Pension Woes Point to Target-Benefit Option: C.D. Howe Institute

TORONTO, July 9, 2014 /CNW/ - Canadian governments need to move beyond defined-benefit (DB) versus defined-contribution (DC) pension model debates, and towards a middle-ground option that incorporates attributes of both designs, according to a report from the C.D. Howe Institute. In "Target-Benefit Plans in Canada – An Innovation Worth Expanding," authors Mel Bartlett, Angela Mazerolle, and Jana Steele call for the changing of pension standards  legislation to accommodate single-employer target-benefit plans (TBPs), which they feel combine elements of both DB and DC plans in a way that addresses the limitations of each. 

"DC plans leave complicated investment decision-making to plan members, who frequently have no investment expertise," state the authors. "Furthermore, while risk and reward may be aligned, DC is not a completely economically efficient model because it fails to capture substantial value available from the pooling of risks and costs among plan members."

Bartlett, Mazerolle, and Steele also note that, due to extremely low interest rates and the volatility of equity markets over the past several years, many DB plans have suffered from significant solvency deficits. Additionally, "the longer-term trends of increasing life expectancies and maturing pension plans have also constituted a rise in DB funding costs."  

Designed to be flexible and adaptive, the authors describe TBPs as having the following characteristics:

1. Fixed contribution amounts.
2. Plan members receive a targeted defined-benefit-type pension at retirement.
3. Benefits may be adjusted, both up and down, to balance the plan's funding. This, according to the authors, is a TBP's defining characteristic.

Using the recent New Brunswick shared risk pension legislation to draw lessons that can be applied to the design of similar TBP legislation elsewhere, the authors recommend that pension standards legislation must be changed to accommodate single employer TBPs. The report also calls for clear and logical accounting guidance for TBPs to be established to facilitate the emergence of such plans as well as changes to the tax rules. The report concludes that policy makers should be encouraged to move outside the pure DB versus DC debate, and permit the implementation of TBP pension options across various Canadian jurisdictions.

The C. D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada's trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada's most influential think tank.

For the report go to: http://www.cdhowe.org/target-benefit-plans-in-canada-an-innovation-worth-exploring/26674

SOURCE: C.D. Howe Institute

Mel Bartlett, Morneau Shepell; Angela Mazerolle, New Brunswick Financial & Consumer Services Commission; Jana Steele, Osler, Hoskin & Harcourt LLP; or Alexandre Laurin, Associate Director of Research, C.D. Howe Institute 416-865-1904; E-Mail: [email protected]