Currently, only 4 out of each 10 Canadians are covered by a pension program apart from CPP or QPP. Employers typically do not like DB plans simply because they?re too risky. Employees will take anything they are able to get but would usually prefer DB plans. How do we resolve this conflict and raise pension strategy coverage in Canada?
Multi-employer pension plans (MEPPs) have been around because the middle of the 20th century. Generally, they?re target benefit plans (TBPs) that involve a union or unions. A lot more lately, a renewed breed of MEPP/TBP has been conceived by each of the important expert pension commissions across the country (Alberta/B.C., Ontario, Nova Scotia and federal). They simply referred to them by slightly distinctive names: SCTBP (specified contribution target benefit program), JGTBP (jointly governed target benefit strategy), TBP (target benefit strategy) and NCDBP (negotiated expense defined benefit plan), respectively.
The main purpose of the numerous expert commissions was to enhance private pension strategy coverage inside the many jurisdictions. So far, that has not happened, but they did lay the groundwork by endorsing the TBP. It was then as much as the many governments to put in place the needed legislative and regulatory framework to enable the TBP to flourish, and this really is now beginning to take place.
Understanding MEPPs and TBPs
Regular MEPPs-or, additional particularly, SMEPPs (specified multi-employer pension plans), to differentiate them from public sector DB MEPPs:
involve several participating employers;
are union-negotiated/collectively bargained;
are governed by joint labour-management or 100% union-trusteed board;
are structured as a mixture DB/DC strategy, with both advantages and contributions defined (the objective is DB, but the promise is DC);
have fixed contributions (generally a cents-per-hour defined contribution rate) that go into the program on a DC basis, and rewards (normally flat dollar) that are paid out from the program on a DB basis;
have advantages which are targeted and are paid as scheduled, contingent on the plan?s financial position;
demand members to bear 100% of the risk on a collective basis; and
are ?specified? as per the federal Income Tax Act.
MEPPs have weathered the financial storms of the past half-century, such as the fantastic storm with the early 2000s as well as the economic and industry crisis of 2008. While advantages in most MEPPs have been reduced, on either or each an accrued past service and future service basis, it?s likely that these reductions are only temporary and will eventually be restored as markets and economies recover. These plans are created to weather the volatility of our times-something that standard DB and DC plans struggle with.
TBPs will ought to share several basic functions with MEPPs so as to be efficient:
trustees have the capacity to decrease accrued positive aspects;
the employers? liability is limited to the fixed negotiated or agreed-upon contributions;
the program is viewed as DC for both accounting (CICA, IFRS) and tax [Canada Revenue Agency (CRA)] purposes; and
there?s no solvency funding requirement.
But the TBP concept envisioned by the expert commissions goes beyond the regular MEPP in that there may be only a single employer or corporation, there could not be a union involved, along with the contribution and benefit formulas are not restricted to cents-per-hour and flat rewards, respectively (i.e., they could also be formularized as a percent of salary).
The future of TBPs
What has to take place in order for TBPs to flourish across the country? First of all, TBPs should be formally recognized in the many provincial legislations and regulations. This has already started to happen in Ontario, where TBP has been defined under the Pension Benefits Act (PBA) as well as the MEPP/TBP concept clarified with respect to single employers. The component with the proposed new law referencing the union versus non-union aspect utilizes the term ?collective agreement.? Basically removing the word collective would open up the TBP design to the huge Ontario private sector non-union environment.
The a variety of provincial PBAs, the federal Pension Benefit Standards Act and the associated regulations, when viewing these plans as fundamentally DB, have to enable the reduction in accrued benefits (just as Ontario?s does for MEPPs); exempt these plans from solvency funding (just as Ontario?s does for specified Ontario MEPPs and in line with new permanent exempting legislation now on the books); and not need the employer to make up any deficit within the program. This is not the case in Quebec and New Brunswick, where MEPPs-and presumably the new TBPs-simply don?t and will not function nicely due to the funding risk and linked DB accounting.
