Quebec’s target-benefit plan, a new concept?
Insights – May 2021
All views expressed are the author’s own and do not necessarily reflect the official position of any agency, organization, plan sponsor or company.
With the adoption of Bill 68 on December 11, 2020, the Quebec retirement system was expanded providing Quebec organizations in all industries with the option to provide target-benefit pension plans (TBPs) to their employees. Similar to Member-funded pension plans that have existed in Quebec since 2007, TBPs are an appealing alternative to capital accumulation plans1 when a conventional defined benefit plan is no longer a sustainable option.
Overview of the Quebec TBP
With TBPs, the employer contribution is stipulated in the plan documents and pension benefits are established based on a target formula, which provides more predictable and stable benefits than under a capital accumulation plan. The biggest challenge with TBPs is the possibility of adjusting benefits, including those in payment, when the plan’s financial situation falls below or exceeds a certain required level. Pension benefits are therefore relatively predictable but could vary over time depending on the plan’s financial situation. The risks and rewards are accordingly borne by plan members on a collective basis rather than individually, as they are for capital accumulation plans.
In the area of funding, Bill 68 sets out rules that are similar to those that apply to private-sector defined benefit pension plans, although some rules are specific to TBPs.2 The adjustments required to restore balance to the plan’s funding may take various forms, such as increasing the contributions of active members, increasing the employer contribution if the plan documents provide for this, or reducing accrued or future benefits, including benefits in payment to retirees. Some constraints on benefits also apply, such as a prohibition against stipulating a pension formula based on final earnings, providing early retirement benefits based on years of employment or credited service, or providing post-retirement indexation other than by a fixed rate under the plan.
While set for expansion in Quebec, this type of plan has existed elsewhere in Canada for decades in the form of defined benefit multi-employer pension plans (DB MEPPs). As we explain in the next section, the DB MEPP is very similar to Quebec’s TBP.
The parallel with DB MEPPs
The DB MEPP is a plan in which many employers participate and typically covers unionized employees in the same industry. It is usually established through collective bargaining, or other types of participation agreements. These types of plans exist throughout Canada, but the rules governing them differ depending on the province. Generally, these plans provide for the following provisions and features:
- The employer contribution is negotiated and fixed for the term of the collective agreement.
- The benefit amount is based on a specified target formula; it is not guaranteed and could be increased or reduced.
- Target formula is set in relation to available levels of funding and provides more predictable and stable benefits than a capital accumulation plan.
- A board of trustees (or a pension committee) is responsible for the sound management of the plan.
- Members are involved in plan governance with at least half the board of trustees’ members representing plan members.
- The board of trustees is responsible for applying recovery and restoration measures to the plan’s financial position.
- Benefit reductions, if required, may affect future and accrued benefits, including benefits that are currently being paid.
- Considering the potential variability of pension benefits, risk management plays an important role in the board of trustees’ governance activities. With the help of expert advisors, the board of trustees must establish appropriate margins to include in the plan funding.
Over time, while many DB MEPPs have developed control measures and have had to apply recovery and restoration measures, many have also been able to apply improvements. They have had to adapt to market changes and handle various issues, including communicating with members to ensure transparency around the possible variability of benefits.
Under the Quebec legislation on TBPs, the various recovery measures to be implemented when contributions are insufficient (such as increasing contributions from active members or reducing benefits), including restoration measures when the future financial situation permits, will have to be established from the start based on a relatively rigid framework.
The terms and conditions of application of these measures must not provide the pension committee any discretion regarding the election of the applicable measures, the order in which those measures are to be applied and how they are to be applied among the groups of active and non-active members. The same principle also applies when allocating available surplus assets. This is an important difference compared to the legislation applicable to DB MEPPs.
Thus, the work of developing this framework for each TBP will be a critical step since future changes to control measures will only be allowed after a member consultation process. In other words, the terms and conditions relative to these measures will lack flexibility to customize the measures to deal with a specific situation and the plan must put a framework in place that will be appropriate for a broad set of circumstances and scenarios.
The parties involved in implementing these plans will have to invest a lot of effort upfront, with the help of expert advisors, to optimize the chances of meeting their long-term objectives.
In our upcoming articles, we will explore a few factors that, based on our experience with target benefit plans, are important in the design and management of a TBP under the requirements of Bill 68.
1 Defined contribution plan (“DC”), simplified pension plan (“SIPP”) or other group savings plans (RRSPs, TFSAs or deferred profit-sharing plans)
2 More information on the technical contents of Bill 68, in its initial version released on October 7, 2020 at the National Assembly of Quebec, is available in our Special Notice from October 2020.
This issue of Insights has been prepared for general information purposes only and does not constitute professional advice. Should you require professional advice based on the contents of this notice, please contact an Eckler consultant.