Is Your Defined-Benefit Pension Guaranteed?: Funding Rules, Insolvency Law and Pension Insurance
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Description
This study analyzes the security of pension benefits in the case of a plan sponsor’s insolvency. Current pension regulation does not provide complete security to defined-benefit plan members, since it allows underfunding to occur. Indeed, argues author Ronald Davis, regulations often encourage practices that lead to questionable risk-taking in pension asset investment, and obscure some of the risks being carried on plan balance sheets.
In recent high-profile cases, large sponsors became insolvent, and pension fund assets were insufficient to pay the benefits earned by workers and retirees. In response, bills were introduced to give higher priority of payment for claims against the sponsor by pension plan members. Davis finds a legal rationale for providing higher priority for unremitted employer contributions but not for the remaining part of an asset shortfall (as a result of depressed asset values or of differences between projected and realized inflation or interest rates, for example). Consequently, he finds insolvency law as a means to improve the security of pension benefits has only limited potential.
Another policy option that is widely discussed is a national pension benefit guarantee scheme to insure benefits against a shortfall in pension assets in the event of the plan sponsor’s insolvency. If carefully designed, Davis believes such a scheme could mitigate the limitations of current plan funding regulations and the poor communication of these limitations to plan members. However, in addition to facing the same problems as any insurance plan, a benefit guarantee scheme would involve extensive federal-provincial negotiations. This is because the regulatory tools to control these insurance problems are under provincial jurisdiction, while presumably the fiscal risk of a national scheme would rest on the federal government.
Regardless of whether governments wish to introduce a national pension benefit guarantee scheme, Davis recommends first reforming the funding and governance of pensions to make explicit some risks and conflicts within pension plans that current regulations hide from stakeholders’ view. These reforms would have to promote target-benefit plans in order to clarify the “pension deal” for plan members; support joint sponsor and member governance of pension plans; and enable small pension plans to use larger plans’ expertise and cost structure. He also suggests holding a royal commission on employer-based pensions to foster public discussion of these plans’ structure and value among regulators, sponsors, members and retirees.
Publication Date
2011
Publisher
Institute for Research on Public Policy
