Occupational pension plans – employment-based arrangements – have historically played a key role in the retirement income systems of many OECD countries. Even today, these plans cover most workers in Denmark, Finland, Iceland, the Netherlands, Norway, Sweden, and Switzerland. As shown in Figure 1, the coverage rates of occupational plans in these countries are above 90 percent of the workforce, which can be explained by their mandatory (by law or statute) or quasi-mandatory nature (as a result of bargaining at the national or industry-wide level). Occupational pension plans are mandatory in Finland, Iceland, Switzerland and, since 2006, in Norway. In these four countries, employers must establish pension plans and employees are obliged to join them.

Since 2001, occupational defined benefit (DB) pension plans in OECD countries have experienced an adverse funding situation, that is, a low ratio of assets to liabilities. The decline in funding ratios can be traced to the low interest rate environment and poor equity market returns, together with longer term pressures such as revisions in life expectancy assumptions. Various regulatory initiatives have been undertaken to address these funding gaps, some providing forbearance to plan sponsors, others aiming at improving benefit protection outright. At the same time, new accounting standards have been introduced which aim at shining a bright light on what has been historically a rather obscure but major component of the balance sheet of pension plan sponsors.

This report outlines the regulatory framework within which defined benefit (DB) pension plans are financed and addresses the challenges facing the funding of such plans. The Appendices include a summary and discussion of the funding regulations in selected OECD countries, most of which have a long history of externally funded DB pension plans. This report attempts to draw on the positive and negative experiences in these countries and then develop ideas and recommendations for the regulation of pension plan financing in OECD countries and elsewhere.

This paper provides a stylised assessment of the impact of investmentrelevant pension fund regulations and accounting rules on contribution and investment strategies within the context of an asset-liability model (ALM) specifically designed for this purpose. The regulations and accounting rules considered represent, in a simplified way, the situation in Germany, Japan, the Netherlands, United Kingdom and United States. These countries were studied for their differences in regulations, including some major regulatory initiatives in recent years, as well for the size of their defined benefit (DB) systems. The analysis could in principle be extended to other countries or regulations.

The issue of pension benefit security is currently in the foreground of both economic and political debate in many OECD countries. After a ‘golden age’ for pension funds, which enjoyed high investment returns and funding surpluses throughout the 1990s, a more troubled period has emerged since the start of the millennium. With equity market corrections, (and the subsequent questioning of long-term equity return assumptions), a low interest rate environment, asset liability mismatches, severe underfunding (highlighted by accounting changes), ageing populations, financial scandals and loss of pension benefits, the whole defined benefit pension system in many countries is under assault. Once the rise in defined contribution schemes (and the uncertainty they inherently entail) as well as the scaling back of government pensions are also taken into consideration, people of all ages are rightly asking what retirement income they can rely on? Though the subject has been debated on many occasions, recent events have ensured that the topic of pension benefit security has once again become a focus for policy discussion.