The sponsor of a defined benefit plan is legally obliged to
ensure that the pension plan is funded over time. Minimum
contributions must be made as specified by applicable law. The
Canadian Association of Pension Supervisory Authorities recently
released Guideline No. 7: Pension Plan Funding Policy Guideline to
assist plan sponsors on the development and adoption of funding
policies for defined benefit pension plans. A funding policy is not
required by law but the Guideline can assist plan sponsors of
defined benefit pension plans in determining whether to develop and
adopt the use of funding policies.
FUNDING POLICY GUIDELINE
The purpose of a funding policy is to establish a framework for
funding a defined benefit pension plan. Some factors that may be
relevant to the plan and the plan sponsor in establishing a
framework include: benefit security, the financial position of the
plan sponsor and competing organizational demands for resources,
and legislative and plan provisions with respect to the utilization
of pension fund surpluses.
Although not legally required, there could be advantages of
developing a funding policy, including providing guidance to the
plan's actuary when selecting actuarial methods and
assumptions, and improving the identification, understanding and
management of the risk factors that affect the variability of
funding requirements and the security of benefits.
It is the role of the plan sponsor to determine whether a
funding policy is appropriate and if so, to develop and adopt such
a policy. The Guideline elaborates on "elements" to
consider including in a funding policy, which include the
Funding Objectives. funding policy indicate
how the funding objectives integrate with the plan's investment
policy as well as the plan sponsor or plan objectives. Objectives
can be stated as they relate, for example, to benefit security,
stability of contributions, and to contribution or benefit levels.
Circumstances where funding in excess of the legislated minimums
would be considered could also be included in the funding
Key Risks Faced By The Plan. The Guideline
suggests that the funding policy should describe the key risks that
are facing the plan from the perspectives of various stakeholders.
Examples of risks include the extent to which the plan's assets
are mismatched against its liabilities and the demographic
characteristics of the plan beneficiaries.
Funding Target Ranges. The Guideline
recommends that any funding targets, contribution target levels,
mechanisms that would allow flexibility in funding and
accommodating potential short term operational requirements, and
established cost sharing arrangements, if applicable, be described
in the funding policy. Funding targets can be expressed in relation
to liabilities for a going concern, solvency, wind-up or some other
Utilization of Funding Excess. The utilization
of funding excess is subject to statutory requirements and the
terms of the applicable plan documents. The Guideline suggests that
the funding policy should also describe the plan sponsor's
policy on using funding excess for an ongoing entity, and if
appropriate, could cover its use in the event of plan termination.
The funding policy should also establish the factors that may be
considered in deciding how and when to use a funding excess if the
funding excess can be used for contribution holidays or benefit
Other elements of a funding policy could include a description
of funding volatility factors and management of risk, cost sharing
mechanisms, actuarial methods, assumptions, and reporting,
frequency of valuations, monitoring, and a communication
Where a plan sponsor adopts a funding policy, the plan
administrator of that pension plan should ensure that the
investment policy is consistent with the funding policy.
Special considerations may apply for pension plans where the
employer has the dual roles of plan sponsor and the plan
administrator. In such circumstances, the employer, acting as plan
sponsor, is entitled to act in its own best interests but may be
subject to an implied duty of good faith but, when acting as plan
administrator, is held to a fiduciary standard of care. Special
considerations may also apply for multi employer pension plans.
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