Conference of Consulting Actuaries Public Plans Community (CCA PPC) Actuarial Funding Policies and Practices for Public Pension Plans Flashcards
The distinguishing feature of this approach is that it is begins with stated policy objectives and then develops specific policy guidance consistent with those objectives. One of the main results is that an effective funding policy often represents a balancing of policy objectives. Another is that adherence to the policy objectives may lead to a narrower range of acceptable practices than is sometimes found in current practice.
What is the primary goal of a funding policy for public pension plans?
The primary goal is to ensure future contributions and current plan assets are sufficient to provide for all benefits expected to be paid to members and their beneficiaries when due.
What does the Actuarial Cost Method in public pension plan funding policies entail?
The Actuarial Cost Method allocates the total present value of future benefits to each year, including all past years, as Normal Cost and Actuarial Accrued Liability (AAL), aiming for a level cost over an employee’s service.
What is the role of asset smoothing methods in pension plan funding policies?
Asset smoothing methods reduce the impact of short-term market volatility while still reflecting the overall movement of the market value of plan assets, aiming for unbiased treatment relative to market performance.
How are amortization policies structured in public pension plan funding?
Amortization policies determine the time and structure for systematic funding of any Unfunded Actuarial Accrued Liability (UAAL) or recognizing surplus, usually through layered, fixed-period methods based on the source of UAAL.
What considerations should be made for transition policies in pension plan funding?
Transition policies may be needed to avoid undue disruption, such as adopting model periods for future liabilities while continuing current policies for existing liabilities, ensuring alignment with principal policy elements.
What key factors influence the choice of actuarial cost method for pension funding?
Key factors include funding each participant’s benefit reasonably by their expected retirement, pay-related benefits reflecting anticipated pay, and ensuring Normal Cost and AAL calculations are based on each member’s tier of benefits.
Describe the LCAM Model practices for public pension plan funding policies.
LCAM Model practices include Entry Age cost method with level percentage of pay Normal Cost, layered fixed-period amortization by UAAL source, and asset smoothing with parameters like smoothing periods and market value corridors.
What is the significance of the Entry Age Normal cost method in public pension funding?
It provides a way to allocate the cost of pensions evenly over the course of an employee’s career, ensuring that costs are equitably distributed among generations.
How does a layered amortization approach benefit pension funding?
Layered amortization isolates changes in liabilities or assets due to different events, allowing for more precise management of funding strategies and adjustments.
Why is asset smoothing important in pension plan actuarial valuation?
Asset smoothing helps mitigate the impact of market volatility on pension funding by averaging gains and losses over a set period, leading to more stable contribution rates.
What is the purpose of an actuarial experience study in pension funding?
To review and adjust actuarial assumptions based on actual plan experience, ensuring that funding and liability estimates remain accurate and realistic over time.
How do demographic changes impact pension funding policies?
Changes in workforce demographics, such as aging or turnover rates, can affect assumptions about retirement ages, mortality rates, and salary growth, influencing funding needs and strategies.
What role does a funding policy play in public pension sustainability?
A funding policy ensures systematic, disciplined saving and investment to meet future pension obligations, promoting fiscal health and intergenerational equity.
How can governments manage the volatility of pension funding levels?
By adopting strategies such as asset smoothing, diversifying investments, and employing conservative actuarial assumptions to mitigate the impact of economic and demographic fluctuations.
What challenges do closed or frozen pension plans face in funding?
Such plans may need to adjust funding methods and assumptions to reflect a diminishing active member base, focusing on securing assets to cover accrued liabilities.
