This is my second blog post in a series regarding target benefit plans (TBPs) (for Part I, which provides a general overview of TBPs, see my March 10, 2014 post). In this post I will focus on New Brunswick, as the first jurisdiction that has implemented comprehensive target benefit legislation.
In 2012, New Brunswick introduced legislation and regulations for shared risk plans (SRPs), a type of TBP. New Brunswick’s approach was to introduce SRPs as a design option outside of traditional defined benefit (DB) and defined contribution plans. The legislation could apply to public or private sector plans, single or multi-employer plans and in a unionized or non-unionized environment. There have been several plans in New Brunswick, both in the public and private sector, that have converted to shared risk under the new legislation.
As a type of TBP, an SRP includes the following features:
- benefits are“targeted” DB-type benefits (usually career average);
- contributions to the SRP are fixed (subject to a narrow pre-determined range); and
- benefits may be adjusted.
The ability to adjust all benefits (including past benefits) is another lever that SRPs and other target benefit plans can use where a pension plan has funding issues. In a traditional DB plan, where a plan has funding issues, generally, additional contributions may be made and/or future benefits may be impacted. This means that in a traditional DB plan the impact is borne by the employer and/or the current and future employee groups.
SRPs have funding policies that set out the roadmap for how benefits will be managed. SRPs are designed to be flexible and adapt as plan and economic circumstances require. If an SRP fails the prescribed funding test set out in New Brunswick’s rules in two consecutive years, depending on the priorities in the plan’s funding policy, accrued base benefits for all members (including retired members) could be reduced. However, in years where the plan has excess funds cost of living adjustments, or COLA, can be paid, employer and employee contributions may be reduced (within a narrow pre-determined range) and other benefit enhancements may be granted in accordance with the plan’s funding policy.
Under an SRP, COLA is generally provided on a conditional basis. That is, COLA is only paid in a given year if the plan can afford it. And when such COLA is paid, the base benefits for all plan members are augmented.
The legislation in New Brunswick also includes prescribed risk management. SRPs are subject to certain testing to help ensure that base benefit reductions are unlikely and plans can respond to any funding issues in a timely manner. There is testing that SRPs undergo at establishment to help set the contribution levels such that there is a very strong probability of base benefits not being reduced. Annual stress testing is also required to determine what actions must or may be taken under the plan’s funding policy in the year based on the open group funded position of the plan.
New Brunswick’s legislation specifically permits the conversion of accrued benefits. That is, if for example, a DB plan is converted to an SRP, the accrued DB benefits at the time of conversion become base benefits under the SRP as at conversion and subject to the SRP rules. This has been the most controversial aspect of the SRP design.
While New Brunswick has taken this laudable step to expand target benefits outside the multi-employer arena (as are currently permissible in most provinces) and provide SRPs as a design option, employers are awaiting movement from other jurisdictions. In my next blog post, I will address the status of single employer target benefits in other jurisdictions.