Claims that Employers "Bear the Risk" in Defined-Benefit Pension Plans on Thin Ice: C.D. Howe Institute Study



    TORONTO, June 12 /CNW/ - Common assumptions about who bears the risk in
defined-benefit pension plans are overly simplistic and questionable,
according to a newly released study by the C.D. Howe Institute. In Risky
Assumptions: A Closer Look at the Bearing of Investment Risk in
Defined-Benefit Pension Plans, James E. Pesando, an economist at the
University of Toronto, examines whether employees, employers or both,
ultimately share the risk for poor investment performance in DB plans - a
question that has important implications for who can lay claim to any
surpluses in plans.

    
    The key findings of the paper include:
    -   The defined-benefit formula notwithstanding, members of DB plans may
        bear substantial investment risk. The key issue is the extent to
        which members of DB plans grant wage or other concessions based on
        the contributions made by the plan sponsor, including any additional
        contributions required as a result of investment shortfalls.
    -   While there is a strong case for clarifying the ownership rights to
        investment surpluses that may emerge in DB plans, the argument that
        sponsors are entitled to plan surpluses because they bear all of the
        downside risk of investment performance may not withstand closer
        scrutiny.
    -   Yet, DB plans are not just DC plans in disguise. Even if members of
        DB plans bear substantial investment risk, there is a fundamental
        difference between risk bearing in DB and in DC plans. In DB plans,
        unlike DC plans, there exists the possibility of intergenerational
        risk sharing. The financial consequences of an adverse investment
        outcome would be shared by all members of the plan. The potential for
        intergenerational risk sharing in DB plans is an important and an
        attractive feature of these plans.
    

    The author also reminds the reader that based on economic analysis,
employees ultimately bear the cost of DB (and DC plans), even if the employer
and the employee ostensibly "share" these costs.

    For the Commentary go to: http://www.cdhowe.org/pdf/commentary_266.pdf.





For further information:

For further information: James E. Pesando, University of Toronto, (416)
978-8625; Robin Banerjee, C.D. Howe Institute, (416) 865-1904,
CDHowe@cdhowe.org


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