What does an amortization policy define?

An amortization policy is specifically designed to outline the approach and methods for systematically managing and eliminating unfunded liabilities associated with a pension plan. This involves detailing how much and how frequently contributions will be adjusted to address these liabilities over a specific period.

By defining the structure for increasing or decreasing contributions, the amortization policy ensures that the pension plan can maintain its financial sustainability and meet future obligations to beneficiaries. The policy typically includes schedules for payments and may be influenced by several factors, including actuarial valuations, changes in the funding status of the pension plan, and any regulatory requirements.

Understanding the significance of an amortization policy enables stakeholders to anticipate and plan for changes in contributions, thereby ensuring the long-term viability of the pension plan while protecting the interests of both the plan sponsors and participants.