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Researchers’ attempt to analyze the efficacy of PfADs implemented by Canadian pension jurisdictions

Pension stakeholders, including the CIA, have had concerns about the lack of harmonized regulatory processes across Canada for many years.

Canada has moved to a new funding regime for defined benefit (DB) pension plans aimed at strengthening the going concern funding requirement through the addition of a funding margin, known as the provision for adverse deviations, or PfAD. Jurisdictions across Canada have taken different approaches to designing the PfAD.

In an attempt to help government policy-makers develop a more common set of funding rules when making reform changes to the pension legislation, an analysis of different PfAD designs was undertaken to determine how effective they are in addressing interest rate risk.

A Comparative Analysis of PfAD Designs provides a comparative analysis of three PfAD design alternatives, namely those adopted by Ontario and British Columbia (B.C.) and an alternative proposed by the author, George Ma, FCIA, with a focus on their effectiveness at stabilizing funding for pension plans under a changing-interest-rate environment.

Useful for pension actuaries

This is the first attempt by researchers to analyze and compare the efficacy of PfADs implemented by various Canadian pension jurisdictions.

“A primary objective of the regulatory reforms was to stabilize the funding for DB plans. I examine several PfAD designs in regard to their effectiveness at stabilizing funding under a changing-interest-rate environment. The modelling I applied in my analysis may be useful to pension actuaries as they assess the impact of the change in the funding rules on their clients’ pension plans,” explains George.

“A primary objective of the regulatory reforms was to stabilize the funding for DB plans. I examine several PfAD designs in regard to their effectiveness at stabilizing funding under a changing-interest-rate environment. The modelling I applied in my analysis may be useful to pension actuaries as they assess the impact of the change in the funding rules on their clients’ pension plans,”

George Ma, FCIA

The study found that Ontario PfAD design is the least capable of stabilizing funding requirements in the face of long-term interest rate changes and that the B.C. PfAD was designed to reduce long-term interest rate risk, but it fails to reflect a plan’s investment risk exposure and maturity. The alternative proposed by the author overcomes the shortcomings of the B.C. approach and has the potential to achieve stable funding for pension plans under a changing-interest-rate environment.

Read the paper’s full findings here to learn more about the efficacy of various PfAD designs in addressing interest rate risk. Be part of the conversation! Share your thoughts in the comments section below.

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