Solvency problem with DB burdensome

The problem with defined benefit pension plans has not been poor investment performance, says a Morneau Shepell ‘News & Views.’ It has been the impact of ever-lower interest rates on solvency liabilities (as well as accounting liabilities), combined with burdensome solvency rules aimed at theoretically safeguarding the tragic but rare events of plan wind-ups following the insolvency of the employer. The strict rigidity of DB plan promises, long considered to be a strength of the defined benefit model, has ultimately proven to be its greatest failing. When governments require plan sponsors and administrators to consider both solvency and going concern funding in making decisions on funding DB promises and in managing the substantial financial risks involved, daunting challenges result. Around the mid-1980s, when DB plans flourished, plan sponsors and actuaries had the luxury of focusing only on going-concern funding. Mark-to-market accounting did not exist yet and the regulators did not insist on solvency funding. Going-concern deficits were not a major problem then since they could be amortized over 15 years and besides, one could count on the bad years eventually being offset by good ones, it says. Had the investment experience of the last decade been combined with the funding and accounting rules as they existed in the 1980s, DB plans would now be enjoying a golden age. They would have continued to thrive, with plan stakeholders having plenty of opportunities to consider significant contribution holidays and benefit improvements. (End of article)

Source: Benefits and Pension Monitor News