Additionally, the provinces should extend the TBP to the single-employer and non-union environments. The federal taxation authority (the CRA) have to view these TBPs as DC plans, just as they do SMEPPs-and, like the provinces, extend the application to the single-employer and non-union environments. Lastly, the accounting authorities (CICA and IFRS) must view these plans as DC plans, just as they do SMEPPs, on the basis that the employer?s liability is limited to the fixed contribution rate.
Assuming that this legislative and regulatory environment is put in place, the stage is set for unprecedented growth in registered pension plans, extending private pension strategy coverage beyond the existing 4 out of 10 Canadian workers towards the remaining six out of 10 employees-the basic objective with the many professional pension commissions.
A ?perfect? remedy in an imperfect world
In a great world, employers would prefer DC and most staff would prefer DB. But in our ?real? globe, employers would prefer TBPs more than DB plans for the reason that they have?
no surplus/deficit asymmetry and ownership problems (surpluses and deficits are 100% the members? responsibility);
no solvency funding needs, other than calculation and disclosure;
predictable fixed costs/contributions;
no accounting troubles or complexities or unforeseen hits to the employer?s financials;
transfers of risk and the associated responsibility of benefits/deficits to the members;
simpler and a lot more flexible taxation rules (e.g., DB excess surplus rules aren?t applicable, pension adjustment calculations are uncomplicated); and
ease of administration positive aspects (the burden is transferred to a board of trustees and expenses are charged towards the fund).
Once again, in our genuine globe, employees would prefer TBPs over DC plans for the reason that they have?
sharing or pooling of investment and mortality/longevity risks;
additional secure and predictable advantages determined by a set scale or formula;
economies of scale (i.e., lower expense unit costs);
access to DB-type pension ancillaries, for example disability and subsidized early retirement positive aspects;
greater investment returns, producing considerably higher pensions; and
joint governance.
MEPPs/TBPs represent a practical option to a standard DB or DC program that optimally balances the often-conflicting requirements and objectives of both employers and staff, taking the most beneficial of both DB and DC worlds.
From the member?s perspective, the TBP has all the capabilities of a DB program, except that it is contingent on the plan?s good results. From the employer?s perspective, the TBP functions like a DC strategy, with no obligation to fund deficits or beyond the fixed agreed-upon contributions.
Governance for these new TBPs will be critically important. Given that the risk is borne by the members, at a minimum, the staff should have a 50%-possibly even 100%-share of the governance. Jointly governed TBPs will likely turn into the norm, with basic present service price (i.e., not which includes any deficit funding requirement) sharing anyplace from 100% employer/0% employee to 50/50. In this new world of operating a MEPP/TBP in a non-union situation, the classic role with the union representatives acting as trustees are going to be met by member association or employee-elected representatives to a pension committee or board of trustees.
Finally, assuming that the required legislative and regulatory alterations are produced, we will have a program design-the TBP design-which effectively works for both employers and workers within the private sector. This sets the stage for growing the pie of registered pension program coverage. With an effective vehicle that meets the two major stakeholders? requirements, pension strategy coverage could be further enhanced by making a registered pension plan a mandatory requirement for all employers (or no less than those meeting a particular size threshold, including a minimum of 15 staff).
Opening up access to private pension plans by way of the TBP for the remaining 60% of Canadian workers will expense absolutely nothing to the government or taxpayers, as there is certainly no Pension Benefits Guarantee Fund safety net. In truth, the ultimate beneficiary -along with all the newly covered workers themselves-will be future taxpayers, as the prospective need to have for government social help down the road might be decreased significantly.
What?s needed now would be to take this ?new? strategy style from the point of conception towards the actual birth of the new TBP for use inside the single- as well as multi-employer environment-and within the non-union also as union environment-thereby growing the pie and broadening pension strategy coverage across the province plus the country.
Source: http://finance101now.com/2011/09/mepps-the-next-piece-of-the-pension-pie-2/
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