The impact of the financial crisis on defined benefit plans and the need for counter-cyclical funding regulations

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. It also presents suggestions to governments and policy-makers for making funding regulations more counter-cyclical in nature, in order to strengthen the security of DB benefits and help to maintain future DB plans.

The policy measures suggested include the following:

• avoid excessive reliance on current market values for purposes of determining contributions
• set minimum funding levels or targets that are consistent with the goal of benefit security
• allow appropriate levels of over-funding in good economic times via more flexible tax ceilings
• limit contribution holidays and plan sponsors' access to surplus
• encourage stability of long-term contribution patterns via appropriate actuarial methods
• incorporate flexibility into funding rules to reflect the overall volatility of funding valuations
• avoid over-regulation and maintain a stable regulatory environment

The authors argue that the international standardisation of funding regulations is unlikely and would likely be ill-fitting across jurisdictions. However, some convergence of over-arching funding principles, and general international best-practices and guidelines to promote counter-cyclical features could strengthen DB systems.