BEST PRACTICES: Core Elements of a Funding Policy for Governmental Pension and OPEB Plans Flashcards
GFOA recommends that governments adopt a funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner.
What is the main purpose of adopting a funding policy for pension and OPEB plans according to GFOA?
To provide reasonable assurance that the cost of benefits will be funded in an equitable and sustainable manner.
What is an actuarially determined contribution (ADC)?
A reasonable estimate used as the basis for government contributions to pension and OPEB plans, calculated to fully fund long-term costs of promised benefits.
What are the key goals when calculating the ADC?
To fully fund the long-term costs of promised benefits, keep contributions stable, and equitably allocate costs over employees’ active service period.
Why is accountability and transparency important in pension funding?
To communicate necessary information for assessing the government’s progress toward meeting its pension funding objectives.
What are the core elements of a comprehensive pension funding policy?
Actuarial cost method, asset smoothing method, amortization policy, and surplus management policy.
What is recommended for the actuarial cost method?
It should allocate normal costs over an employee’s working career, beginning no earlier than the date of employment and not extending beyond the last assumed retirement age, and it should be designed to fully fund the long-term costs of promised benefits.
How should the asset smoothing method be applied?
It should be unbiased, use the same smoothing period for gains and losses, and occur over fixed periods, typically around five years but not longer than ten years.
What considerations should be made for amortization policy?
Use fixed (closed) periods that balance demographic matching and volatility management, never exceeding 25 years, ideally 15-20 years, and use a layered approach for amortization.
What is the purpose of surplus management policy?
To guide the system in managing potential surplus prudently for the long-term health of the plan, including reviewing actuarial assumptions and evaluating risk reduction strategies.
How should a funding policy address plans closed to new entrants?
It may consider alternative cost methods, give special attention to the investment mix, and adopt shorter asset smoothing and amortization periods due to the generally shorter funding time horizon.
