Reforming Pension Reform

Jun 30, 2014

The last time our pension system was truly reformed or revised was 1991 and that year pension rules changed right across the country with every province applying most, if not all, of the same legislation. There was a great deal of uniformity regardless of where you worked.

That was then. Today, pension reform has taken on a new look. Today, we have the federal government implementing changes which apply to federally regulated industries and using moral suasion on their provincial counterparts to implement the same or at least similar changes. Case in point: Pooled Registered Pension Plans (PRPP). On that issue alone, there’s a hodgepodge provincial legislation in the works for most provinces but not all provinces. Expansion of the CPP is another case of the provinces and the federal government differing on how to truly reform our pension system.

Many people don’t view the PRPP as a ‘reformation’ of our pension system anyway. There won’t be much adoption by Canadian business in our opinion. But what might get traction, is the recent federal proposal for target benefit pension plans (TBP) for federally regulated industries. We think the time has come for something new, and target pension plans might solve some of the inherent problems with traditional defined contribution and defined benefit plans. In simplified terms, a TBP is a hybrid of a defined contribution pension plan (DC) and a defined benefit pension (DB) arrangement. We think TBPs are timely, because traditional DB plans have a hard time adopting to weak economic conditions combined with a low interest rate environment while DC plans are subject to significant investment risk.

A TBP will provide a more predictable benefit payment since a specific benefit would be ‘targeted’ by the funding formula and adjustable based on the performance of the plan. If returns aren’t as expected, contributions would be adjusted to meet the targeted benefit or benefits would be adjusted. Members would also benefit from pooling longevity risk which isn’t the case now for a traditional DC.

There is a lot of interest among plan sponsors but legislation has so far hampered their adoption. And Labour is not in favour of target benefit plans as they view this arrangement as just another way for plan sponsors to abandon DB plans completely, and move the burden of pension savings to plan members.

However, we think TBPs are here to stay. New Brunswick, Alberta and Nova Scotia already have legislation to allow TBPs and federal regulations will cover over 1,200 federally regulated pension plans across the country alone. Pension reform? That’s what we’re talking about.

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