Québec’s government announced its intention to introduce target benefit plans for single employers next spring, as part of its Fall Economic Statement presented on 7 November. The finance minister also encouraged Quebecers to reflect on steps that would improve their retirement planning.
The economic statement notes that Canada’s pension system was ranked ninth out of 37 countries in the 2019 Melbourne Mercer Global Pension Index. Despite Canada’s high pension ranking, the government warns that future improvement depends on:
Many of the pension measures presented in the economic statement are consistent with Mercer’s recommendations. The government is encouraging Quebecers to become more familiar with the retirement system and properly plan their retirements to benefit from the system’s strengths. For the first time, the government emphasizes the advantages of deferring Québec Pension Plan (QPP) benefits and federal Old Age Security benefits to help workers better manage investment and longevity risks.
The government also urged employees to consider working longer and has presented incentives to work during retirement — which comprises the fourth pillar of the retirement income system.
Following consultations with major unions and employer associations, the government announced its planned publication of target benefit pension plan legislation for next spring. Target benefit pension plans will help compensate employees for the decline in traditional occupational defined benefit (DB) plans, offering greater predictability and more risk pooling compared with defined contribution (DC) plans. Mercer assumes this bill would be restricted to Québec employees.
Target benefit pension plans will have the following features:
─ Although not fully guaranteed, the annuity amount could be estimated in advance based on a predetermined formula, and could increase or decrease depending on the plan’s financial health.
Once a target benefit pension plan is created, the plan’s provisions will need to outline how risks would be managed and the method for adjusting contributions and/or benefits to accommodate changes in the plan’s financial situation.
Last December, the Québec National Assembly unanimously agreed to prepare legislation that prohibits disparity clauses in pension and employee benefit plans that allow different treatment based on an employee’s date of hire.
In Mercer’s view, a complete prohibition on the use of disparity clauses would cause serious issues for employers. Given the risks, employers do not wish to return to DB pension plans. If employers must include their entire workforce in the same pension plan, they likely would want to speed up the transition to DC plans. Experienced workers would be the most impacted by a prohibition on disparity clauses if they were required to change their retirement date or alter their financial plans shortly before their anticipated retirement age.
Consequently, target benefit pension plans could provide another negotiating tool for employers as they offer better risk pooling than DC plans, and don’t pose the financial risks associated with DB plans. Stakeholders involved in negotiating renewals of collective agreements should give careful consideration to the option of target benefit pension plans.