Classification of Risk Sharing in Pension Plans
The emergence of target benefit pension plans in Canada has focused attention on risk-sharing. Regulations for target benefit plans, Variable Payment Life Annuities and other risk-sharing arrangements are currently under development in several provinces. Although risk sharing already exists in many forms in Canadian pension plans, Canadians tend to think of pension plans as either “defined benefit” or “defined contribution. This has the potential to lead to misunderstandings or become an obstacle to innovation and the adoption of new risk-sharing arrangements.
The paper establishes four categories of shared-risk pension plan designs with common attributes such as accounting treatment, the basis for commuted values, funding targets, income tax treatment and intergenerational equity. Established approaches to existing plan designs can inform the construction and treatment of new and innovative plan designs.
The paper explores how different categories of risk sharing will appeal to different kinds of enterprises and how the existing range of options for communication and regulatory scrutiny of plan changes can serve as a guide for conversion of existing defined benefit or defined contribution accruals to a shared risk basis.
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