Target-Benefit Plans (TBPs) are being hampered by a disconnect between how they are regulated and how they are managed, states a new study from the C.D. Howe Institute.
In The Challenges Facing Target-Benefit Plans: Changes Are Needed to Provincial Pension Standards
, author Barry Gros details how effective and efficient management is key to these plans' success, and where regulating the new pension plan option went wrong.
Beginning in the 1980's, many if not most private-sector pension plans moved away from the single-employer defined-benefit (DB) model due largely to changes to the federal Income Tax Act, increased burden of solvency funding resulting from declining interest rates, and changes to pension accounting rules.
This shift prompted provincial governments to conduct a comprehensive pension system review to identify opportunities for reform. As a result, new pension legislation was brought in to provide more flexible pension models and replace the outgoing DB plans; including the introduction of Target-Benefit Plans. TBPs have fixed contributions, set by terms or negotiations, and a targeted pre-defined benefit formula dependent on financial performance.
Although started with a great deal of promise, regulatory hurdles continue to stifle their ability to achieve maximum efficiency. TBPs' regulatory standards were set with traditional DB templates in mind, but they require a different regulatory approach if they are to thrive. "Somehow, in this transition not enough time was taken to ask hard questions about how target-benefit plans actually work, about their inherent risk characteristics and how they should be regulated differently from traditional DB plans," Gros explains.
The main recommendations for TBPs to continue to be a viable alternative are:
- Changing the conversation by focusing on the benefits the contributions can support;
- Readjusting emphasis on who pension legislation is meant to protect;
- Focusing legislated standards less on financial measures, and more on effective plan management, governance, and communication;
- Developing policy inspired by an understanding of industry's best practices rather than traditional DB pension plan rules;
"Can we fix this? Of course we can. But to do so we need to change how we talk about TBPs. We need to change the conversation." Gros concludes.
is Chair, Pension Board, University of British Columbia Staff Pension Plan.