Pension plan consolidation

The occupational pension system in North America is in a state of transition. On the defined benefit side, plan sponsors continue to adjust their plan’s risk exposure. Some turn to investment solutions that enhance the plan’s risk-return profile, others seek to transfer risk to insurers via annuity buy-ins or buyouts. Yet others choose to adjust plan design elements. A fourth solution now emerging in Canada is for plans to adjust their demographic profiles by combining employee groups—so-called pension plan mergers.

Professors Jean-François Bégin and Barbara Sanders are conducting a quantitative study of the impact of pension plan consolidation, including both mergers of existing plans and the introduction of new groups of employees into mature plans. Existing research (and common sense) suggests that such consolidation could bring, in theory, many benefits to all parties involved, including greater economies of scale, better access to unconventional assets, and more diversification. However, the actual benefit of plan mergers also depends on the specific features of the plans or groups to be combined (e.g., type of benefit, fund size, funded status, demographic profile, etc.). Professors Bégin and Sanders are developing a framework that, for the first time, takes all these elements into account. The framework will include an economic scenario generator that allows for inflation, interest rate and asset dynamics (including private market assets, available only to a subset of plans), a model of economies of scale, a model for longevity risk, and a procedure to condense information into simple welfare measures. They will apply this framework to measure the welfare impact of bringing together specific hypothetical pension plans, that is, how much better off each party may be as a result of this transaction. Specifically, they will quantify the welfare impact of specific, hypothetical mergers on the different parties involved by comparing their welfare before and after the merger, and their relative welfare improvements. The availability of such a tool will promote sound decision-making by all stakeholders (including actuaries) in the context of these plan mergers.