OECD Urges Countercyclical Funding Regs to Thwart DB Closures‎

(July 26, 2010) — Smarter policies are needed to prevent the end of defined benefit (DB) pension schemes, a new report asserts.

A paper by the Organisation for Economic Cooperation and Development (OECD) affirms that regulations on DB pension funding should be reformed to promote countercyclical funding policies, such as providing better tax ceilings for over-funded schemes.

From reducing reliance on market values of assets and liabilities in determining contribution levels to setting minimum funding levels, the authors of the report – Juan Yermo and Clara Severinson – suggest an array of funding reform measures for private pensions. The organization says such regulation and internationally coordinated policies are needed to support the continuation of DB plans in the wake of the financial crisis.

The paper, which specifically addresses pension funding regulations across the OECD’s 32 member countries, states that policymakers should allow “appropriate levels of over-funding in good economic times” by creating more flexible tax ceilings for over-funded pension plans. Furthermore, the paper indicates policymakers could devote more attention to how international accounting standards affect companies’ desire to close and freeze DB plans.

“Three essential goals of pension plan funding are the long-term viability, stability and security of member benefits,” the OECD said in its paper titled ‘The Impact of the Financial Crisis on Defined Benefit Plans and the Need for Counter-Cyclical Funding Regulations.’ “Reform of funding regulations for defined benefit (DB) pension schemes to make them more counter-cyclical in nature can help achieve these goals as well as make DB schemes more attractive to plan sponsors that are increasingly moving away from DB towards defined contribution plans.”

Earlier this month, the Paris-based OECD said in its July Pension Markets in Focus report that pension funds in OECD countries recouped about $1.5 trillion of the $3.5 trillion in market value they lost in 2008, spurred by rebounding equity prices last year. Still, assets remain about 9% below December 2007 levels.