August 13, 2013
Partner Mitch Frazer, a leading pensions and benefits practitioner, provided comment in a Financial Post article that details the different solutions many businesses are applying to the changing landscape of pensions. Below is an excerpt of the article.
Business law firms are beefing up their pension departments to advise clients on a range of changes within the industry, including the “de-risking” of defined benefit pension plans.
. . .One way of de-risking involves the conversion of traditional defined benefit (DB) plans into the Dutch model of shared risk plans with target benefits. Ms. Steele advised on the implementation of New Brunswick’s new shared risk plan legislation, which came into effect in July.
In a defined benefit plan, the employer is obligated to guarantee that pensioners receive their benefits, plus cost-of-living increases, regardless of the plan’s market performance. A defined contribution (DC) plan puts the risk on the pensioners, who receive benefits based on the plan’s performance in the market. New Brunswick’s shared-risk model is a hybrid: some benefits are guaranteed and some are conditional.
“The New Brunswick plan addresses the volatility issue by focusing on robust risk management to promote benefit security and pension plan sustainability,” Ms. Steele says.
“Employers’ contributions, which can vary only within a pre-established range, are determined with regard to a prescribed minimum security level of funding that is set when the plan is established or when a benefit is changed.”
Although New Brunswick’s shared-risk model is the first of its kind in Canada, there’s a definite trend toward de-risking in this way. Quebec is finalizing target benefit plan legislation, but only for the pulp and paper sector. British Columbia and Alberta still lack implementing regulations, but have the necessary statutory framework in place. So do Ontario and Nova Scotia, although their legislation only allows target benefit plans in unionized workplaces.
“De-risking is a meaningful, live issue where much should happen in the next few years,” says Mitch Frazer in Tory LLP’s Toronto office.
How much will happen is uncertain, given the polarization between employers’ desire to share risk and employees’ desire for the security of a defined pension after working towards it for a substantial period of time.
To read the full article, click here.