Industry News

On August 22, 2024, the Conference of Consulting Actuaries’ Public Plans Community (CCA PPC) released its white paper, Actuarial Funding Policies and Practices for Public Pension Plans: Second Edition. The paper provides guidance to actuaries, policymakers and other interested parties on the development of actuarial funding policies for public pension plans. The white paper offers a framework for actuaries and retirement boards to consider in setting funding policies that comply with the current Actuarial Standards of Practice (ASOPs). 

The first edition of the white paper was published in October 2014. A committee began working on an update of the original paper in 2022 and an exposure draft was released in May 2024. After the exposure draft comments were considered, the second edition was developed and approved by the Steering Committee of the CCA PPC on July 31, 2024. According to the paper, “The intent of the changes in the second edition is to preserve and enhance the ongoing relevance and credibility of the white paper. The Steering Committee of the CCA PPC believes the second edition reflects substantial consensus among current actuaries who provide valuation and consulting services to public pension plans.”

As referred to in the scope of the paper, “This white paper develops actuarial funding policies for traditional defined benefit public pension plans that are open to new members and pre-funded using an actuarially determined contribution.”

The paper begins with identifying general policy objectives and then develops specific policy guidance consistent with those objectives, as well as with current and emerging actuarial science and governing actuarial standards of practice. It develops a principles-based empirically grounded Level Cost Allocation Model (LCAM) to be used as a basis for U.S. public pension plans’ funding policies. The paper also states that, “the funding policies developed herein could serve as a “reasonable actuarially determined contribution” under Actuarial Standard of Practice No. 4 and could be disclosed as the plan’s actuarially determined contribution under GASB 67 and 68.”

The white paper focuses on the elements and choices that need to be made when following the principles of the LCAM model for public pension funding. While the LCAM is consistent with well-established actuarial practice, actuaries are advised to use professional judgment to recommend the most appropriate policies for each situation.

The general funding policy objectives applicable to the LCAM include:

• Determining future contributions that, when combined with current plan assets, are sufficient to provide expected benefits when due;
• Reasonably allocating the cost of benefits and required funding to each year of service in order to promote intergenerational equity for taxpayers;
• Managing future contribution volatility to promote inter-period equity for taxpayers, to the extent possible;
• Supporting the general public policy goals of transparency and accountability; and
• Considering the nature of public sector pension plans and their governance.

The paper is intended to address the principal elements of an actuarial funding policy in most situations, including: 1) actuarial cost method; 2) asset smoothing method; 3) amortization method; and 4) output smoothing method, if any. The paper evaluates various policy element structures and parameters according to the following categories:

• LCAM Model practices
• Acceptable practices
• Acceptable practices, with conditions
• Non-recommended practices
• Unacceptable practices

The categories are intended to assist in the evaluation of specific policy elements. However, if a Board adopts non-recommended practices, it should be aware of the policy concerns and consider disclosure of the reasons for using the policies.

Piotr Krekora, Senior Consultant for GRS, serves as a member of the CCA PPC that developed this paper.

The white paper is available here.