Jointly Sponsored Pension Plans

Jointly Sponsored Pension Plans

A jointly sponsored pension plan is a defined-benefit plan in which an employer shares risks and rewards in the plan equally with the plan members, who are current employees and retirees. Since there are usually many individual plan members, an organization is typically formed to represent all of them collectively as a plan sponsor (e.g., an employee union or federation). This type of defined-benefit plan is most often seen in the public sector, while a defined-benefit plan where the employer is the sole sponsor is more typical of the private sector.

Jointly sponsored pension plans are governed by a formal agreement between the joint sponsors that give them shared control of the plan. The joint sponsors appoint a governing board with equal representation and a mutually agreed-upon chair. The governing board is usually responsible for ensuring the plan has enough money to meet its obligations to pension recipients. It does this by setting benefit levels, establishing contribution rates, and deciding how to address funding shortfalls and surpluses.

In a jointly sponsored plan, the employer and participants usually contribute equal amounts to the plan. In other words, the plan is structured such that the risk of ultimately funding benefits is borne equally by the employer and the employees as a group. Since the employer, as a joint sponsor, guarantees only half of each retiree’s pension benefits, the employer only accounts for its half of the plan.

The fact that the pension benefits laws in many countries predate the establishment of many jointly sponsored pension plans and the implicit assumption that defined benefit pension plans are sponsored solely by employers gives rise to a number of practical problems for jointly sponsored pension plans. These are:

  1. assigning responsibility for making contributions to the pension fund; Jointly Sponsored Pension Plans
  2. selecting the most appropriate method for amortizing a going concern unfunded liability; Jointly Sponsored Pension Plans
  3. selecting the most appropriate method for amortizing a solvency deficiency; Jointly Sponsored Pension Plans
  4. coordinating special payments in respect of a going concern unfunded liability and a solvency deficiency; Jointly Sponsored Pension Plans
  5. remitting special payments in respect of a going concern unfunded liability (or a solvency deficiency) plus interest to the pension fund from the date of the funding valuation to the date the valuation is filed with some kind of pension fund supervising authority;
  6. applying actuarial gains and losses to a schedule of special payments to amortize a going concern unfunded liability or solvency deficiency which was established in the previous actuarial valuation; and
  7. paying commuted values of pension benefits earned by a terminating plan member in circumstances where the pension plan has a transfer deficiency.
Something else -   Retirement Benefit Plans

Defining a jointly sponsored pension plan

A jointly sponsored pension plan means a contributory defined benefit pension plan in which the documents which create and support the plan provide that:

  • the members of the plan are required to make contributions in respect of any going concern unfunded liability and solvency deficiency (as co-sponsors of their plan, members share in the assumption of the risks associated with the provision of a benefit the cost of which cannot be determined in advance);
  • plan members and the employer share responsibility for plan governance, plan administration and plan terms; and,
  • the level of plan benefits and the amount of member contributions in respect of the plan’s normal cost are directly related to the level of pensionable earnings of the plan member (the pension plan must provide defined benefits based on final average or career average earnings, given that the contribution rates are directly related to pensionable earnings).

Past service cost

The change in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service cost may be either positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative (when existing benefits are changed so that the present value of the defined benefit obligation decreases).

Pension capital sum agreement

A capital sum agreement is quite unusual. In short, its goal is to achieve a fixed capital on the retirement date. In contrast to a defined contribution scheme, the capital on the retirement date is guaranteed. The size of the pension payment and the height of the pension premium are therefore unpredictable.

Something else -   Proportionate consolidation

Pension deficit or surplus

The deficit or surplus is:

  1. the present value of the defined benefit obligation less
  2. the fair value of plan assets (if any).

Jointly Sponsored Pension Plans

Jointly Sponsored Pension Plans

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Something else -   Business combination