ADVISORIES: Responsible Management and Design Practices for Defined Benefit Pension Plans Flashcards
Under no circumstance should state and local government plan sponsors engage in pension contribution holidays or make insufficient contributions.
What practices are recommended against for state and local government plan sponsors?
Engaging in pension contribution holidays or making insufficient contributions.
What is the consequence of skipping or reducing actuarially required contributions?
Deferred costs to the future, jeopardizing the long-term funding of the plan and placing the burden on future taxpayers.
Why should plan sponsors be cautious of spiking final pensionable compensation?
It may result in inequitable distribution of benefits, hidden costs, and a public perception of impropriety.
What adjustment is recommended in response to increased life expectancy?
Reevaluating and possibly increasing normal retirement ages to ensure the sustainability of the plan.
Why are retroactive benefits increases problematic?
They result in an immediate increase in existing liabilities for past service that have not been funded, potentially leading to significant underfunding.
What is the issue with Deferred Retirement Option Plans (DROPs)?
Costs have been consistently higher than anticipated, due to factors like poor plan design and unrealistic investment return crediting rates.
What is advised regarding ad hoc cost-of-living allowances (COLA) for existing retirees?
An ad hoc COLA creates an immediate unfunded liability and should not be funded with temporary surpluses.
What is recommended regarding investment assumptions?
Assumed investment rates of return should be realistic and regularly evaluated to avoid chronic underfunding.
Why are non-contributory plans cautioned against?
Plans that include employee contributions ensure participants appreciate the value of their benefits and share the cost of enhancements.
What caution is advised regarding prior service credits?
They should be calculated at full actuarial cost and reviewed regularly to ensure viability.
