Who Should Own a Pension Surplus - Employer or Employees? An Assessment of Arguments About Asymmetry of Risks and Rewards and Deferred Wages in Pension Plans
64 Pages Posted: 8 Jun 2008 Last revised: 2 Aug 2014
If a defined-benefit (DB) pension plan has more assets than liabilities, who should own the "surplus" assets that are not needed to meet the plan's benefit obligations? This report, prepared for the Ontario Expert Commission on Pensions, assesses two leading arguments about ownership of pension surpluses - the asymmetry argument and the deferred-wage argument.
The asymmetry argument holds that the party with the burden of funding pension deficits should get the benefit of pension surpluses. Employers claim that Ontario law is "asymmetric" because employers must fund pension deficits while employees get some or all of the benefit when a plan terminates with a surplus. This asymmetry, employers contend, undermines the incentive to maintain and properly fund DB plans. The report analyzes the burdens and benefits of pension funding under Ontario law and whether "asymmetry" threatens DB plans. While the pension funding rules do appear to create asymmetric benefits and burdens, a more fundamental problem may be that Ontario law creates a zero-sum conflict between employers, who get the benefit of a surplus in an ongoing plan, and employees, who get the benefit of a surplus when a plan terminates. This conflict threatens to undermine the trust that is necessary for DB plans to operate.
The deferred-wage argument holds that employer contributions to a pension plan are deferred wages. Because employees own the funds contributed to their pension plan, unions and other advocates for employees contend that employees should own any pension surplus derived from these funds. The report raises several questions about the premises and reasoning of the deferred-wage argument.
Keywords: pension, surplus, funding, Ontario, employees, retirement, finance, deferred wage, asymmetry
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