Federally regulated plans: Legislation introduced for target benefits and buy-out annuities
On October 19, 2016, the federal government introduced Bill C-27, which will permit the establishment of target benefit plans (TBPs) by federally regulated employers, for both single and multi-employer pension plans. Bill C-27 follows the 2014 consultation on target benefits for federal plans, as discussed in our Special Communiqué of April 2014.
Another important development is that Bill C-27 will also allow federally regulated defined benefit (DB) plans to purchase buy-out annuities to fully satisfy some or all of their liabilities under the plan and thereby fully extinguish their liability to members. This would be another tool allowing plan sponsors to manage risks.
Introduction to TBP
A TBP is a pension plan that allows for some or all of the plan benefits to be adjusted upwards or downwards based on the financial performance of the plan. Because of the risk to members, comprehensive target benefit legislation requires increased disclosure, governance and risk management that do not apply to a typical DB plan. There is general consensus that pooling of pension risks by groups of members can lead to a more efficient and effective pension delivery model, particularly for those who do not possess a deep knowledge of financial markets.
The Federal government chose a comprehensive risk management framework as the basis for the TBP legislation. The general framework is similar in many respects to the legislation introduced in New Brunswick in 2012 for Shared Risk Plans (SRPs). It is less similar to the approach taken to TBPs in Alberta and British Columbia.
The Target Benefit Plan model as written in the legislation could be described as “outcome-based”, with the plan being expected to meet certain stability goals, based on actuarial modelling, at the date of establishment. The stability goals will be restricted by rules that will be prescribed in the upcoming regulations.
Establishment and conversion to TBP
According to the proposed rules, a TBP must be a newly established plan and may not include a defined contribution provision or regular defined benefits.
Defined benefits earned for service to date under a DB provision may only be transferred to a TBP with the consent of members, former members and survivors, as applicable. Consent is to be provided at an individual level, except that in a unionized workplace the union may consent on behalf of active members. Disclosure requirements to obtain consent will be prescribed in the regulations and must be approved by the Superintendent of Pensions. This differs from the approach used for SRPs in New Brunswick where conversion of past DB benefits is allowed under a prescribed high standard for benefit stability goals.
Bill C-27 imposes on TBPs requirements that resemble those applicable to existing Multi-employer Pension Plans (MEPPs) or to SRPs in New Brunswick, as shown in the following table:
Requirements for Target Benefit Plans
In comparison to the SRP rules in New Brunswick, the major difference in the administration of an ongoing federal TBP seems to be the requirement of adopting a formal governance policy. The proposed federal rules do not track the TBP rules in Alberta and British Columbia, which require governance and funding policies (as would apply to any defined benefit plan), but otherwise do not impose the same levels of actuarial analysis and specificity with respect to funding objectives, pension benefit stability and the circumstances in which benefits will be reduced.
Buy-out annuity purchase
Bill C-27 also permits DB pension plans to extinguish their liability to members through the purchase of a buy-out annuity. The annuity must be purchased from a life insurer or another issuer approved by the Superintendent. The plan must authorize the annuity purchase and the annuity must replicate the benefits under the plan.
Notice requirements will be prescribed by regulations.
The introduction of target benefit plans at the Federal level is a positive step that could boost the development of these types of plans across the country, offering a new middle-ground approach between DB and DC.
The ability for DB plan sponsors to extinguish liabilities through the purchase of buy-out annuities will help federally regulated DB employers implement de-risking initiatives and possibly remove pension liabilities from their financial statements.
While Bill C-27 will not affect employers who are not federally regulated, the introduction of outcome based and risk managed TBPs at the federal level may give additional encouragement for other jurisdictions to enable the establishment of TBPs. So far, only New Brunswick has a similar framework. Alberta and British Columbia also permit target benefit plans to be established, although Alberta currently does not allow conversion of accrued benefits. There is currently unproclaimed legislation in Nova Scotia and Ontario permitting target benefit plans to be established. Ontario is expected to move toward target benefit for MEPPs as a first step before single employer TBPs.
NOTE: Morneau Shepell played a key role in the development and implementation of outcome based and risk managed SRPs in the New Brunswick 2012 legislation, for the New Brunswick Teachers’ Pension Plan reform of 2014 and for the reform of public service pension plans in PEI. Morneau Shepell has also participated in the conversion of British Columbia DB plans into TBPs.