Canada-Wide Industrial Pension Plan outline the benefits and risks associated with this hybrid DB and DC model
When it comes to workplace retirement plans, most plan sponsors are familiar with the big two – defined benefit (DC) and defined contribution (DC). But there’s a lesser known third option, one that David Le Roy believes is long overdue for a reintroduction.
That’s why he’s on a mission to make target benefit plans better understood.
“They’ve existed for a long time but in the rush to DC, people kind of forgot that a target benefit plan existed so employers have been really keen to close out their DB plans,” said Le Roy, director of market engagement at Canada Wide Industrial Pension Plan (CWIPP).
He explains that DB plans became increasingly unsustainable for employers, especially in the face of market volatility and the actuarial burden of guaranteeing benefits. DC plans rose in popularity as a result, offering more cost certainty to sponsors, but at a price for plan members.
This is where CWIPP comes in. Established by the Canadian Labour Congress (CLC) in the early 1970s, CWIPP operates under a target benefit model - for unionized members - that Le Roy describes as a hybrid.
“To the plan members, it’s a bit like a DC plan, because the employer contribution will not change. But the benefit to the participant can go up or down depending on the performance of the plan,” he explained. “It’s a cross between a DB and a DC.”
Le Roy doesn’t shy away from the complexity. He points out that unlike DB plans, target benefit plans don’t impose financial liabilities on the employer.
“They’re not obligated to fund it. It’s not on their books,” he said. “For them, it’s like a DC plan. But for the participant, it’s like a DB plan.”
In his view, DB plans are quickly becoming obsolete, not because they don’t serve a purpose, but because the cost and complexity of maintaining them is increasingly hard to justify.
“Nobody is establishing a DB plan these days,” he said. “They’re extremely complicated to administer and they come with a lot of complications. None of that happens with a target benefit plan.”
Contrastingly, he says target benefit plans provide the same kind of predictable monthly income for members but without the liabilities DB plans create for employers. Unlike a DB plan, the employer doesn’t need to worry about unfunded liabilities showing up on the balance sheet or being forced to make additional contributions when markets shift.
For those who might default to a defined contribution (DC) or group RRSP plan instead, Le Roy notes that those arrangements still require the employer to take on responsibility, whether that’s selecting fund options, monitoring performance, or dealing with administration. Target benefit plans remove that burden by outsourcing all of it to an existing, specialized framework.
Additionally, in contrast to DC, target benefit plans relieve the employer from fiduciary risks tied to fund selection and performance. He’s also quick to push back against the idea that DC plans are inherently simpler or safer.
“If your outcome is meant to be a retirement income, this type of plan produces a better result than a DC plan will,” he said.
One of the key features of CWIPP’s model is asset pooling, which allows for risk-sharing among members and better access to diverse asset classes.
“It creates a longevity hedge,” underscored Le Roy. “You don’t have to worry about running out of money before you die because the pension is guaranteed for as long as you live.”
He also draws a sharp line between CWIPP and traditional DB plans. In CWIPP, each union or employer group is tracked separately. This structure avoids the cross-subsidization issues that plague DB plans and ensures intergenerational equity.
He admitted that target benefit plans are not without risk, however.
Chief among them is the potential for benefits to be reduced if the plan underperforms financially over time. While target benefit plans aim to provide stable and predictable retirement income, they do not guarantee a fixed payout like a traditional defined benefit plan.
This means that in adverse market conditions or if investment assumptions don’t hold, the benefits paid to members could be scaled back or reduced, he explained.
However, he noted that this isn’t a decision taken lightly or triggered by short-term performance. CWIPP, for example, manages this risk by maintaining reserves and focusing on multi-year returns rather than reacting to short-term volatility.
That’s why Le Roy emphasized clear communication is essential to making sure plan members understand this risk upfront and see the trade-off: a plan that may offer better average outcomes and even upside during strong performance years, but one that isn’t immune to benefit adjustments in tougher times.
CWIPP has roughly 70 participating employers today, many of whom were introduced to the plan through collective bargaining. In some cases, Le Roy said, the employers don’t even know the details of the plan, as “they just write the check.”
What makes target benefit plans particularly attractive, he argues, is their ability to deliver stable retirement income without the administrative burden or legal exposure of a DC setup.
“In this case, they’re just sending a check. That’s all they do,” he said.
Ultimately, Le Roy believes in the potential for strong growth among target benefit plans, particularly among employers already offering DC or group RRSPs.
“It’s easily promoted as an enhancement, a better benefit for their members,” he said. “And it actually does produce a better outcome.”
