Canadian HR Reporter - February 13, 2012

■ PENSIONS
CANADIAN HR REPORTER

DEPARTMENTS 15
Are hybrid pension plans the answer?
DBs are nearing extinction, DCs aren’t ideal – it’s time for a third option

BY FRED VETTESE

While more than five million work- ing Canadians rely on workplace pension plans for retirement security, the predominant form — a defined benefit (DB) plan — is in danger of extinction, at least in the private sector. Traditional DB plans are a nonstarter for any organization that does not already sponsor such a plan.

And even though we have seen a massive migration to defined contribution (DC) pension plans, these are far from ideal since the transfer of risk to employees — who have minimal investment knowledge and an aversion to risk — will always be a problem. So is there a third way?

In the middle of the risk-sharing spectrum are hybrid plans, which include any plan with both DB and DC features. If employers no longer want to absorb all the risk, then surely plans that share the risk with workers is the way to go.

Harry Arthurs, chair of the
Ontario Expert Commission on
Pensions, stressed the impor-
tance of innovation in plan de-
sign in his 2008 report:
“How can our system of
voluntary pension plans be
sustained and enlarged while
protecting the security of mem-
bers’ entitlements and afford-
ability for sponsors?... The
achievement of these seem-
ingly contradictory objectives
is indeed possible but only if
we can move beyond conven-
tional understanding of DB and
DC plans.”
However, the concepts of DB
and DC are so deeply ingrained
that plan designs falling outside
these strict boundaries make
people vaguely uncomfort-
able — especially the regula-
tors who will have to rule on
whether a given hybrid design
is acceptable.

Some examples of hybrid
plans illustrate the challenge.

The main drawback, however, is explaining it to members since the DB and DC pieces cannot easily be added together. One involves a lifetime annuity and the other an account balance, and any attempt to homogenize them is artificial.

Of course, such plans aren’t
all bad. They share risk be-
tween the employer and em-
ployees, just not in the most
elegant fashion. The other fea-
ture in their favour is existing
pension and tax legislation al-
ready accommodates them.

Target benefit plans

Target benefit plans are the
most talked about hybrid plans
these days, even though they
aren’t yet permitted in single-
employer situations. A target
benefit plan is like a DB plan as
it pays a pension over an em-
ployee’s lifetime — the amount
of which is expressed in a for-
mula. It is also like a DC plan
as employer contributions are
fixed; hence, in the case of a
funding deficit, benefits would
be reduced rather than contri-
butions being increased.

See Page 17 / MODIFIED
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2-tiered plans

The most common type of hybrid plan involves a core DB plan and supplementary DC plan. This is the arrangement Air Canada and its flight attendants union agreed to adopt in September 2011.

It can be argued this is not a true hybrid plan but rather two separate, conventional plans mashed together. A combination DB-DC plan is fraught with problems. It’s harder to administer, since it usually requires different service providers for the DB and DC portions. The cost of administration is nearly double since both a DB and a DC record need to be kept for each member.