Earlier this week, federal Liberal Finance Minister Bill Morneau introduced Bill C-27, which would amend the Pension Benefits Standards Act and make possible target benefit pension plans for federally-regulated and Crown corporation employers. (This would not affect federal public sector employees or retirees at this time.)
Target benefit plans (TBPs) are a unique type of pension plan that blend elements of defined benefit and defined contribution plans to provide a base monthly pension at retirement (which may be allowed to change, depending on the pension plan’s performance) with limited or conditional indexation. The benefits paid in retirement are usually linked with how well the pension plan performs.
Target benefit plans shift the concept of risk. With defined benefit pensions, the employer or plan sponsor is usually wholly responsible to ensure the pension promise is fulfilled. The employer and to some extent active employees are responsible for making up pension funding shortfalls, through their contributions and the plan’s investments. With defined-contribution plans, employees bear all the risk – their contributions are known, but the benefit they will receive in retirement is not. Target plans usually link the pension benefit and indexing with plan performance, and allow benefit reductions; retirees become partially responsible for making-up plan funding shortfalls. Read our primer on target benefit plans to learn more.
We’ve noted the following key points after a initial review of Bill C-27:
- Target benefit plans would be a new type of pension plan allowed for federally-regulated employers, such as banks and telecommunications companies, and Crown corporations like Canada Post, in addition to the already-available defined benefit and defined contribution pension plans
- Existing defined benefit and defined contribution plans could not likely be immediately “converted” to target plans, but members could consent to surrender their defined benefit or contribution pension in exchange for benefits under a target benefit plan. The informed consent of the pension plan member and their spouse or common-law partner would be needed
- If a target plan’s funding policy allows it, retirees’ pension payments could be allowed to change if plan performance is lower than expected
- Unions may be able to consent to having defined benefit plans converted to target benefit plans, for unionized members they represent
Several things aren’t yet clear – such as the specifics around consent; what happens if a retiree doesn’t or cannot provide consent to surrender their current pension for a target benefit pension; what might occur if a retiree and their spouse don’t agree on whether to surrender the defined benefit pension for a target benefit; or whether unions could be considered to represent retired plan members for the purposes of consent.
It’s still early days: the bill is at first reading stage. Though we don’t yet have a timeline, it will be referred to a parliamentary committee for review and reporting, before being passed in the Commons, considered by the Senate and eventually become law. Many details on how exactly federal target benefit pension plans will work will be established by regulations – and given the complexity involved in pension plans and especially in how target benefit plans work, this could all take some time.
Throughout the legislative process, Federal Retirees will keep you up-to-date with a full analysis on Bill C-27. Be sure to sign up for our email updates using the form below to get more news on federal target benefit pension plans and what they could mean to you as we learn more.