BEST PRACTICES: Sustainable Funding Practices for Defined Benefit Pensions and Other Postemployment Benefits (OPEB) Flashcards
Governments should ensure that the costs of DB pensions and OPEB are properly measured and reported. Governments that sponsor or participate in DB pension plans, or that offer OPEB, should contribute the full amount of their actuarially determined contribution (ADC) each year.
What is the fundamental financial objective for government employers offering DB pensions and OPEB?
To fund the long-term cost of benefits promised to participants in a systematic and disciplined manner during the active service life of the benefiting employees.
What does GFOA recommend for ensuring the sustainability of DB pensions and OPEB?
Contributing the full amount of their actuarially determined contribution (ADC) each year.
What is a key component of the funding policy for DB pensions and OPEB?
The actuarial funding method selected, which influences the stability and predictability of the ADC.
What should the funding policy stipulate about employer and employee contributions?
Contributions are to be made at regular intervals, determined by a recent actuarial valuation.
How often should an actuarial valuation be prepared according to GFOA best practices?
At least biennially, following generally accepted actuarial principles.
What should be performed at least once every three years to ensure funding based on updated and reasonable assumptions?
An actuarial experience study.
What is the purpose of conducting a comprehensive actuarial audit of the actuarial valuations?
To provide an independent assessment of the reasonableness of the actuarial methods and assumptions in use.
What strategy does GFOA recommend for reducing ADC volatility?
Smoothing returns on assets over several years to balance the need for a longer-term investment horizon with short-term market fluctuations.
Why is diversifying the investment portfolio important?
To reduce volatility in investment returns, affecting annual changes in the ADC.
What considerations should be made regarding benefit enhancements in DB pensions and OPEB?
Benefit enhancements should be actuarially valued and presented to governing bodies before adoption to fully understand their impact on the fund’s liabilities and contribution rates.
