The
Society of Actuaries has commissioned a Blue Ribbon Panel to develop a
public Policy and discuss strategies to ensure solvency and accountability of
the U.S. public pension landscape…in essence the panel recommends solutions to
public pension underfunding.
Recommendations released by this
multidisciplinary panel of experts provides a guide for trustees, legislators
and plan advisors to improve the financial health of public pension plans.
Using plans’ own financial reporting, the total amount of unfunded public
pension plan liabilities in the U.S. amounts to nearly $1 trillion, according
to some estimates.
“Public pension plan funding is a
complex issue, with many vexing questions and no easy near-term solutions,”
said panel chair Bob Stein, FSA, MAAA, former global managing partner of
actuarial services at Ernst & Young. “Taken as a whole, the panel’s
recommendations will make available to all stakeholders in public pension
systems – employees and retirees, plan sponsors and trustees, as well as
taxpayers – more reliable and improved information about the financial status
of a plan and the risks it faces. This should enable the development of a
stronger funding program, more responsive to the rapidly changing environment
in which all plans operate.”
The Blue Ribbon Panel on Public
Pension Plan Funding was commissioned by the Society of Actuaries (SOA) to
assess the current state of pension plan funding and make recommendations to
improve the financial strength of public pension plans going forward. Members
of the panel represented a variety of disciplines and interest groups to ensure
the panel examined the issue from multiple perspectives. The panel began its
work in early 2013 and issued its final recommendations today at an event at
the National Press Club in Washington, D.C.
“Leaving the policy decisions
about the level of retirement benefits to states, cities, counties and their
employees, the panel focused on how to strengthen the ability of sponsors to
keep the benefit promises they have made,” Stein added.
The panel’s report lays out three
principles of an effective public pension funding program:
• The costs of
future retirement benefits should be pre-funded, and funded in a way that
targets 100% funding of plan obligations. Median economic assumptions should be
used to avoid being overly optimistic or overly pessimistic.
• Taxpayers
receiving the benefit of today’s public employees’ services should pay the
taxpayer portion of the costs of those employees’ pension benefits; funding
programs should restrain the tendency to shift these costs to future
generations of taxpayers.
• While the
panel believes that stable costs will be difficult to achieve, it does
recognize the benefits that predictable costs can bring to the sponsor’s
budgeting processes over short periods of time.
The panel
recognizes that funding entities frequently face significant competing demands
on their resources and that the full recommended contribution cannot always be
made. In such circumstances, sponsors should develop an effective funding
program that moves the plan toward a fully funded status in a reasonable period
of time.
Improve
Financial Management and Information
The panel’s
report includes a number of specific recommendations designed to improve the
information available to all stakeholders about the financial condition and
level of risk taken by an individual plan. These recommended disclosures
include measures of:
• Plan maturity,
such as the ratio of active employees to retirees and the ratio of the
market-value assets to payroll;
• Plan cost,
such as the ratio of the actuarially required contribution (ARC) to payroll and
to the funding entities’ total budget;
• Payment
experience, the ratio of contributions paid to the recommended contribution;
• Investment
risk, such as the plan liability at a risk-free rate; and
• Stress tests,
consisting of projections of contributions and funded status under periods of
higher or lower investment return, and in which recommended contributions were
not fully paid.
“The panel has
sought to encourage a higher level of financial management and more rigorous
risk analysis among public pension plans,” Stein added. “That focus is
manifested in the comprehensive disclosures recommended, which should enable
all parties involved to make more fully informed decisions about plan funding.”
Create a Standardized
Contribution Benchmark
To provide a
benchmark which plans can use to measure the aggregate level of funding risk,
the panel recommends a standardized contribution be calculated and disclosed in
actuarial reports. This standardized contribution can help trustees and other
stakeholders assess the reasonableness of the assumptions and methods used in
the plan’s recommended contribution. The Standardized Plan Contribution would
use a stipulated rate of investment return and other specified actuarial methods.
Strengthen the
Role of the Actuary
The panel
recommends that actuaries be required to disclose the information noted above
and that the actuary be required to provide a professional opinion on the
reasonableness of the assumptions and methods used in funding the plan. In
addition, the panel makes several recommendations about how actuarial
assumptions and methods are established and encourages the Actuarial Standards
Board to consider including these recommendations in Actuarial Standards of
Practice.
Improve Plan
Governance
Finally, the
panel called for strong governance practices, including the establishment of
governance structures that support payment of recommended contributions, the
development of a strong risk oversight function at the board level, and the
thorough consideration of the cost and risks of proposed plan changes before
they are adopted.