National Pension Hub Publications
Risk Shifting Versus Risk Management:
Canadian Pension Plan Liability Discount Rates
Sally Shen and Serguei Zernov
Defined benefit pension plans play an important role in societies and economies of different countries assuring financial well-being for retirees and arguably contributing to social welfare. In order to perform their role, pension plans need to be designed and implemented in a way that is fair, in a defined sense, for all the stake holders - cohorts of plan members, plan sponsors, and tax payers. The design of a pension plan should reflect preferences of the stake holders and be resilient to economic, financial and demographic stresses.
This paper studies choices with respect to parameters of the plan design and investment strategies in the context of the regulatory environment and their institutional organisation. Our objective is to infer whether these choices are driven by preferences of the plan members or rather by opportunities of unfair risk transfers that are possible thanks to perverse regulatory incentives. If the latter is the case, then the plans fail their objective of improving social welfare by contributing to social tensions and potentially failing in delivering the pension promise to the members.
Studies of investment strategies of the U.S. public pension plans (see, for example, Andonov et al. (2017)) demonstrate empirical evidence of risk shifting from plan members and plan sponsors to tax payers under the existing regulatory incentives. Our study analyses data on the Canadian defined benefit pension plans and does not find evidence of such risk transfer behavior which can be interpreted as a testament of better designed regulatory environment in which Canadian public plans operate.