Room to Thrive: Why Principles-based Standards Make Sense for Regulating Contingent Pension Plans

Abstract

As membership in traditional defined-benefit pension plans declines, plans in which benefits are contingent on the financial status of the plan are becoming more common. Rather than placing all the risk on sponsors to deliver guaranteed benefits to members, these contingent pension plans require members to take on at least some of the risk that benefits may or may not meet expectations.

This E-Brief focuses on two types of contingent plans, target-benefit plans and multi- employer pension plans. These plans offer a different promise than traditional defined-benefit plans and the contract with plan members is different. This needs to be reflected in how they are regulated. Regulators should adopt a principles-based approach to financing-related standards, while using a rules-based approach for aspects such as governance and member communication. Principles-based regulations focus on desired outcomes rather than processes. Most contingent plans have members materially involved in the running of the plan, involved in making all key decisions, which makes principles-based regulations particularly well fitted. Plan governors would have more flexibility in how they manage the financing risks, rather than having to comply with generic rules that attempt to work on a universal basis. The streamlining of rules and an emphasis on objectives promote compliance, and enhance the ability of regulations to achieve their desired outcomes.