A Blue Ribbon Panel on Public Pension Funding has been convened by the Society of Actuaries to assess the current state of pension plan funding and make recommendations to improve the financial strength of public pension going forward.
Members of the panel came from 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. The panel’s formation comes as many federal, state and local pension plans continue to struggle with unfunded pension liabilities for the past several years.
The panel sets 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 percent funding of plan obligations. Median economic assumptions should be used to avoid being overly optimistic or 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 recommended that public entities improve their financial management and information.
“The panel has sought to encourage a higher level of financial management and more rigorous risk analysis among public pension plans,” said Bob Stein, chairman of the Blue Ribbon Panel and former global managing partner of Actuarial Services, Ernst & Young. “That focus is manifested in the comprehensive disclosures recommended, which should enable all parties involved to make more fully informed decisions about plan funding.”
It is also recommending the creation of a standardized contribution benchmark that plans can use to measure the aggregate level of funding risk and a standardized contribution that can be calculated and disclosed for 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.
Actuaries should be required to disclose the information noted above and provide a professional opinion on the reasonableness of the assumptions and methods used in funding the plan, the panel found.
Improving plan governance is also a priority, including the creation 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.