Many plan sponsors may be too small to adequately manage the risks and costs of sponsoring a defined benefit plan, but risks can be mitigated by forming multi-employer pension plans(MEPPs), said Bank of Canada Governor David Dodge.

“If structures such as large multi-employer pension plans could be created, this could help them to pool both costs and risks, making it easier for smaller employees to sponsor defined benefit plans,” he said earlier today at The Conference Board of Canada’s 2007 Pensions Summit in Toronto.

“After all,” Dodge added, “municipalities in Ontario pooled together to form OMERS, and we should examine ways to construct similar pension arrangements for private sector employers.”

He believes MEPPs could provide a measure of increased pension portability for employees.

Dodge also said that the disincentives for sponsors to run actuarial surpluses in goods that offset actuarial deficits in other periods should be reduced.

“More clarity regarding the legal ownership of surpluses is needed, so that the sponsor that owns the risks also owns the benefits from taking those risks,” he stated. “In addition, we should examine the rules governing the tax treatment of contributions when plans are in actuarial surplus.”

An effective defined benefit pension system is a tremendous asset for plan members, employers, the economy and good for Canadian society, said Dodge.

“Putting these plans on a sustainable footing involves strengthening the legal, regulatory, accounting, actuarial, and economic frameworks that determine how these plans operate,” he explained. “If we get it right, these changes would give sponsors the appropriate degree of flexibility needed to manage risk effectively.”

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