GLOBAL - Governments and policymakers must do more to make defined benefit (DB) pension schemes' funding regulations more counter-cyclical in the wake of the financial crisis, according to the Organisation for Economic Co-operation and Development (OECD).
The OECD said long-term viability, stability and security of member benefits were the three "essential goals" of pension-plan funding, and that making DB schemes more counter-cyclical by reforming funding regulations would go a long way toward achieving those goals.
In a working paper on private pensions published today, the OECD said regulators should do more to encourage deficit-reduction contributions and the build-up of surpluses when plan sponsor finances were strong.
It also said regulation should help maintain predictable costs and dampen volatility, as well as give plan sponsors more control to manage risks and costs.
In particular, Juan Yermo and Clara Severinson, the authors of the paper, said governments should try to avoid relying on current market values when determining contributions.
They also said policymakers should allow "appropriate levels of over-funding in good economic times" by creating more flexible tax ceilings, spanning a multi-year period, for example, instead of being set on an annual basis.
Further, they said regulators should restrict the extent to which sponsors are able to take contribution holidays, offer additional benefits or withdraw a portion of a pension fund surplus - "only allowing them when a certain level of funding above the minimum level is reached", for example.
While the authors of the report conceded international standardisation of funding regulations was unlikely and potentially "ill-fitting" across multiple jurisdictions, they maintained that "some convergence of overarching funding principles" to promote counter-cyclical features could strengthen DB systems worldwide.