The Minister of Finance, Eric Girard, tabled a bill last week that will allow the implementation of a new type of company pension plan: the target benefit plan (PC).
What is it about ?
And is it a good deal?
The PC diet, the third way
This is an approach that fits between two already known formulas:
- The defined benefit (DB) pension plan: this is the pension fund everyone dreams of. It guarantees the worker the payment of a retirement pension until death, a benefit based on salary and years of service. The fund is supplied by contributions from employees and the employer, but it is on the latter that rests the responsibility of filling any deficits, and therefore of assuming the financial risks.
- The defined contribution plan (DC): much less risky for businesses, this plan is also much less generous for employees. It is more like an individual Registered Retirement Savings Plan (RRSP) to which the employer and employee contribute. When the latter leaves the company, he leaves with his pot and must manage it. The risk weighs on the individual beneficiary. Her woolen sock can wear out.
An unsecured lifetime annuity
The target benefit pension plan borrows characteristics from these two plans.
Like the DB, it provides the retiree with protection against longevity risk by paying an annuity until death, but the benefit may decrease in the event of a significant decline in the markets. The employer contributes to the fund, but does not have to top it up when a deficit appears.
The beneficiaries assume the risks mutually. The money left on the table by participants who die young is used to finance the retirement of those who are living old.
A complex diet
“With a target benefit plan, you have to set up a pension committee, establish an investment policy, perform actuarial valuations, etc. The requirements are as high as with a defined benefit plan, ”explains Mélanie Beauvais, actuary and tax expert at Banque Nationale Gestion Privée 1859.
As there is no employer to fill any actuarial deficits, the management of such a pension plan could be more prudent, according to the specialist. This would result in lower pensions than what participants would have obtained, with equivalent contributions, with a defined benefit plan.
The new standard?
With the exception of the public service and very large companies, defined benefit pension plans are tending to slowly disappear in favor of defined contribution plans, which are less expensive for employers.
The arrival of target benefit plans could well accelerate this movement. Companies that still offer a DB plan will certainly be tempted to downgrade to this less risky formula.
On the other hand, organizations that have already switched to DC will not rush to come up with an improved target benefit plan that is more complex to manage.
It will be up to the employees to claim it, and strong.