June 11, 2020 – Current pension rules, designed from a defined-benefit perspective, are a bad fit for target-benefit pension plans, says a new report from the C.D. Howe Institute.
In “Room to Thrive: Why Principles-based Standards Make Sense for Regulating Contingent Pension Plans,” author Barry Gros argues that contingent pension plans, especially target-benefit plans and multi-employer plans, need to be uniquely managed, communicated and regulated as they play an increasingly important role in delivering retirement benefits.
“Pension regulations that were first promulgated starting in the mid-1960s were pretty much focussed on traditional defined-benefit plans – several existing pension plan designs didn’t even exist then, including jointly sponsored pension plans – and pension regulation has evolved over time from that defined-benefit plans base,” writes Gros.
Contingent pension plans offer a different promise than traditional defined-benefit plans and the contract with plan members is different. This needs to be reflected in how they are regulated. Regulators should adopt a principles-based approach to financing-related standards, while using a rules-based approach for aspects such as governance and member communication.
Principles-based regulation is based on the idea that organizations and their management are better placed than policymakers and regulators to determine what processes and actions are required within their operations to achieve a given policy objective. Principles-based regulations focus on desired outcomes rather than processes, which better allows regulations to keep pace with constant improvements in industry best practices. Most contingent plans have members materially involved in the running of the plan, involved in making all key decisions, which makes principles-based regulations particularly well fitted.
“Because target-benefit plans and multi-employer pension plans are different than defined-benefit plans, they need their own policy and pension standards that are focussed on clear outcomes,” says Gros. “Principles-based regulation allows plan sponsors to focus on the risks inherent in their plan rather than having to comply with generic rules that attempt to work on a universal basis.”
In addition to target-benefit plans and multi-employer plans needing their own financing-related standards, Gros recommends prescribing stronger governance rather than relying on guidelines, and that plans establish and implement a communication policy.
For more information contact: Victoria-based Barry Gros, retired actuary and Chair, Pension Board, University of British Columbia Staff Pension Plan; or Nancy Schlömer, Communications Officer, C.D. Howe Institute, phone 416-865-1904 ext. 0247, email: nschlomer@cdhowe.org.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.