In most target benefit frameworks, accrued benefits can be reduced if the plan’s funding level falls below a given threshold, and if the plan and legislation allow this. Over the past decade, approximately 25 percent of multi-employer pension plans have had to reduce benefits. That risk can never be entirely eliminated.
The overall plan risk is shifted heavily towards retirees. According to PBI Actuarial consultants, "there is no risk sharing other than between members of the plan; the employer(s) bear no risk, with their liability limited to a fixed agreed-to contribution rate (unless negotiated otherwise), which cannot be "automatically" increased in the case of a deficit..."1 .
In some jurisdictions, people who recently retired with a defined-benefit pension have had their pension shifted to a new target benefit regime. This means that the pension they thought they would have at retirement, as well as the indexing they expected, may be reduced after they worked for it.
In April 2014, the federal government released a consultation paper that proposed a federal framework that would allow federally-regulated employers and Crown corporations to implement target benefit plans for their employees and retirees. That framework was essentially paused during the 2015 federal election and the transition to the new Liberal government. But on October 19, 2016 federal Liberal Finance Minister Bill Morneau introduced Bill C-27 – legislation that would amend the federal Pension Benefits Standards Act to enable a new target benefit pension framework for federally-regulated employers and Crown corporations. It could also permit employers who have defined benefit pension plans to essentially transition those plans into target benefit plans – although pension plan members would be asked to consent to giving up their existing pensions in exchange for a pension under a target benefit plan.
Federal Retirees will have an analysis on what the legislation could mean over the coming weeks, and we’ll be following developments closely.
1 PBI Actuarial Consultants Ltd., "Consultation Paper Pension Innovation for Canadians: The Target Benefit Plan". June 23, 2014