Highlighting recent public pension news, research reports and commentary.
Actuarial Standards Board Finalizes Updated Pension Guidelines
On February 11, 2022, the Actuarial Standards Board (ASB) announced final approval of an updated Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Plan Costs or Contributions. This updated standard applies to actuarial work related to defined benefit pension plans and addresses key issues like cost allocation procedures and guidance on preparing actuarial valuations. The process of updating ASOP 4 began as part of the ASB’s Pension Task Force in 2014 and will become effective in February 2023.
According to the ASB, actuarial standards of practice “describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.” There are 56 ASOPs covering a wide range of actuarial services related to pensions, insurance and risk management. Other ASOPs that apply to defined benefit pension and OPEB plans include ASOP 6, 27, 35, 44, and 51.
Our team of credentialled actuaries at GovInvest adhere to these standards and closely monitor updates to ensure our actuarial services reflect the latest guidance in the field.
Click here to read the full text of the revised ASOP No. 4.
Funding Levels Up, Investment Return Assumptions Down in 2021 According to Annual NCPERS Study
In early February 2022, the National Conference on Public Employee Retirement Systems (NCPERS)—a trade association representing approximately 500 state and local pension funds in the U.S. and Canada—released its 11th annual Public Retirement System Study. The 2021 study was based on a survey of 156 NCPERS members, split nearly equally between state plans and local plans, with total asset levels of more than $2.5 trillion. Key trends around plan funding, assumptions, investments and plan administration were reviewed.
The study reported an overall funding level among respondents of 74.7% and an improvement in funding among plans who participated in both the 2020 and 2021 survey. Strong 2021 investment performance of 14% led by the public and private equity asset classes contributed to this funding improvement. At the same time, plans continued the recent trend of scaling back investment return expectations for the future as the average rate of return assumption fell from 7.26% to 7.07%.
From a plan administration perspective, the study found that average expenses to both administer the fund and pay investment managers fell from 60 basis points to 54 basis points in 2021. It also reported an uptick in oversight practices such as audits, asset allocation studies and data management tool utilization.
Click here to read the full study.
Pension and OPEB Considerations to Watch in 2022: S&P Global Ratings
S&P Global Ratings last month published commentary on public pension and OPEB issues they are tracking in 2022. Key issues identified in the piece include the strong pension plan performance during 2021, the impact of rising inflation, and the continued uncertainly around demographic impacts of COVID-19, government payroll levels and employee retirement patterns. It also discussed the outlook for pension obligation bond issuances moving forward and how ESG factors overlap credit rating analysis for pensions and OPEB.
Tracking these periodic articles from S&P, along with other credit rating agencies like Moody’s Investors Services and Fitch Ratings, can provide policymakers and finance officials useful insights on how pension and OPEB liabilities could influence credit opinions that directly impact government borrowing costs.
Click here to read the full commentary, which can be accessed by signing up for a free S&P account.
Award Winners Announced for Innovative Pension Funding Strategies
The National Institute on Retirement Security (NIRS) and the Conference of Consulting Actuaries (CCA) announced in early March 2022 three winners of the inaugural “Innovative Public Pension Funding Strategies” competition. Participants were provided a hypothetical pension scenario and were asked to design a funding policy that achieved the goals of reducing cost volatility, promoting intergenerational equity, and ensuring long term fiscal strength of the plan. The winning plans and authors included:
- “The Cost of Stability: A Case Study” by Andy Blough and Seth Stock. Indiana Public Retirement System.
- “Risk-Based Funding Policy” by Bill Willingham, Michelle Boyles, Aaron Shaprio and David Kent. Milliman.
- “Reserve Fund Stabilization Contribution Policy- A Model Public Pension Funding Policy” by David Draine. The Pew Charitable Trusts.
Common themes reflected across the winning plans incorporate features that lead to actual contributions that exceed the actuarial determined contribution (ADC). These features were designed to enhance cost stability, and examples include a policy that prevents contribution rate reductions until plan funding achieves 105% (Blough Et. al), funding a Contribution Surplus Account that can be used to offset future contributions or fund benefit improvements (Willingham, et Al), and establishing a Reserve Fund Policy, like the one currently used in Tennessee, and available to participating employers in CalPERs and Oregon PERS (Draine).
An article we published earlier this year discussed GovInvest’s work with the City of Benicia, CA as they develop a strategy for utilizing a Section 115 Trust to manage their CalPERS pension costs moving forward. This is one example of the type of reserve fund described in Draine’s winning plan.
Click here for the award winner announcements and links to the winning plans.