CANADA - Canadian policy-makers must rebalance the incentives for plan sponsors if DB plans are to survive, said Canada Governor David Lodge.
DB plans are by far the most prevalent private-employer pension plans in the country, but have seen a decline in recent years as many plans report increasing deficits, Lodge said.
“If DB plans are to survive, grow, and provide a source of funding for long-term, riskier assets, it is important that Canadian policy-makers consider taking steps to rebalance the incentives for sponsors to operate defined-benefit plans,” he said.
Lodge said the lack of incentives under which these plans operate was a key factor behind this decline, as well as developments in the economy and the labour force.
As a solution, provincial and federal governments needed to make appropriate adjustments to their pension laws so that the sponsors of DB pension plans were responsible for all residual risks to the pension plan - both outcomes that lead to deficits and outcomes that lead to surpluses, he said.
“A second step would be to consider rebalancing the tax treatment of employer contributions. Currently, in most circumstances, employers are not allowed to deduct contributions to a DB plan if the going-concern valuation of the plan is more than 110% of expected future liabilities,” he said. “This has certainly added to the bias against sponsors allowing surpluses to build up in their pension plans.”
Finally, Lodge called for reform in the Canadian accounting standards for pensions in terms of valuation, which had been posing challenges since they were adopted in 1999.
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