Two leading organizations of the US actuarial profession issued papers in February regarding public pension plan financial reporting and the funding of public pension liabilities. The situations facing public pension plans have had high visibility in the recent past as the contributions necessary to fund promised benefits take up an increasing percentage of state and local government budgets and as the country watches the Detroit bankruptcy where promised public pension benefits may be cut in the city's reorganization plan. The papers released by the American Academy of Actuaries and the Society of Actuaries attempt to present policymakers, plan sponsors, the actuarial profession and the public with reasoned discussions of the policies and economic realities which impact pension funding.
The American Academy of Actuaries published its issue brief titled Objectives and Principles for Funding Public Sector Pension Plans. The document talks about the need to balance three primary objectives of
- Benefit Security
- Contribution Stability and Predictability, and
- Generational Equity
The Academy's issue brief speaks more at a high level, explaining these objectives and how different approached to public pension plan reporting and funding methods can impact these objectives. The issue brief does not make many specific recommendations but instead attempts to provide a context for ongoing improvement of public pensions.
The Blue Ribbon Panel of the Society of Actuaries was much more willing to make specific recommendations in its Report on Public Pension Funding. While reciting similar objectives for pension plan funding, the Blue Ribbon Panel Report is much more a description of recommended best practices in this area, with specific recommendations for such things as asset smoothing, stress testing, funding methods, and investment risk disclosures.
The panel recognized that its recommendations were going beyond the standard of practice for public pension actuaries currently:
In addition, because there may be differences of
opinion regarding the appropriateness of funding
assumptions and methods, the Panel believes that
the actuary should opine on the reasonableness
of the selected assumptions and methods in his/
her actuarial funding report. This extends the
actuary's duty to opine beyond today's standards
(that assumptions and methods meet Actuarial
Standards of Practice (ASOPs)).
The Panel also believes that the current range
of funding assumptions and methods in use is
overly broad and recommends narrowing the
range of practices with respect to various funding
assumptions and methods.
The Panel requests that the Actuarial
Standards Board (ASB) actively consider the
recommendations made herein and take steps to
incorporate them into ASOPs if needed to achieve
the objectives of the Panel's recommendations.
Both the Academy's Issue Brief and the Blue Ribbon Panel Report provide important contributions to the discussion of what should be done to improve public pension finances. While these documents are not binding recommendations for anyone, they will certainly influence the development of the standard of practice for pension practitioners in the public sphere.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.