Defined benefit plans declining

Report recommends government intervention to encourage employers to generously contribute to plans

Defined benefit plans covering Canadian employees are in jeopardy unless governments change workplace pension rules, a recent report stated.

The number of plans has been steadily declining since the early 1990s when 44 per cent of the workforce was covered by defined benefit plans in 1992. In 2003, that percentage fell to 34 according to a report released by the Association of Canadian Pension Management (ACPM).

A defined benefit plan is typically considered one of the best pension plans because it guarantees its members a retirement income based on a formula related to how much a person made in his career and years of service.

Low interest rates in the past few years have driven up the cost of pension liabilities faster than the pension assets could appreciate in the capital markets so employers have had to pay more into the plans to make up for the shortfall.

The ACPM report, titled Back from the Brink: Securing the Future of Defined Benefit Pension Plans , recommends that governments pass legislation to allow plan sponsors, namely employers, greater access to plan surpluses. The ACPM report said this would encourage employers to contribute more to defined benefit plans.

To protect defined benefit plans, the report said government legislation should provide for greater flexibility for plan sponsors to withdraw the surplus, with clearly defined limits, and it should also require that the plans have a written funding policy to be given to the plan actuary and plan members.

The report also recommended that governments’ regulatory approach focus solely on the measure of a plan’s ability to provide promised benefits in the event it is wound up.

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