GFOA Exam Prep LMS Training: Pension and Defined Contribution Plans Overview Flashcards
What is the role of mortality assumptions in actuarial valuations?
Mortality assumptions have become more conservative and specific, leading to a better and more stable assessment of liabilities. They account for higher longevity in the public sector and anticipate longevity improvement every year.
How are inflation projections used in actuarial valuations?
Inflation projections, such as the 30-year breakeven rate and survey of investment consultants, help in setting assumptions for actuarial valuations, impacting the funding and financial planning of pension plans.
What trend is observed in investment return assumptions for pension plans?
Investment return assumptions are trending downward, reflecting changes in the economic environment and the expectations for future market returns.
What does the National Institute on Retirement Security Research identify as a primary challenge to plan funded status improvement?
The research identifies assumption changes, especially related to investment returns, as a primary challenge to improving the funded status of pension plans since the Global Financial Crisis.
What is a funded ratio, and why is caution warranted in its interpretation?
A funded ratio indicates a pension plan’s financial health at a single point in time, showing the percentage of assets to liabilities. Caution is warranted because it is subject to economic cycles, actuarial assumptions, and can be easily misused.
Why target at least 100% funded status in pension plans?
Targeting at least 100% funded status ensures plans are ‘on track’, eliminates unfunded liability payments, and prepares for future economic cycles and risks. Holding unfunded liability is expensive and results from past decisions to defer costs.
What is the Low-Default-Risk Obligation Measure (LDROM) in ASOP 4?
LDROM is a supplemental calculation of liability using a discount rate derived from low-default-risk fixed income securities, reflecting the cost to remove most investment risk from the plan.
How does the LDROM affect liabilities compared to Actuarial Accrued Liability (AAL)?
LDROM usually results in much higher liabilities than AAL due to its use of a discount rate based on low-default-risk securities, making the total liability measure more volatile and unpredictable.
What new requirements are introduced in the update to ASOP 4?
New requirements include disclosure of the implications of Contribution Allocation Procedure or Funding Policy, a ‘reasonable’ Actuarially Determined Contribution (ADC), and the calculation and disclosure of LDROM.
What are the benefits of the Hybrid DB/DC Plan for both employer and employee?
For the employer, the hybrid plan shares risk and may lower actuarial costs. For the employee, it provides a lifetime benefit (DB portion) and control over investments (DC portion).
What is the structure of the Hybrid DB/DC Plan in Town of Glastonbury?
The plan includes a DB component with benefits based on years of service and earnings, and a DC component where employees contribute a percentage of wages, with employer contributions and a 10-year vesting period.
Why is ongoing education important for employees in the DC component of the Hybrid Plan?
Education emphasizes the employee’s role in the success of the DC component, communicates the plan’s features, and explains how contributions are invested, helping employees make informed decisions.
What are the key considerations in managing the Hybrid DB/DC Plan?
Regular review of investment options, periodic encouragement to members for financial wellness, employer benefit administrator education, and ensuring adequacy of retirement benefits are key.
How does prefunding OPEB plans affect the financial statements and plan costs?
Prefunding is recognized as assets on financial statements, can provide a greater rate of return, favorably impact credit ratings, and help manage future costs by hedging against health care inflation and demographic changes.
What actions can OPEB plan sponsors take to manage plan costs?
Actions include healthcare cost containment, coordination with Medicare, establishing vesting rules and eligibility based on other coverage, and redefining the OPEB plan benefit to a fixed or service-based subsidy.
