Scenario testing in Defined Benefit Pension Plans - A good practice

Changes in financial markets and economic conditions have the potential to adversely impact financial institutions and other financial system participants, including pension plans. Looking forward, the continuing market volatility and low discount rates highlight the need for pension plans to assess their risk exposure and tolerance, and for OSFI to continue to apply risk-based supervision.

OSFI has identified focus on the changing risk environment as its long-term business priority. In this regard, OSFI is taking steps to improve its ability to understand the changing risk environment and how it might affect financial institutions and pension plans, and is using that increased understanding to adjust its supervisory and regulatory expectations of financial institutions and pension plans.

Estimated Solvency Ratio (ESR) testing will continue as a part of OSFI's assessment of the effect of current market conditions on pension plans. This exercise assists OSFI in identifying plans that appear to be more at risk and intervening as appropriate.

While the ESR exercise is a valuable regulatory tool that helps to estimate the current financial position of pension plans, we believe that each plan administrator needs to have a clear understanding of their risk tolerances. We encourage plan administrators to undertake scenario testing to help identify potential exposures and impacts on their pension plans and their plan members and take initiatives to manage these risks prudently to safeguard pension benefits.

Whether it is investment returns, interest rates, or demographic shifts, scenario testing helps ensure that current approaches are robust enough to withstand a range of outcomes and that plan administrators and sponsors are prepared to respond.