Clear a path for TBPs: reportThursday March 05, 2015 Written by C.D. Howe Institute
A new report argues Ottawa needs to change federal tax rules to accommodate single-employer target benefit plans (TBP).
In “The Taxation of Single-Employer Target Benefit Plans – Where We Are and Where We Ought To Be,” the C.D. Howe Institute proposes a tax treatment for single-employer TBPs that is consistent with the existing tax regime.
Many pension sponsors have been looking for alternatives beyond traditional pension arrangements to better manage their pension risks and those of plan members. Some find defined benefit (DB) plans too risky and expensive, since they promise pre-determined pension amounts which may not be sustainable, particularly during times when the economic and demographic environment is unfavourable.
Defined contribution (DC) plans are not ideal either, since the pension payout is unknown and will depend entirely on contributions, investment returns and how long the individual will live.
TBPs constitute an attractive hybrid of DB and DC plans in which employer and employee contributions are fixed to fund target pension payouts.
“Many policymakers and regulators across Canada are in the process of making the required changes to pension standards legislation that would recognize single-employer TBPs,” said Jana Steele, one of the report’s authors.
In the report, the authors offer a blueprint of how tax rules can be changed to better accommodate TBPs. “Until federal changes are made, uncertainty surrounding the tax treatment of TBPs will continue to hinder their adoption by employers and employees,” said Karen Hall, another of the report’s authors.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies.