TARGET BENEFIT PLAN FAQS

How will the transition affect active plan members?

If you intend on collecting a pension from the plan when you retire, you will NOT be impacted by the transition to a target benefit plan. You will continue to accumulate pension benefits the same way you did before, based on the same pension formula. However, new funding rules mean that members, spouses and beneficiaries who withdraw their pension from the plan as a lump-sum payout (following a break in service or pre-retirement death) will now receive a lower lump-sum payout.

In other words:

  • If you break service from the plan and leave your funds in the plan, your monthly pension income in retirement will NOT be affected by the transition. 
  • If you break service from the plan and decide to withdraw your pension from the plan as a lump-sum payout, your payout will be lower under the new target benefit plan rules.
  • Similarly, if you pass away before you are eligible to retire and your beneficiary or spouse withdraws your pension from the plan as a lump-sum payout, the pre-retirement death benefit they will receive will be lower under the new target benefit plan rules. 

Remember, you and your spouse always have the option of staying in the plan and collecting a pension in retirement. 

 

How will the transition affect retired plan members?

If you are already collecting a pension from the plan, you will NOT be affected by the transition to a target benefit plan. 

 

How will the transition affect members receiving LTD or rehabilitation benefits?

The transition will NOT impact members receiving LTD benefits. The IWA–Forest Industry Pension Plan is separate from the IWA–Forest Industry LTD Plan, so changes to the pension plan will not affect the LTD plan and its members. 
 

How will the transition affect inactive (also known as deferred) plan members?

After breaking service from the plan, inactive plan members have a one-time option withdrawing their pension from the plan as a lump-sum payout, or leaving their funds in the plan and collecting a pension from the plan in retirement. 

  • If you intend to collect a pension from the plan when you retire,  your monthly pension income in retirement is NOT be affected by the transition. 
  • If you decide to withdraw your pension as a lump-sum payout from the plan, your payout will be lower under the new target benefit plan rules.
  • Similarly, if you pass away before retirement and your beneficiary or spouse withdraws your pension from the plan as a lump-sum payout, the pre-retirement death benefit they will receive will be lower under the target benefit plan rules. 

 

What type of type of plan was the IWA–Forest Industry Pension Plan before the transition?

The pension plan was originally designed as a multi-employer negotiated cost defined benefit plan (abbreviated to multi-employer pension plan.) A multi-employer pension plan is built on a collective agreement and pays members a monthly benefit upon retirement, based on members’ credited years of service, their applicable benefit level, and plan funding. For most active members, the benefit level is $60 a month per year of credited service after January 1, 2003. As a member, both you and your employer contribute to the plan. All contributions are directed into a pension fund and are invested as per the plan’s investment policy. When you retire, you receive a pension payable for your lifetime from the pension fund. 

Multi-employer pension plans are required to measure plan funding using two security tests: the short-term solvency valuation, and the long-term going concern valuation. 

 

What is a target benefit plan? 

Target benefit plans were introduced into BC pension legislation in September 2015. The key advantage of target benefit plans is related to funding rules. This kind of plan remains based on a multi-employer arrangement, which also provides retired members with a monthly lifetime pension based on members' credited years of service, applicable benefit level, and the plan's funded status. 

However, target benefit plans are not required to fund plan liabilities on the short-term solvency valuation. Instead, target benefit plans fund plan liabilities on the long-term going concern valuation that assumes the plan will continue indefinitely into the future. This increases the long-term stability of the plan going forward and reduces the chance of benefit cuts. 

 

What would have happened if we didn't transition to a target benefit plan?

Under pension legislation, multi-employer pension plans typically need to eliminate any solvency deficit by reducing benefits for members, negotiating an increase in contributions, or a combination of both. Because the plan has a solvency deficit, and contributions are fixed through collective bargaining, this means that we would be required to reduce member benefits under the previous arrangement. However, the government has given the plan an exemption from funding the plan based on solvency (also known as a solvency moratorium.) This exemption will end on December 31, 2017. Should the plan still face a solvency deficit at December 31, 2017, the plan would have been required to reduce member benefits by the amount of the solvency deficit. But by transitioning to a target benefit plan, we eliminated the need to ever fund the plan on a solvency basis, and therefore reduced the possibility and severity of any future pension reductions.

 

What is the difference between measuring plan funding using the solvency basis or the going concern basis?

