to facilitate CDC plans. Recently, the UK government committed to making these legislative changes on an ambitious timeline. The intent is to have the CDC legislation in force by 2020 and for the new plan to be operative by the end of 2020. Hats off to the UK for moving quickly to meet a plan design need.