Vulnerabilities in Defined-Benefit Pension Plans
AbstractAn 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.
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Bibliographic InfoPaper provided by Bank of Canada in its series Discussion Papers with number 07-3.
Length: 20 pages
Date of creation: 2007
Date of revision:
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Find related papers by JEL classification:
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-19 (All new papers)
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- 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.
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