In recent years, Canadian jurisdictions have undergone reforms in the legislation governing the funding of defined benefit (DB) pension plans, transitioning to a new "going concern plus" funding model.
The goal of these reforms is to reduce the level and volatility of contributions required for DB plans, mainly by reducing solvency funding requirements and strengthening going concern funding requirements.
This study employs stochastic modelling techniques to evaluate the effects of funding-related policies on the risks and costs associated with a DB plan under the new funding regime.
The primary risk metric employed is the going concern funded ratio, representing the ratio of plan assets to liabilities. The analysis focuses on several key policy decisions, including the amortization period, target asset allocation, limits on surplus utilization, and the provision for adverse deviations (PfAD).
By examining these policy variables, our research provides valuable insights for DB plan sponsors and trustees seeking to deliver promised benefits while effectively managing the volatility of funding requirements. Specifically, our findings highlight the role of policymakers in controlling the potential risks associated with the plan's future funding level by setting appropriate values for the PfAD and surplus utilization limits.