Trustees of public pensions programs have long had the need to perform due diligence to ensure they are using taxpayer money prudently, as well as funding plans appropriately to provide for retirees’ years of public service. To confirm that a pension system’s plans are properly funded, annual actuarial valuations are crucial, which leads many public retirement systems to seek a second actuarial opinion. Best practice dictates a regular audit to: a) ensure that valuation calculations were done accurately, and b) offer a professional second opinion in assessing the appropriateness of the demographic and economic assumptions used.
Some public plans are legislatively required to have regular actuarial audits performed. For those without these legislative requirements, there are many reasons why actuarial audits of pension systems are necessary:
• Conducting an actuarial valuation audit is good governance for public funds and helps increase public trust in the management of funds. An audit ensures trustees that valuations are being performed on an ongoing basis to serve the financial objectives of the system, while preserving the ongoing relationship with the consulting actuary, who knows the particular pension plan best.
• The auditing actuary may have a different perspective that leads to better understanding of the valuation overall. A second opinion can provide recommendations for improvements in the valuation process, perhaps through how the information is presented in reporting and communications.
• If the auditing actuary feels changes in calculations or assumptions are needed, suggestions for specific steps can be provided for the retirement system or consulting actuary to pursue. That means trustees won’t be faced with questions like, “How can we fix that?”
Actuarial audits vary by situation, with some calling for full replications of the most recent actuarial valuation whereas others are more limited in scope. Often the auditing actuary must execute much of the same work for either option. A full-scope audit is generally the best way to ensure confidence in the valuation results.
The Governmental Accounting Standards Board (GASB) yesterday announced they have approve two new standards that will substantially improve the accounting and financial reporting of public employee pensions by state and local governments. The press release is available here. Here is an excerpt from the release:
“The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations,” said GASB Chairman Robert H. Attmore. “Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.”
Pensions & Investments picks up on the release of the new report on public retirement plan preferences, “Decisions, Decisions.” Here is an excerpt from P&I:
Public-sector employees overwhelmingly choose defined benefit plans over defined contribution plans when given a choice, according to a report by the National Institute on Retirement Security and Milliman.
In six states that offer new employees a choice between DB and DC plans, the report found that DB was chosen by most employees, ranging from 75% to 98% among the state plans.
“If you had an election with 75% of the vote (for a candidate), it would be well past a landslide,” Mark Olleman, a consulting actuary and principal at Milliman, said in a telephone interview. Mr. Olleman is co-author of the report, which was issued Thursday, with Ilana Boivie, an NIRS economist.
Statewide DC plans have lower investment returns than DB plans because DB assets are pooled and professionally managed, according to the report.
“Some states have considered moving from a DB-only to a DC-only structure in an attempt to address an unfunded liability,” the report said. “Making this shift, however, does nothing to close any funding shortfalls and can actually increase retirement costs.”
Reuters casts the findings in an even broader context, comparing public and private employer approaches to retirement:
To fix their persistent pension problems, some U.S. states are looking to reshape their retirement plans to resemble those in the private sector, but they may find may employees resistant and the savings elusive.
For more perspective, check out coverage from Plan Sponsor, AdvisorOne, Institutional Investor, and BenefitsPro. And you might also might appreciate the article from Investment News with our favorite headline so far: “This just in–DB plans rock.”
A new study of the retirement plan choice in the public sector finds that defined benefit (DB) pensions are strongly preferred over 401(k)-type defined contribution (DC) individual accounts. The study analyzes seven state retirement systems that offer a choice between DB and DC plans to find that the DB uptake rate ranges from 98% to 75%. The rate for new employees choosing DC plans ranges from 2% to 25% for the plans studied.
In recent years, a few states have offered public employees a choice between primary DB and DC plans. The new study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, analyzes the choices made by employees and finds that:
- When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
- DB pensions are more cost-efficient than DC accounts because of higher investment returns and longevity risk pooling.
- DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan, which are therefore not deposited to the members’ accounts.
- When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
- A “hybrid” plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.