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How can legislation affect sponsor contributions?

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asked Nov 9, 2017 in BUS 4027W - Actuarial Risk Management by Rowan (3,390 points)

Legislation sometimes has control over how pension schemes should use their surplus or deficit. It says that the problem with legislation constraining options for using surplus is that it can deter sponsors from funding prudently. The undesired consequence may be that security of member's benefits may be worsened. Could you please explain this paragraph?

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answered Nov 9, 2017 by jolegutko (540 points)

If a sponsor knows that any surplus will not be available to the sponsor (because legislation says it belongs to members, for example), then the sponsor would be reluctant to pay contributions into the fund that are any higher than they need to be, because once they are in the sponsor can't get them back. So it might be prudent to pay 15% of salaries, but if that prudent amount is actually more than needed, the money is gone. So sponsors will be reluctant to create surplus, and might only contribute say 12% of salaries, which means that funds are likely to be 100% funded or less - that is less safe for the members.

The most extreme consequence of this is that the sponsor might choose not to provide a pension fund at all to avoid this stress.

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