Intergenerational equity has been a relevant qualitative concept in plan design, management and governance of public and private pension plans. There are, however, challenges even in defining what constitutes equity or an adequate level of intergenerational transfer for all involved parties. An additional challenge for the actuary is to design and use adequate metrics, thus providing a quantitative dimension to the conversation which often relies only on qualitative assessments.
Speaker(s): Louis Adam (École d’actuariat, Université Laval)
As an example of the application of intergenerational equity issue, we consider the specific framework of granting conditional indexation in an occupational contributory defined benefits pension plan. With the recent changes to legislative constraints applicable to such plans in the province of Quebec (Canada), specific requirements on establishing a provision for adverse deviation have been enacted in separate pieces of legislation depending upon the nature of the plan sponsor. The legislation leaves some leeway in how this provision can be used for either smoothing future contributions from active participants and plan sponsor, or providing some form of indexation to plan beneficiaries, contingent on the plan funded ratio.
Intergenerational equity issues arise in the conflicting objective of three interested parties: minimize and stabilize future contributions, allocate cost between the plan sponsor and active members, and maximize the benefits received by plan beneficiaries by modulating conditional indexation.
The presentation will describe the framework, define some metrics of cost and indexation, and show the simulation results of various indexation policies applicable to a mature plan. Metrics should capture the value to the plan retirees of these indexation policies over the course of the simulation horizon, while cost funding metrics should measure the impact on active members and plan sponsor, within the objective set out in the plan financing Policy.