Less than two years after passing its Pooled Registered Pension Plans (PRPP) legislation, the Ministry of Finance launched a consultation on Target Benefit Plans (TBPs) last week. The comment period ends on June 23.Ottawa is proposing regulatory changes that would allow TBPs to be offered by federally regulated private sector and Crown corporation plan sponsors. The proposed framework would not affect public sector pension plans which are governed by statutes such as the Public Service Superannuation Act, the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act.
The Minister of State for Finance, Kevin Sorenson, will lead the consultation. “The voluntary nature of the proposed framework means that all parties would be involved in the decision as to whether or not to adopt a TBP, and have a say in the design elements of the plan if they do,” says Sorenson. These plans allow employers and employees to agree in advance on a target retirement benefit, and they also agree to make the necessary adjustments along the way if the target is not reached. Depending on the circumstances, the solution could be to increase the level of contributions or decrease the target pension.
This flexibility would not burden new plans with funding requirements in the event of a shortfall, notes the minister. The proposed framework would also allow defined contribution and defined benefit pension plans to be converted into target benefit plans. Sorenson notes that there are currently 1,234 pension plans under federal jurisdiction in Canada. The government believes the new system will encourage even more employers to offer a pension plan that offers predictable pension benefits to employees. As for Pooled Registered Pension Plans, they are defined contribution plans and the benefits payable at retirement depend on contributions and investment returns.
The announcement of this consultation has already generated a reaction from employer groups and insurers. Because of the funding exemptions that TBP are expected to enjoy, the Canadian Federation of Independent Business (CFIB) says it is a pity that the legislation will not cover public service plans where they could, according to the CFIB, be essential in dealing with massive funding shortfalls.
“Given that the private sector is increasingly abandoning traditional defined benefit pension plans, a risk-sharing model would be an asset in the pension landscape in Canada,” commented Monique Moreau, director of national affairs for the CFIB.
“It would also help taxpayers who will pay for the massive pension deficits, such as the one at Canada Post, which amounts to $6.5 billion.” She also points out that the variability of returns often generates huge funding deficits, and calls the proposed framework “a small step forward”.
For its part, Standard Life unreservedly welcomes Minister Sorenson’s initiative. “We support any dialogue that contributes to the debate to strengthen the pension plan ecosystem,” says Standard Life CEO Charles Guay.