Research Projects in Pension

Call for Essays

Good, Better, Best: The Basics of Funding Public Sector Pension Plans

Essay authors may choose how they distinguish between "good, better, best and not recommended;" authors can consider factors such as ability to withstand economic downturns; alignment with sponsor cash flow considerations; time period over which an underfunded plan would become fully funded; allocation of costs to generations of taxpayers; ability to produce smooth pattern of contributions; alignment with markets (e.g. discount rates and investment); risk management; future service periods; or other factors of the author's choosing. Please see Appendix I for a sample of topics to consider. Appendix II contains sample tables meant to illustrate how the table format is intended to be used; these are not intended to be commented on as part of the Call for Essays.

There are many different types of public sector pension plans, including single-employer plans, agent multiple-employer plans (where assets are pooled for investment purposes but segregated for reporting), and cost-sharing multiple-employer plans (where obligations and assets are shared across multiple employers). Individuals may submit essays covering only one or several types of plans; recommendations for "good better, best and not recommended" methods and assumptions could differ by type of plans.

Actuarial Standards of Practice (ASOPs) define the appropriate range of assumptions and methods that actuaries should use but are not specific as to which assumptions and methods are preferable (or not recommended) for funding policy. ASOPs give discretion to actuaries to design funding policies that can best meet the plan sponsor's needs. Authors do not need to take ASOPs into consideration, although actuaries may want to comment on where their recommendations are aligned, or not aligned, with ASOPs.

Essays should be 2-3 pages in length (excluding "good, better, best and not recommended" table; approximately 1,500 words, excluding the table). The table should be one page, landscape or portrait format. Individuals who wish to provide examples of "good, better, best and not recommended" tables for different types of public sector plans (or different considerations that might drive funding) are encouraged to submit multiple essays.

Essays should be submitted by Friday March 30, 2012 to Susan Martz, smartz@soa.org. Essays should be submitted in Word or compatible word-processing program. Please submit your contact information with your essay (e-mail address and daytime phone number). Essay submitters do not have to be members of the SOA.

This call for essays is the first step in a process for 2012 intended to help establish guidance for trustees and plan sponsors with regard to public sector plan funding. Submitted essays will be published by the SOA during the second quarter of 2012 (targeted). Currently, we plan to have a symposium in May or June featuring selected essay authors. We also plan to allow all essay authors and other interested parties to participate in a Delphi process, wherein we consider the various submissions and work toward a consensus set of good, better, best and not recommended templates.

If you have any questions, please contact staff fellows Emily Kessler, ekessler@soa.org, 847.706.3530 or Andy Peterson, apeterson@soa.org, 847.706.3591.

Appendix I — Discussion of Items to Consider in Essays

We recognize that to keep the essays short, there are important details that will be left out. Below is a list of some of the types of things that you might want to consider as you write your essay and complete your table. We also recognize that individual employer/plan situation may impact where you might place a given practice under the good/better/best model. We ask that authors try to prioritize their points to stay within the 1,500 word guidelines.

• How do plans balance smoothing of contributions and the need for predictability in budgets with maintaining plan funding?
• What role is there for market discount rates in liability measurement?
• Are the funding (and accounting) bases the only bases of plan measurement? Should there be other rates considered in other situations (e.g. union negotiations)?
• Is use of bond investing (or equivalent) an issue?
• Should there be special rules for Pension Obligation Bond (POB) funding?
• Should standards focus separately on discount rates and rates of return on assets and for what purpose should these two different assumptions be used?
• Should setting of real returns and inflation be separately disclosed and how should these assumptions be set?
• Should plan funding rules include rules on assumption setting?
• Should this be handled solely by ASOPs?
• Should the geometric (median) assumption be favored over the arithmetic (no expected gain or loss) assumption?
• How should actuaries deal with features such as gain sharing, deferred retirement option plans (DROPs), purchase of service, transfers of service, cash balances, and creative off market plan designs?
• How should plan maturity factor into funding?
• What role does the employer commitment or financial stability of the government entity play (or not play) in setting a funding standard?
• Should a plan that the employer can walk away from without funding unfunded benefits have a different standard?
• Should (and how would) actuaries disclose such issues?
• Should top standard be achieved only if "contractual guarantee" is something less than promise of future accruals under current formula?
• How does intergenerational equity relate to funding standards?
• Are there specific plan designs that need to be addressed in funding rules? Are there specific plan designs which prevent achieving the top standard simply by their existence?
• Should the scope of the funding standards be limited to public plans?
• Who should enforce or encourage any standard or model (governance)?
• What role should the Actuarial Standards Board (ASB) play or not play?
• ASB/GFOA/Congress

Appendix II — Illustrative Sample Tables

Sample Table I

Sample Table II