On October 19, 2016, the federal government introduced Bill C-27 which, if passed, will permit federally-regulated employers to establish single-employer and multi-employer target benefit plans. The bill proposes to amend the Pension Benefits Standards Act, 1985 to add target benefit plans as an alternative to the traditional defined benefit (DB) and defined contribution (DC) plan design options. Following the steps of other Canadian jurisdictions like New Brunswick, Alberta and British Columbia, Bill C-27 addresses the perceived need for alternative pension plan designs as a way to increase and/or improve pension plan coverage in the private sector. If you are a federally-regulated employer seeking to establish a new pension plan, or re-evaluate or re-design your current pension and retirement savings program, you may want to consider target benefit plans.
Target benefit plans contain both DB and DC plan design features. They aim to provide members with a defined monthly pension benefit at retirement, similar to a DB plan, but are funded through fixed contributions, like in a DC plan. Depending on the funding level of the plan, benefits (including accrued benefits and future benefits) may be adjusted.
Like other provincially regulated employers, federally-regulated employers (such as banks, airlines, railways and telecommunications companies) are seeking ways to control the volatility of pension contributions and the often corresponding negative impact on their balance sheets associated with DB plan designs. The ability to create target benefit plans would offer employers with an opportunity to provide sustainable and predictable pension benefits with more cost certainty and without the solvency liability risk associated with traditional DB plans.
While many details regarding the federal target benefit plan framework will be set out in regulations that have yet to be released, some of the main features being proposed include the following:
- Target benefit plans must be created as new plans. Converting an existing pension plan into a target benefit plan will not be permitted. However, pension benefits under an existing pension plan may be surrendered by members in exchange for pension benefits under a target benefit plan with the member’s informed consent.
- Target benefit plans must be administered by a board of trustees or other similar body.
- A written governance policy must be established for the plan, in accordance with the regulations.
- A funding policy must be established for the plan. The funding policy is required to include, among other things, the rate of employer and, if applicable, employee contributions; the objectives of the plan with respect to pension benefit stability; a deficit recovery plan; and a surplus utilization plan.
- Once a target benefit plan’s objectives regarding pension benefit stability are established, they cannot be amended. In addition, an amendment reducing accrued benefits is void unless it complies with the plan’s funding policy.
- If DB benefits under an existing pension plan are surrendered and transferred to a target benefit plan and the target benefit plan is terminated within five years of the transfer, members will be entitled to the greater of the benefit under the original pension plan and the target benefit plan.
The introduction of Bill C-27 is a positive step towards providing more choice to employers in pension plan design options which will hopefully encourage more employers to offer, and continue to offer, pension plans as part of their employee benefits package.
We will keep you posted on any new developments regarding target benefit plans and the proposed federal legislation.