The Canadian Institute of Actuaries published a new analysis of public policy related to the funding of defined benefit pension plans which assesses how different funding-related policies impact the risks and costs of a defined benefit (DB) pension plan. They say the measures under investigation in the report are amortization policy, investment policy, surplus policy and funding reserve policy.
It goes on to look at uncertain nature of pension funding dynamics, at the longer-term funding implications arising from different policy measures being applied to a DB plan, and examines the long-term funding risk associated with declining or growing memberships, comparing these to plans with stationary memberships.
“Solvency funding prescribed under the old funding regime essentially evaluates whether a plan had sufficient assets to support the benefits promised under the plan at current market interest rates if the plan were to wind up. Going concern funding, on the other hand, puts focus on the rational and orderly accumulation of assets to support the payments of promised benefits over the long term,” state the researchers and authors of the paper A Stochastic Analysis of Policies Related to Funding of Defined Benefit Pension Plans.
They add that the new DB funding regimes being implemented in various jurisdictions have several common features, including a funding reserve, also known as a provision for adverse deviations (PfAD), which must be included in the calculation of liabilities. Amortization periods for funding going concern deficits are shorter – moving from 15 years to just 10 (there are other rules related to amortization as well), and the ability for employers of a pension plan to take contribution holidays or a refund of surplus if the plan permits, as long as the actuary determines that the plan will remain fully funded. “The going concern valuation is likely to be the key funding driver going forward for many Canadian DB plans,” they write.
“Plans are required to keep reserves to buffer against adverse deviations in experience, versus assumptions made in the actuarial valuation. This regulatory funding regime is new, and untested.” They add that as of January 1, 2021, more than 4.4-million Canadians were members of a DB pension plan. “For sponsors and trustees trying to deliver benefits promised under a DB plan while managing the volatility of funding requirements, the policy insights provided in this paper may help them put plan on a sustainable funding path.”
