What Are 'Target Benefit Plans' And Why Should You Care?

“Target: a goal to be achieved.”      

 Webster Dictionary

Why You Should Care

While Europeans have been talking about ‘defined ambition’ pension plans for some time now, the term has not caught on elsewhere. Instead, Americans and Canadians have begun to talk about ‘target benefit’ plans (or TBPs for short). As it is still early going in the conduct of these conversations, not surprisingly, the TBP term still means different things to different people. This is a problem. Constructive conversations on the design and merits of TBPs require a common understanding as to what TBPs are…and what they are not. The goal of this Letter is to foster that common understanding, which in turn should lead to more  constructive conversations about pension plan design in general.

We start by deconstructing the TBP term into its three components: 1. Plan, 2. Benefit, and 3. Target. The meaning of the ‘Plan’ term in this context is pretty straight-forward. It is an arrangement meant to generate post-retirement income.