“Every state and local government that offers defined-benefit pensions [should] formally adopt a funding policy…,” according to the Government Finance Officers Association (GFOA) best practice recommendations. Guidelines for Funding Defined Benefit Pensions (2013) (CORBA)
SOA and GASB Provide Guidance
Blue Ribbon Panel. Last month, a blue ribbon panel formed by the Society of Actuaries went one step further to endorse risk measures, disclosures and actuarial assumptions as well as guidelines regarding plan governance and benefit changes. These recommendations come at a time when public pensions have come under mounting criticism since the “great recession” and it’s imperative that public plan sponsors be able to demonstrate that their plans are sustainable in the long-term.
GASB 67/68. Furthermore, it’s critical that public sector plan sponsors follow a written funding policy now that GASB 67 and 68 explicitly separate pension funding and pension accounting,. These accounting standards are effective for plan years beginning after June 15, 2013 and June 15, 2014, respectively. For many plan sponsors this means the fiscal years ending June 30, 2014 (!) and June 30, 2015.
Funding Policy Checklist
The place to begin is to gather the facts, actuarially and politically. Here is a checklist of items to assist in providing a basis for developing an effective funding policy:
- Assemble a history of plan benefit levels and changes.
- Develop a history of contribution levels by members and sponsors.
- Compare benefit levels, locally and nationally, to determine appropriateness.
- Consider the political history of plan changes.
- Identify the politically “hot” topics.
- Review legal constraints on plan changes.
- Analyze collective bargaining agreements and recent changes.
- Calculate the plan’s current funded status.
- Determine sustainable funding goals.
- Evaluate options for achieving goals.
We recently assisted a large Midwestern city in developing a comprehensive funding policy that linked future benefit changes to achieving a targeted funding level. In addition, the city Council adopted guidelines for amortization periods and for direct smoothing of actuarially-determined contributions. Indeed, funding policy, investment policy and pension benefit policy must be linked and reinforce one another.
The time is here for every plan sponsor to develop or review their pension plan funding policy to make sure that it is actuarially sound.