5 components of a sustainable pension plan

Posted for Members, June 21, 2017

How does a Modern DB pension plan stay sustainable? There are five key components needed for a successful Modern DB plan, like the CAAT Pension Plan.

1. Shared governance

When employers and members share the responsibilities for the costs and risks of running a pension plan, they are more likely to have successful governance. This “joint governance” model fosters cooperation and flexibility, and encourages prudent and responsible decision-making. The CAAT Plan’s governors are committed to providing benefit security, stable contribution rates, and equity among members.

2. Funding Policy

The importance of this component cannot be overstated. A detailed Funding Policy guides Plan governors in their decisions on managing funding reserves and shortfalls, changes to contribution rates, and the benefit enhancement or the suspension of conditional inflation protection. The Funding Policy provides the framework for ensuring benefit security and contribution rate stability. The CAAT Plan’s Funding Policy was approved in 2006 and took over a year to develop. It outlines six funding levels, as well as the possible options available to Plan governors at each level. Having a documented Funding Policy provides transparency to stakeholders. You can read the Funding Policy here.

3. Long-term thinking

Pension plans need to focus on the long term. The CAAT Pension Plan regularly reviews potential risks and assesses their impact over the coming decades. As a result of asset-liability modelling studies and regular assessments of longer term risks, the Plan’s governors can make better informed decisions in support of the shared goals of the Funding Policy. The Plan’s most recent asset-liability modelling study indicates that the Plan has a 98% probability of remaining fully funded in 20 years.

4. Purposeful investing

Investments need to be focused on meeting the Plan’s obligation to members. For the CAAT Plan, the guiding principles are laid out in the Statement of Investment Policies and Procedures (SIPP). These principles help ensure assets are invested in a manner that meets the Plan’s liabilities and long-term funding needs, and follow standards for quality, compliance and performance that will contribute to the sustainability of the pension fund. In addition, the CAAT Plan has a Responsible Investing Policy built on the Plan’s belief that over the long term, companies with sound corporate governance structures and practices will outperform those that do not.

5. Understanding the value

Surveys of Plan members consistently show that the more they know about their Plan and benefits, the more they value them. Clear communication is the core to members understanding the value of their pension, that the Plan is well-managed, and that their benefits are secure. Helpful service and easy-to-understand information are also needed for the various benefit-related milestones that can occur during a member’s career and lifetime. Stay up-to-date with the latest news from the CAAT Pension Plan by signing up for My Pension NewsLink, attending a member presentation or watching our retirement planning videos.

To learn more about Modern DB plans, visit our website and read “Be a Pension Champion.”