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Vulnerabilities in Defined-Benefit Pension Plans

Author

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  • Jack Selody

Abstract

An effective pension system enhances economic and financial efficiency. A majority of pension plans in Canada are defined-benefit (DB) plans, but DB plans are under stress from increasing longevity, low long-term interest rates, and the shrinking equity premium. DB plans are vulnerable to such shocks because they are complex financial vehicles, with interdependencies not fully understood by those who design, administer, regulate, and otherwise influence their operation. In this paper, I provide an overview of the basic economic workings of a highly stylized DB pension plan. I use the framework to highlight some of the misconceptions about these plans and explain why the burden on sponsors has been increasing.

Suggested Citation

  • Jack Selody, 2007. "Vulnerabilities in Defined-Benefit Pension Plans," Discussion Papers 07-3, Bank of Canada.
    • Handle: RePEc:bca:bocadp:07-3
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2010/01/dp07-3.pdf
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    Citations

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    Cited by:

    1. James E. Pesando, 2008. "Risky Assumptions: A closer Look at the Bearing of Investment Risk in Defined-Benefit Pension Plans," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 266, June.
    2. Mario Jametti, 2008. "Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance: An Overview of Theory and Evidence," Canadian Public Policy, University of Toronto Press, vol. 34(s1), pages 39-46, November.

    More about this item

    Keywords

    Financial institutions;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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