The decline of defined benefit plans is being exacerbated by federal laws and regulations that foster employer underfunding, says a C.D. Howe Institute study.
The study—Lifting the Lid on Pension Funding: Why Income-Tax-Act Limits on Contributions Should Rise—says the prohibition by the federal Income Tax Act of sponsor contributions to such plans when their assets exceed recorded liabilities promotes underfunding.
It finds limiting contributions in good times stops plan sponsors saving in good years to cushion against lean ones.
“By preventing contributions when surpluses reach 10%,” says the study, “the ITA either induces sponsors to inflate the size of reported liabilities so the cap does not constrain funding—a practice that perverts the cause of meaningful reporting—or stops companies from pursuing consistent contribution strategies as interest rates and asset markets fluctuate.”
The study finds that at a 25% limit—which currently applies to multi-employer risk-shared plans—deficits are about as infrequent and small as when there is no limit at all.
“The ITA limit on contributions is not the only problem afflicting DB plans, but it is readily addressed,” it concludes. “Raising or removing it would be a useful step toward more healthy DB pension plans in Canada.”
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