Canadian HR Reporter

By Troy Milnthorp i t'S nOt OFten that a new pension plan structure, however innovative, makes headlines. But that's just what happened in June when the Re- gina Police Service unveiled its new target retirement income plan (TRIP), a landmark pen- sion plan that will provide post- retirement income security to nearly 500 employees for many years to come. What got everyone's attention was the fact that the TRIP is a so-called "target benefi t plan," an evolving model in the Canadian pension landscape with features that give the plan the fl exibility to remain sustainable through mar- ket fl uctuations as well as chang- ing demographics and economic circumstances. As nearly every jurisdiction in Canada considers regulatory reform to help improve pension plan sustainability, the Regina story is an example not just of how a target benefi t structure can create that sustainability but also how co-operation, fl exibility and a mutual commitment to fi nding solutions can work for pension sponsors, participants and regu- lators alike. Background Not so long ago, the future of in- come security for Regina Police Service employees (sworn offi - cers along with civilian employ- ees) seemed uncertain. In 2009, when Aon Hewitt, as actuary and advisor, conducted a valuation of the existing defi ned benefi t (DB) pension plan, it was clear a diff er- ent kind of pension solution was necessary. e existing plan was in severe defi cit, with the parties facing a total contribution rate of about 34 per cent of pay. Faced with those realities, both sides came to a consensus the existing plan was unsustainable. What followed was a laborious but fi rmly committed process of education, debate and evaluation that, in the end, took more than four years to reach its conclusion. In January 2010, an employee- employer working group was established. The first step was agreeing on objectives, particu- larly the mutual commitment to collaboration and the defi nition of a pension solution that would be sustainable, aff ordable and fair. The working group quickly decided the problem needed to be split into two separate pieces: past service and future service. In terms of past service, the options were to close the existing plan, wind it up over time or imple- ment a "soft freeze" where mem- bers would stop accruing service in the existing plan, but salary and service for the purposes of retiring early continue to increase, up until termination, retirement or death. For future service, the working group looked at a number of op- tions: defi ned contribution (DC) plans, a new DB plan or alterna- tive, and hybrid designs that have characteristics of both DB and DC plans (one of which was a target benefi t structure). The working group felt DC plans left members with too much uncertainty, while the DB design did not provide the fl ex- ibility needed to ensure long- term sustainability. The target benefi t plan, however, allowed for a middle ground, with fi xed contribution rates along with reasonable benefits. The ben- efits vary depending on peri- odic aff ordability testing, but all changes are subject to mutually agreed guidelines so there are no surprises. Unlike DB plans, where spon- sors assume most of the risk, or DC plans, where employees individu- ally take on all the risk, the target benefi t scheme means plan mem- bers collectively share the risk. In the end, all parties agreed to two key steps forward. First was to place a soft freeze on the exist- ing plan, with the employer as- suming responsibility for the past debt; the second was to move all members to a target benefi t pen- sion plan for future service. And so the TRIP was born. In many ways, the TRIP re- sembles a traditional DB plan. Employee and employer contri- bution rates are fi xed and the plan defi nes a lifetime pension formu- la. But one of the key design as- pects of the TRIP that sets it apart is the set of pre-determined ben- efi t levers that can adjust benefi ts upward or downward depend- ing on plan experience. These can only be triggered through an annual aff ordability test (assets over liabilities) that falls outside the pre-determined aff ordability range. e range is fairly wide as benefi t stability was a key objec- tive for all parties. Overall benefi ts look and feel similar to the old plan, though some have been reduced; for example, guaranteed cost-of-liv- ing indexing has been removed and there are less accommodative procedures for early retirement. On the contribution side, there are substantial comparative gains. e combined contribution rate to the TRIP will be 17 per cent of salary, shared equally by employ- ers and employees, while main- taining the existing plan would have required a 34 per cent con- tribution rate. The deal would not have been possible without the co- operation of the regulator and provincial government — secured at the outset and engaged every step of the way — whose pragmatic views helped to enact the necessary legislative changes to fi nalize the deal. At the end of the day, this was a case study in co-operation and dedication. roughout the pro- cess, the parties remained com- mitted and were an example of what can be accomplished when all parties, faced with signifi cant challenges, work together to fi nd solutions. Troy Milnthorp is an associate partner in the Saskatoon offi ce of Aon Hewitt. He can be reached at (306) 934-8698 or troy.milnthorp@aonhewitt.com. Credit: Liam Richards (CP) Police block access to a flooded underpass near Mosaic Stadium in June 2014 in Regina. Regina Police Service vies for PENSION SUSTAINABILITY New target retirement income plan a study in collaboration PENSIONS In many ways, the TRIP resembles a traditional DB plan... Overall benefi ts look and feel similar to the old plan. FEATURES FEATURES

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