What you should know about the newly proposed target benefit plans (TBPs)

Kevin Sorenson announces the federal governments proposal on April 24th, 2014   There are reasons to be weary of this proposal and to proceed with caution
Kevin Sorenson announces the federal governments proposal on April 24th, 2014 There are reasons to be weary of this proposal and to proceed with caution

Minister of State for Finance, Kevin Sorenson announced last week that the federal government will introduce Target Benefit Plans (TBPs). TBPs would be a new, voluntary, sustainable and flexible pension option available to federally regulated private sector and Crown corporation plan sponsors, employees and retirees under the Pension Benefits Standards Act, according to the Minister Sorenson.

The proposed TBP framework is designed to help ensure that effective, sustainable pension options are available to Canadians who work in the federally regulated private sector or Crown corporations. This innovative approach is intended to preserve and increase the number of employers that can offer employees an affordable workplace pension plan that has a predictable pension in retirement, according to the official release.

While the government is claiming the move will lead to more flexibility and offer new options to employers currently without a pension plan, there may be other motives for the move.

Target benefit plans on their own are not necessarily bad, especially in comparison to private options like RRSPs and defined contribution plans and if a company is starting a plan from scratch.

But, the federal target benefit pension plan could encourage federal agencies and corporations most of which have defined benefit plans – to convert simply because it could save the organization money.

It could also mean an erosion of benefits. New Brunswick began converting public DB plans into target benefits plans last year, in the processes the province got rid of guaranteed inflation indexing for retirement benefits and had even considered creating an option to reduce retirement benefits for existing retirees, until public opposition prevented the move.

TBPs can play a role in the pension landscape, particularly in situations where an employer wants to offer a plan to employees where none currently exists. But if TBPs are used to undermine more robust DB plans, it could represent an erosion of existing pension benefits.

May 2, 2014