In our posts over the past two weeks, we discussed some of the myths surrounding target benefit plans (TBPs), clarifying that:
- while the introduction of TBPs as an option for single employers is a welcome innovation, target benefits have been prevalent in the multi-employer context for some time; and
- permitting plan design options, such as TBPs, should be encouraged as a progressive alternative that could, in many circumstances, be preferable to exiting traditional defined benefit (DB) plans for future service and/or future hires.
In this post, we consider another myth – unions and employees are opposed to target benefits.
First, as pointed out in an earlier post, unions have embraced multi-employer pensions plans, which often provide target benefits, for many years.
Second, although there are some unions or branches of unions that have recently voiced opposition to legislative changes to permit single employer TBPs, it appears that much of this opposition is directed at legislation which permits the conversion of past benefits to target benefits, as is permissible in New Brunswick. On a plan conversion from defined benefit to shared risk in New Brunswick, all accrued benefits are converted to base benefits which are afforded a higher level of protection than ancillary benefits, but which are, nevertheless, subject to the shared risk rules.
Notwithstanding the opposition of some unions or union branches, there can be some advantages to members if past benefits are converted in conjunction with moving to a TBP. Of course, from the employer’s perspective conversion is preferable because it includes legacy DB benefits within the scope of TBP risk management and there would only be a single plan design to administer going forward. From the affected member perspective, all benefits are subject to prescribed risk management rules to help achieve improved benefit security and address potential inter-generational inequities. In addition, to the extent TBP conversion is linked to joint sponsorship/governance, members participate in plan sponsor and administration decisions through their selected representatives.
It is notable that the majority of the conversions from defined benefit to shared risk in New Brunswick were done with the consent and support of the applicable unions.
In our final post, we consider Myth #4: Defined Benefit Plans are “Guaranteed”.