Examining the effects of guarantee funds on pension plans
Date
2009
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Society of Actuaries
Abstract
Bankruptcy risk falls to pension plan participants if a plan sponsor fails when a defined benefit
(DB) pension plan is underfunded. This article examines the incidence of that risk and how it
changes when public policy provides a guarantee fund. Although government-based guarantee
funds are in a unique position to provide pension protection, primarily because of the extent to
which the risk of sponsor default is systematic in nature, a looming question is the extent to which
such guarantees are exposed to moral hazard. The article focuses on that question using data
from four Canadian provinces, including one (Ontario) that operates a guarantee fund for pensions.
The findings show that plan assets per DB-plan participant increase with the earnings of
workers and decrease with higher unemployment, and that level of assets also is moderated by
the influence of taxes, with higher plan assets observed when and where tax rates are higher.
Plans in Ontario had on average $20,035 less in asset value per participant, and Ontario plans
covered by the guarantee fund had an average of $16,497 less per participant than other Canadian
DB plans not backed by a guarantee fund. A separate model finds the presence of a
guarantee fund to be one of a very small number of variables significant in explaining variability
in the plans’ funded ratios. These empirical results are consistent with the existence of moral
hazard.
Description
© Society of Actuaries, Schaumburg, Illinois. Posted with permission granted August 5, 2011.
Keywords
Defined benefit plans, Pension funds
Citation
Nielson, N. L. “Examining the effects of guarantee funds on pension plans", in North American Actuarial Journal, Vol. 13, No.2 (2009) pp. 157-169.