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TBFs Possible Answer


Target benefit plans (TBPs) are a possible answer to many problems facing pension plan design, says an article by Fred Vettese, Morneau Shepell’s chief actuary in its ‘Visions’ newsletter. In ‘Target Benefit Plans, Game-Changer or Non-Starter?’, he says with plan sponsors looking for cost effective and easier plans to administer, TBPs, while not new to multi-employer plans, can work well for single-employer plans looking to make changes. “In its most basic form, a TBP is a pension plan that aims to provide a defined benefit, but with fixed contributions. To plan members, it is virtually indistinguishable from a regular DB plan except that accrued benefits are subject to reduction if the funding level falls below a given threshold. TBPs are promising because they eliminate the risk of rising costs inherent in DB plans while offering a better solution for most employees than most defined contribution plans.” Several inherent design elements make the model work. TBP contributions are fixed, the assets are pooled for investment purposes, the accounting applied to TBPs can be less expensive and less complicated than for DB plans, pension adjustment calculations are simplified by looking at contributions made, and TBPs are monitored as going-concern valuations rather than solvency valuations which has, itself, damaged the solvency of many companies.

Courtesy of Benefits and Pensions Monitor website News Alerts

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