The sustainability of pension plans have been called into question in recent years, with both defined benefit and defined contribution suffering amid the turmoil of unstable markets. According to Aon Hewitt target benefit plans may be the answer to pension sustainability woes.
Target benefit plans bear some similarity to defined benefit plans- contributions are based on projected benefits at retirement. However, unlike a DB plan, the contribution level can be adjusted as experience develops. Hence ‘target’ rather than ‘defined’.
Target benefit plans are not exactly new in Canada. They have commonly existed under collective agreements and, according to Aon Hewitt, are still a good solution for private sector organizations with strong unions. But new legislation in Canada is putting TB plans in front of more HR professionals as an option for their employees, and, Aon Hewitt says, they may offer a solution for organization’s in a pension deficit, with poorly funded plans or contemplating moving on from DB.
TB plans have traditionally been more costly to implement than DB or DC plans, which may explain their, to date, limited uptake in North America. But they may prove an attractive option for organizations wanting to side-step the risk associated with both DB and DC plans.
Claude Lockhead, chair of Canadian Investment Consulting Practice for Aon Hewitt says target benefit plans leverage the best aspects of DB and DC plans, while minimizing the disadvantages of each.
Support for the TB approach is growing across the country, with British Columbia recently introducing pension legislation to allow private administrators to offer more pension plan options, including target benefits. Many provinces across Canada are expected to follow suit with new legislation.
The Association of Canadian Pension Management also threw their weight behind target benefits earlier this month, releasing a paper that called for greater backing from governments and stakeholders for a wide range of pension solutions and said this is the best way for Canada’s pension and retirement income system to remain viable.
The report said target benefit plan design could help manage market volatility, rekindle employer interest in defined benefit pension models, help achieve public policy objectives of government, offer great benefits to employees and give Canada one of the most comprehensive pension systems in the world.
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