Target Benefit Plans: An Update on Where They Stand

Amanda Wilke, CEBSDecember 14, 2023

Although target benefit pension plans have been in a state of unknown for a while, they are now closer to having a permanent funding model with several new proposals currently under consideration. In 2015, the Office of the Superintendent of Financial Institutions (OSFI) and Financial Services Commission of Ontario (FSCO) both developed the concept of a risk management model. Eight years later, an evolution of pension plans is underway as plans across the country move from a broader funding model to a model that is more specific in terms of pension plan management and governance.

In the International Foundation webcast “Target Benefit Plans—A Cross-Country Update,” Domenic Barbiero, a principal and consulting actuary at Eckler Ltd.; Susan Bird, CEBS, president of The McAteer Group of Companies; and James Harnum, a partner at Koskie Minsky LLP, discuss how provinces are introducing legislation and regulations on pension plan funding, as well as target benefit plan governance and communication issues across Canada.

The speakers highlighted three topics:

1) The Components of Target Benefit Frameworks

Target benefit frameworks are not a new concept, though many jurisdictions do not refer to these benefits as target benefits.Bird reviewed the components of target benefit frameworks.

Contributions are payable under a collective agreement where the employer’s liability is fixed to those contributions. There is no other employer liability for a funding deficit.
For the most part, target benefit plans are multi-employer plans.
Target benefit plans are managed by a fiduciary board of trustees.
Benefits in a target benefit plan can be increased or decreased, depending on legislation and specific plan funding.

2) The Ontario Consultation Paper on the Permanent Funding Framework for Target Benefit Plans

Ontario has been using temporary funding rules for over 20 years. In March 2023, Ontario issued a consultation paper for funding rules, which was deemed flawed, and the proposal was withdrawn. On September 1, 2023, the Ontario government announced a second consultation paper on permanent funding framework for target benefit plans.

Harnum discussed the three policy requirements for the new framework included in the second consultation paper:

Funding and benefits policy. The policy should identify the objectives for the pension plan and address objectives for benefits provided under the plan; stability of benefits and contributions; equitable treatment of members, former members and retired plan members; and handling of funding insufficiencies.
Communication policy. The policy should reflect how to communicate with plan members to explain benefits and risks, which may need to be filed with the Financial Services Regulatory Authority of Ontario (FSRA); it is still unclear at this point.
Governance policy. The policy should look at the pillars of fiduciary duties including a duty of loyalty (i.e., conflict of interests cannot get in the way) and a duty of prudence (i.e., what the standard of care is in the industry). The policy must address the roles and responsibilities of persons involved in plan administration; operational policies in place; and skills, knowledge, experience and other attributes required of each person in pension administration.

Harnum identified two major remaining issues to resolve before legislation can be finalized:

Reinstatement of prior-reduced benefits. Questions exist around how far back to go if a plan had a benefits reduction years ago and wants to make an improvement today.
Concerns around how plans are managed and the role of the fiduciary in plan design and funding. Some trustees may prefer the current rules and believe they are in a better position to make plan design choices than the Ontario legislature.

Finalized Ontario target benefit legislation is expected by December 2024.

3) The Canadian Association of Pension Supervisory Authorities (CAPSA) Consultation on Pension Risk Management

CAPSA is a national association of pension regulators that sets best-practice guidelines, but they do not make laws. Entities around the world use the CAPSA guidelines to aid in the efficient management of pension regulations. Earlier this year, CAPSA opened a pension risk consultation that focused on ESG investment risk. A second draft was later issued which included ESG, cyber risk and target pension arrangements. Bird discussed the latest consultation and what plans can expect from it.

CAPSA identifies the following risks in its consultation:

The target benefit is not achievable due to poor plan design or investment returns not meeting expectations
Plan members may not understand the variable nature of their benefits
Orientation and governance (i.e., how decisions are made, when they are made and what trustees are looking at related to strategic planning) may not be designed well.

CAPSA provides the following suggestions to plans:

Develop communications that emphasize how benefits can be adjusted depending on the financial status of the plan
Provide member presentations, booklets and seminars
Collect feedback from members to better gauge information comprehension.

CAPSA hints that the result of the consultation will come in the form of a new CAPSA guideline. CAPSA recommends implementing specific strategies as part of pension risk management:

Develop orientation policies. The onboarding should include information on who the new trustee needs to see and what they need to know about the pension plan.
Communicate with stakeholders. Communications should focus on selecting the next fiduciary and the roles, knowledge, skills and experience in the appointment or election process.
Create education policies. This defines how fiduciaries will be educated.

Provinces are in varying stages of implementing target benefit plans. Trustees can focus on risk management and fiduciary responsibility.

International Foundation members can access a free recording of the webcast to take a deeper dive into the topic.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.