Policy-makers need to make sure that Canada’s system of private pensions provides the right incentives for risk to be managed appropriately, Bank of Canada Governor David Dodge said today.

In a speech to the Conference Board of Canada’s 2007 Pensions Summit, Governor Dodge outlined a number of areas where the incentives to manage risk could be improved for members and sponsors of private pension plans, particularly defined-benefit pension plans. “Given the significance of our pension system, policy-makers in Canada need to keep working on improving its operation,” he said.

In particular, Governor Dodge noted that the incentives now in place lead plan sponsors to avoid running actuarial surpluses in their defined-benefits plans, even though it would be appropriate for plans to run surpluses in some periods that would offset deficits in other periods. Other concerns mentioned by the Governor included allowing sponsors the appropriate level of flexibility to deal with actuarial deficits, making sure the application of accounting rules does not introduce unnecessary volatility to the balance sheets of sponsors, and looking at ways to allow smaller companies to pool costs and risks in order to form multi-employer defined-benefit pension plans.

“If we get it right, these changes would give sponsors the appropriate degree of flexibility needed to manage risk effectively,” Governor Dodge said. “And, ultimately, Canada can have a better-managed pension system that is good for members, good for employers, good for the economy, and good for Canadian society.”