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 GFOA’s recommendation for governments that offer defined benefit pensions or OPEB?
To formally adopt a funding policy that ensures the cost of these benefits will be funded in an equitable and sustainable manner.
What should the adopted funding policy aim to achieve with the actuarially determined contribution (ADC)?
The ADC should fully fund the long-term costs of promised benefits, balance keeping contributions stable, and equitably allocate costs over the employees’ active service period.
How often should government employers obtain a reasonable ADC for their pension and OPEB plans?
No less than biennially.
What are the core elements of a comprehensive pension funding policy?
Actuarial cost method, asset smoothing method, amortization policy, and surplus management policy.
Which actuarial cost method is especially well-suited to achieving stable and equitable funding?
The entry age method—level percentage of pay normal cost.
What should the asset smoothing method aim to achieve?
To be unbiased relative to market, use fixed periods for gains and losses, and typically not exceed five to ten years.
What characteristics should the amortization of unfunded actuarial accrued liability have?
Use fixed (closed) periods that do not exceed 25 years, ideally fall in the 15-20 year range, and use a layered approach for various components.
What should a surplus management policy address when the plan enters a surplus position?
Review key actuarial assumptions, evaluate risk reduction strategies, consider how contributions are affected, and establish guidelines for benefit enhancements.
How can a funding policy reduce the volatility of the ADC?
By smoothing returns on assets over several years and diversifying the investment portfolio.
What additional considerations should be made for plans closed to new entrants regarding asset smoothing and amortization periods?
Asset smoothing periods should be shorter, corridors narrower, and amortization periods should be shorter compared to open plans.
