Cleaning up the pensions mess

The Institute promotes the application of independent research and analysis to major economic and social issues affecting the quality of life of Canadians in all regions of the country. [...] As with all Institute publications, the views expressed here are those of the authors, and do not necessarily reflect the opinions of the Institute’s members or Board of Directors. [...] Everything else equal, the lower long-term interest rates are, the more money it takes to discharge a known stream of future pension payments.1 If the estimated 30 percent balance sheet deterioration since the end of 1999 is representative of the aggregate Canadian DB plan balance sheet of about $600 billion, an approximate balance sheet loss of $180 billion is implied for the Canadian DB plan sec [...] For example, the collapse in the asset values of some corporate 401(k) plans in the U. S. has already led to a number of lawsuits. [...] The strange result is that the more risk you take on the asset side of the pension balance sheet, the lower the balance sheet reserve required to hedge that risk needs to be.7 It is our view that this actuarial practice leads to an artificial bias towards taking on asset-liability mismatch risk in the DB pensions sector.