1887

OECD Working Papers on Finance, Insurance and Private Pensions

Selected studies on finance, insurance and private pensions policy prepared for dissemination in order to stimulate wider discussion and further analysis and obtain feedback from interested audiences. The studies provide timely analysis and background on industry developments, structural issues, and public policy in the financial sector. Topics include risk management, governance, investments, benefit protection, and financial education. Previous papers addressing these policy issues are available via http://dx.doi.org/10.1787/19936397.

English

The Impact of the Financial Crisis on Defined Benefit Plans and the Need for Counter-Cyclical Funding Regulations

Three essential goals of pension plan funding are the long-term viability, stability and security of member benefits. Reform of funding regulations for defined benefit (DB) pension schemes to make them more counter-cyclical in nature can help achieve these goals as well as make DB schemes more attractive to plan sponsors that are increasingly moving away from DB towards defined contribution plans. If designed properly, funding regulations could help maintain DB systems for the long-term and provide greater member security. Broadly speaking, DB funding regulations should (i) encourage deficit reduction contributions and appropriate build up of surplus when plan sponsor finances are strong; (ii) help maintain predictable costs and dampen volatility; and, (iii) give plan sponsors more control to manage risks and costs. This paper discusses the impact of the crisis on DB pension schemes and the temporary responses taken by regulators to help ease financially strained plan sponsors. Furthermore, the paper presents suggestions to governments and policy-makers for making funding regulations more counter-cyclical in nature. Such measures could strengthen the security of DB benefits and help to maintain DB plans for future workers.

English

Keywords: counter-cyclical, funding, defined benefit, financial crisis, surplus, deficit, pensions, regulation, marked-to-market, contribution
JEL: K20: Law and Economics / Regulation and Business Law / Regulation and Business Law: General; G15: Financial Economics / General Financial Markets / International Financial Markets; M52: Business Administration and Business Economics; Marketing; Accounting; Personnel Economics / Personnel Economics / Personnel Economics: Compensation and Compensation Methods and Their Effects; G01: Financial Economics / General / Financial Crises; J33: Labor and Demographic Economics / Wages, Compensation, and Labor Costs / Compensation Packages; Payment Methods; G23: Financial Economics / Financial Institutions and Services / Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors; E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations; Cycles; D21: Microeconomics / Production and Organizations / Firm Behavior: Theory; G32: Financial Economics / Corporate Finance and Governance / Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill; M40: Business Administration and Business Economics; Marketing; Accounting; Personnel Economics / Accounting and Auditing / Accounting and Auditing: General
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