to pension surpluses, even though employees typically bear none of the responsibility for any deficit. another factor is that tax regulations discourage sponsors from building surpluses in excess of 10 per cent. partly as a result of these two factors, sponsors of defined - benefit plans have incentives to keep plans only minimally funded and to avoid surpluses. but it is entirely appropriate, from time to time, for defined - benefit plans to run significant surpluses – or deficits – given the way they pool risks across all members – past, present, and future. secondly, sponsors can be hampered by regulations that do not always take sufficient account of their ability to make contributions in the future. regulators typically determine funding adequacy in one of two ways. one method assumes that the sponsor is a going concern and will be around to make up any shortfall in pension obligations before they come due. the other method assumes that the sponsor could become insolvent at any time, and so sufficient funds to cover actuarial liabilities must always be available to cover that risk. but the use of the solvency test can, in some circumstances, place an inappropriate burden on sponsors that are unlikely to become insolvent. consider what happens when asset values are temporarily depressed relative to liabilities. in this case, the solvency deficit can be significantly larger than the going - concern deficit. this would require the sponsor to make a special contribution that should be reversed once asset values recover. but if the sponsor does not have access to the surplus, and so cannot reclaim this special contribution once asset markets recover, then the sponsor's expected costs are raised inappropriately. the third area of concern relates to accounting rules, or perhaps more specifically, to our use of these rules. this area is becoming increasingly important to pension plan sponsors because international accounting standard setters are examining a move to unsmoothed, so - called " fair - value " methods. these accounting rules are intended to replace rules that smooth changes in asset and liability values with rules that focus on values at a point in time. but it is not at all clear how useful or relevant it is to determine point - in - time values of assets and liabilities in a defined - benefit plan. for plans as a whole, what we are interested in is not today's values, but expected values far into the future. if this review results in changes to accounting standards, it could make sponsor balance sheets and income statements much more volatile. so sponsors

periods. more clarity regarding the legal ownership of surpluses is needed, so that the sponsor that owns the risks also owns the benefits from taking those risks. in addition, we should examine the rules governing the tax treatment of contributions when plans are in actuarial surplus. second, we should accept the fact that some defined - benefit plans run by creditworthy sponsors will have substantial solvency deficits from time to time, and make these easier to handle. in this area, i would note that there has been real progress in some jurisdictions, since sponsors are now allowed greater use of letters of credit to cover temporary solvency deficits. third, we should ensure that our accounting rules – and most importantly, how we make use of these rules – are appropriate for defined - benefit plans. what we are interested in is not today's values, but expected values far into the future. fourth, we should strengthen incentives to share group - longevity risk between plan sponsors and members. fifth, the costs of plan improvements should be made clear to shareholders and workers at the time they are promised. finally, we could examine mechanisms that facilitate the formation of multi - employer plans so that risks can be pooled across a number of plan sponsors. after all, municipalities in ontario pooled together to form omers, and we should examine ways to construct similar pension arrangements for private sector employers. as i said, an effective defined - benefit pension system is a tremendous asset for individuals, for employers, and for our society as a whole. putting these plans on a sustainable footing involves strengthening the legal, regulatory, accounting, actuarial, and economic frameworks that determine how these plans operate. if we get it right, these changes would give sponsors the appropriate degree of flexibility needed to manage risk effectively. 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.