Target-Benefit Plan

Target-Benefit Plan

A pension plan with a defined contribution but no guaranteed payout. That is, when the annuitant purchases the plan, he/she makes a contribution each month according to a formula that is most likely to result in a certain payout when he/she begins receiving payments. The formula assumes a certain interest rate and/or market movements will take place. If these do not occur according to the formula's projections, the plan's operators are under no obligation to provide the projected payout. Instead, they provide what the contributions have actually earned over the life of the pension.
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Finally, we examine the New Brunswick shared risk model, as an example of a specific type of target-benefit plan.
A target-benefit plan is a pension plan with the following key characteristics:
Investment risk in a target-benefit plan is also shared through the commingling of retiree and active member assets.
The second is by converting the PSPP to a target-benefit plan where the 20 percent contribution rate is fixed and the risks are borne entirely by members through adjustments, both positive and negative, to the pensions they receive.
Converting the PSPP to a target-benefit plan closes the compensation gap in the least painful way (by removing an expensive guarantee that employees underappreciate) while simultaneously solving or mitigating some other problems.
Continuing in this direction, suppose now that the pension plan was converted to a target-benefit plan by changing the $100 benefit from a guarantee to a target.
The cost of the target-benefit plan for compensation purposes would then be:
Target-Benefit Plans in Canada--An Innovation Worth
Further reforms to the Pension Benefits Act should address this issue by more easily allowing pension "collectives," such as multi-employer, target-benefit plans for non-related employers.
A key principle of target-benefit plans is a greater ability to share risks through rebalancing the benefit/funding equation.
They are no longer even common in Canada's public sector, where far larger numbers of employees participate in target-benefit plans that take funding levels into account in their benefit formulas.
Their key virtue is that they drastically reduce the scope for intentional understating of costs--even more than target-benefit plans do--since the benefits they will pay are straightforwardly a function of the money that goes in and the assets they hold.
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