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Governments need to move beyond debating defined-benefit and defined-contribution pension models, and toward incorporating the best of both plans, says the C.D. Howe Institute.

Researchers Mel Bartlett, Angela Mazerolle and Jana Steele call for changes to pension standards legislation to accommodate single-employer target-benefit plans (TBPs). TBPs combine elements of both DB and DC plans to addresses the limitations of each.

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“DC plans leave complicated investment decision-making to plan members, who frequently have no investment expertise,” say the authors. “Furthermore, while risk and reward may be aligned, DC is not a completely economically efficient model because it fails to capture substantial value available from the pooling of risks and costs among plan members.”

Bartlett, Mazerolle, and Steele also note that, due to extremely low interest rates and the volatility of equity markets over the past several years, many DB plans have suffered from significant solvency deficits. Additionally, “the longer-term trends of increasing life expectancies and maturing pension plans have also constituted a rise in DB funding costs.”

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Designed to be flexible and adaptive, the authors say TBPs have:

  1. Fixed contribution amounts;
  2. A targeted defined-benefit-type pension at retirement;
  3. The ability to adjust benefits to balance the plan’s funding. This, say the authors, is a TBP’s defining characteristic.

The authors recommend that pension standards legislation be changed to accommodate single-employer TBPs, since TBPs aren’t legal in all provinces. The authors also call for clear accounting guidance for TBPs and changes to tax rules.

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Originally published on Advisor.ca

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