Reform Pension Schemes – part 4 – Solutions

Now that we have identified the problems with pension schemes what are the solutions.  The government might want to consider dissolving all defined benefit (DB) schemes and permitting only defined contribution (DC) schemes.  This would eliminate the requirement for actuarial valuations to determine if a surplus or deficit occurs.  As we previously stated DC schemes cannot go into deficit as a persons entitlement is based upon the accumulated savings.  There should be rules governing the dissolution of the funds and the distribution of the surplus.

The practice of vesting should be discontinued and an employee should be entitled to the employer’s portion from day one.  This is because the pension fund is supposed to act as a means of saving towards one’s retirement.  If an employee knows that he/she will get the employer’s contribution from day one it will provide any additional incentive to become part of a scheme or to participate in an Individual Retirement Annuity (IRA) scheme.  In addition, in order to ensure the success of this savings plan, when employees leave their place of employment their pension contributions should be transferred to another approved pension fund or to an IRA.  Alternatively the person could be allowed to remain in the fund as there will no longer be surpluses to worry about.  Persons should not be allowed to remove their pension contributions except in unusual cases and if withdrawn then the amounts should be subject to tax.

Another part of the solution to reforming pension schemes is to ensure that all interest earned and all increases/decreases in the value of the assets of the fund should be credited in full to the existing members of the scheme.  In a pension scheme there are unrealized gains and losses which can present problems when doing the allocation.  One could decide to allocate the full gain/loss to each person as the valuation changes.  Alternatively they could be subject to an assessment by the actuary as to how much of the unrealized gains should be credited to the employees.  This method however has the drawback of leaving a potential surplus in the fund, although it would be much smaller than those that currently exist.

None of these suggestions are new and the regulations governing IRAs incorporate all of them.   The problem is that there are hundreds of schemes that still operate as DB schemes and as we have seen the court does not seem to be the best place for determining where the surpluses should go.  By eliminating the surpluses we eliminate the need for court action and ensure that the employees receive all the benefits of the scheme which fulfills the original intention of pension funds.