Both the solvency basis and going concern basis measure the ability of the plan to fund its liabilities (i.e., the pension benefits that need to be paid out) with its assets (i.e. the contributions and investment earnings.) The key difference between the two calculations has to do with when the plan is expected to pay out all of its liabilities. 

Solvency basis 

The solvency basis calculates the ability of the plan to pay all of its liabilities as if the plan were to terminate immediately. Measuring on a solvency basis results in a ratio or percentage that indicates the degree to which the Plan’s liabilities are currently funded. For example, if the plan is 70% Solvent, it means that 30% of its liabilities are unfunded. Because the solvency valuation is meant to calculate the immediate funding status of the plan, it uses current interest rates, which are at a historic low. At its most recent valuation (in 2014), the plan had a solvency ratio of 69.8%.

Going concern basis

The going concern basis is another way to evaluate the plan’s funding level. The going concern basis calculates the ability of the plan to pay all of its liabilities over the long term, assuming the plan continues indefinitely into the future. Because the going concern calculation is forward looking, it uses interest rates that are based on the plan’s long-term expected return on investments, which generally results in a higher funded level than under the Solvency calculation. As of December 31, 2016, the plan is estimated to be fully funded on a going concern basis. 

 

Why do target benefit plans only get measured on a going concern basis?

Prior to the introduction of target benefit plans, all multi-employer pension plans were required to fund their liabilities according to their solvency valuation. This requirement was in place to ensure plans could pay out all promised benefits to members, should they terminate immediately due to company bankruptcy. However, legislators now recognize that this logic only makes sense for single employer plans, where bankruptcy of the single employer would result in the termination of the entire plan. It is harder to justify funding multi-employer pension plans on the solvency basis, because the likelihood of a multi-employer plan terminating is very small (as multiple employers would need to declare bankruptcy simultaneously.) Target benefit plans are therefore not required to fund their liabilities based on thesolvency basis. Instead, they are required to fund their liabilities on the more realistic long-term going concern basis.

 

Why do members who break their service and elect to withdraw the lump-sum value of their pension now receive a lower lump-sum payment? Is there any way to avoid this?

Under target benefit plan rules, lump-sum payouts are calculated on a going concern basis. This new formula will result in lower lump-sum value than under previous rules. However, the primary purpose of the plan is to provide members with pension benefits during retirement. If a member breaks their service with the plan, they will always have the option of keeping their funds in the plan rather than electing a lump-sum payment. Choosing to keep their funds in the plan means they will receive a pension in retirement and will not be affected by the lower lump-sum calculations.

 

I understand that the way lump-sum payouts are calculated has changed. Is there any other impact to members? 

No. 

  • The plan’s provisions have not changed—pension benefits continue to accumulate the same way, based on the same formula.
  • The transition will not impact the lifetime pension provided by the plan.
  • The transition has no impact for deferred members or for active members who terminate their participation in the plan and choose to receive a deferred pension from the plan in retirement, nor for current retirees.

 

I wasn't aware monthly pensions could be reduced. Has this always been the case with our plan?

Yes. Pension legislation has always allowed for pension reductions. Most recently, plan amendments in 2014 reduced specific pension benefits. However, while certain benefits have been reduced in the past, the presence of a solvency moratorium has prevented significant benefit reductions. 

The ability to reduce benefits has nothing to do with the transition to a target benefit plan. While moving to a target benefit plan did not change the ability of the plan to make benefit reductions, it has helped decrease the chance and severity of benefit reductions because the plan no longer needs to be funded on a solvency basis.

 

Under what circumstances may pension benefits be reduced?

Under a target benefit plan, when negotiated contributions do not cover the minimum required contribution level to fund the plan on a going concern basis as per the actuarial valuation report, benefits must be reduced or a contribution increase must be negotiated to meet the required contribution level. An actuarial valuation report is done for the board by an independent actuary every three years as an assessment of the financial health of the plan.
 

Is it possible that negotiated contributions will not cover the minimum required contributions to the plan in the future?

Because a combination of multiple factors is involved, it is impossible to predict when and by how much pension benefits could potentially be decreased in the future. The key factors that could negatively affect the financial position of the plan are:

  • Less-than-expected investment returns, which could happen as a result of poor market conditions, unfavourable investment strategy, or a combination of both.
  • Lower-than-expected contributions to the plan, which would happen if the number of hours worked by members is low in a given period.
  • Longer-than-expected lifetime pensions, which could happen as a result of longer member life-spans, earlier member retirement, or a combination of both.

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