CAAT DBplus – A Step in the Right Direction
There is an interesting development in the Canadian pension landscape that has the potential to be a real game changer. Earlier this year, the CAAT Pension Plan launched DBplus, which will effectively operate as a separate component within the CAAT Pension Plan and will provide members with a lifetime pension similar to that provided under traditional defined benefit plans, but with the cost certainty of a defined contribution plan. In many respects DBplus is a “target benefit pension”, but in reality it is still a traditional DB pension plan with conditional enhancement (a “defined ambition pension”).
What is most interesting, is that the CAAT Pension Plan (“CAAT”) seems willing to expand outside of its traditional employer base of Ontario colleges, and is now open and ready to welcome employees from employers in the broader public sector, not-for-profit sector, and private sector – which, by my reading, means open to pretty much any employer.
It is my understanding that CAAT is open to having new employers join either its new DBplus offering, or its existing final average earnings style DB benefit component. In recent years, employers such as the Royal Ontario Museum and Youth Services Bureau have joined CAAT. Furthermore, in June, CAAT entered into an agreement to merge Torstar’s eight registered defined benefit pension plans effective October 1, 2018 – but this merger is still dependent on the approval of members in the Torstar plans and will also require regulatory approval.
The DBplus offering at CAAT is not entirely unique. Earlier this year, OPTrust launched OPTrust Select, which like DBplus will be a separate “defined ambition pension” component within the OPTrust Pension Plan. However, OPTrust Select is targeted to Ontario workplaces in the broader public sector, charitable, and not-for-profit groups that do not already offer a workplace DB pension (and thus, does not have the same broad-based appeal to the private sector as does DBplus).
The key takeaway that I draw from these developments is that it is now much easier for employers to offer their employees a decent defined benefit pension, and to do so without taking the typical risks, governance, and administrative responsibilities associated with single employer defined benefit plans.
For complete details on CAAT’s DBplus offering, I will point you to their website. However, as a brief description, employees and their employer are to each make matching contributions of between 5% and 9% of pay, which are then used to generate a base pension benefit that is 8.5% of total contributions. This base pension benefit increases during an employee’s working lifetime with additional benefit accruals, as well as with wage growth to the extent permitted by CAAT’s Funding Policy. At retirement, an employee’s pension becomes guaranteed, and they will receive conditional inflation protection enhancements which again are determined based on CAAT’s Funding Policy. A survivor pension is also available to be provided to the member’s surviving spouse.
From the employees’ perspective, the pension benefit that is provided under DBplus is akin to a ‘career average earnings’ type defined benefit pension. However, from the employers’ perspective, DBplus simply requires they make a contribution of between 5% to 9% of employee payroll, and there is no balance sheet risk or contribution volatility – that is, it operates like a capital accumulation program – but with the additional convenience that the employer does not have to be responsible for administering the program.
First, a well-deserved compliment; and then a few critical remarks
In the promotional material on DBplus there is a section where some of the leading experts in our industry are lauding this new program. I share their sentiment for this program and agree whole-heartedly with all their comments. One comment that is worth repeating is veteran labour and employment lawyer Ronald Pink’s comment:
“Finally, a modern pension plan for Canadians. DBplus pension design is unique and one which is long overdue. DBplus will become a leader in the pension industry in Canada and Canadians will have better retirements because of this innovation.”
With that said, I have a few critiques on the design of the DBplus I wish to share:
- When converting the total (employee and employer) contributions into a base pension benefit, I would have preferred to see a factor that is dependent on age, rather than just using the same conversion rate of 8.5% for all members. I understand the need to balance fairness with simplicity, but in my view, using the same conversion factor for all ages focuses too much on the latter and does not adequately address the former. Even with the wage enhancements and inflation protection, the difference between the actuarial value for the same pension benefit is significantly different between the young and the old – and given the mobility of today’s workforce, I would prefer that this difference be addressed directly in the plan design.
- Also, I would have preferred to see DBplus be available with employee and employer matching contributions that are as low as 3% each. I can appreciate the need to ensure that there are adequate contributions to cover the administrative costs of running the program and to ensure that the pensions are truly adequate, but in my view, there are certain groups of employees (i.e. lower income or part-time employees) that may be better served by allocating a greater proportion of their retirement savings to a Tax-Free Savings Account.
- Finally, since certain benefits under the DBplus design are guaranteed, CAAT needs to build sufficient reserves to ensure that the base benefits can be provided when financial markets sour. Furthermore, CAAT also needs to ensure that the funding status of the existing final average earnings DB benefit component is not harmed by the growth of new members into the DBplus component of the plan. These criteria will pose a challenge in managing the intra-plan and inter-generational equity of plan members (as will be the case for all shared risk plans). As an employer decides to join DBplus, they are effectively putting their faith in the CAAT Trustees to manage these risks prudently.
Calls for plan designs like DBplus are not new in Canada. In recent years, many experts have been promoting target benefit pension plans as a viable alternative that should be made more readily available in Canada. The launch of DBplus is a welcome development, especially given the decline of defined benefit pension plans over the years. To a certain extent, I am disappointed that our provincial and federal governments have not moved faster to allow plan designs like DBplus to flourish. Nevertheless, progress on these issues is slowly being made.
One key advantage that CAAT has over most other pension plans is that, being a Jointly Sponsored Pension Plan, it was able to apply for and receive an exemption for following the Solvency Funding Requirements that apply to single employer defined benefit plans. This enables CAAT to take a long-term perspective, and not be overly burdened by fluctuations in the financial markets. While this advantage is afforded to CAAT via legislation, it is ultimately reflective of its size and unique joint governance structure.
If I were to be wishful, it would be for governments to be more proactive on target benefit/shared risk pension plan initiatives, and to allow greater flexibility to other pension providers (e.g. insurance companies, multi-employer pension plans) to offer target benefit/shared risk pensions. To be critical, in some respects Ontario is moving towards a system that provides certain pension providers with a “regulatory arbitrage” advantage that is not afforded to all market participants. In my view, Canadians would be better served if there was more competition to unique offerings like DBplus.
In light of the above, employers should be aware that the opportunity to join a well-managed jointly sponsored pension plan like CAAT exists.
For employers that already sponsor a single employer defined benefit pension plan, and are in the process of exploring an exit, a merger with CAAT could be worth considering. However, this process is a bit more cumbersome than a typical wind-up or de-risking exercise as it would require CAAT, member, and regulatory approval.
In any event, the DBplus offering is truly unique and offers employers with relatively easy access to a decent pension program. Such an offering may be especially attractive to employers with no pension program, or with capital accumulation programs that they wish were more productive.