Monday, October 7, 2019

Pension Review Board closing gaps on performance

By Joe Gimenez/G3 Public Relations

The actuarial committee of the Texas Pension Review Board in September adopted draft, informal guidance for pension systems to use in developing funding policies. 

These policies are now required after the Legislature approved Senate Bill 2224 during the last legislative session with the intent to help systems develop a roadmap to fully funded long-term obligations. Next, the full board will consider the draft at its Oct. 17 meeting. 

The informal guidelines are intended to assist pension systems comply with SB 2224 and its Jan. 1, 2020, deadline. The PRB has posted the guidelines and is soliciting comments from stakeholders for consideration by the Board.

“Most plans in the state are fixed rate contribution plans and for many there’s no statutory mechanism and certainly no funding policy mechanism to make sure the assets and liabilities come together. I think the evidence for that [divergence] is ample,” said committee chairman Keith Brainard. “I commend the Legislature for passing this bill, to at least require that people are aware of that situation and to require them to have a contingency plan in case they need to use it.”

The PRB’s deputy director, Michelle Kranes, described the new informal guidelines as “practical.” She nodded to the legislative intent for policies to achieve 100 percent funding. Then she added staff’s recommendation “to add to that, to specify a time period over which full funding would be targeted, one that is in line with PRB funding guidelines” of 10-25 years.

The informal guidelines recommend that plans should first set boundaries for their assumptions using one of three actuarial methods –actuarial cost, asset smoothing, or amortization policy. Then the guidelines recommend ways that plans can achieve funding goals through contribution rates and parameters for increasing benefits or reducing contributions. After a funding plan is used for a while, the PRB guidelines offer thoughts on how a Board can make changes given their experience. The guidelines suggest that any associated costs to the plan in not meeting its goals should be distributed between employer and employees. 

“This structure prevents one party from bearing all the risk in a funding policy,” according to the guidelines. The guidelines also note how, “when there is no formal risk-sharing policy, benefits reductions or cost increases are imposed on employees, retirees or both after the plan’s condition has deteriorated.”

The PRB informal guidelines then offers three policy suggestions for identifying “triggers” for adjustments to actual contribution rates. The guidelines lay out options: a contribution corridor, maximum and minimum contribution rates, and contribution smoothing. Finally, the staff’s informal guidelines for funding policies recommend spelling out when benefit adjustments – both increases and decreases – should occur. Positive fund performance could warrant benefit or COLA increases, but only if the performance is viewed as being “consistent” into the future.

The staff’s document also offers funding policy examples used by Texas and other states’ systems. And the informal guidelines offer a check-box style discussion sheet for pension systems to use in conversations with their plan sponsors in developing a funding policy.

The informal guidelines may be the first step toward establishing formal rules, according to Anumeha Kumar, the PRB's executive director. But she advised the actuarial committee that staff wanted to see the first submissions of funding policies from pension funds before formalizing its guidelines into rules.

“There are some new concepts in here,” Kumar said. “We are happy to answer any questions and really appreciate input that our stakeholders can provide…through public comment.”

The PRB will post the informal guidelines on its website and ask for public feedback in coming weeks and months. The recommendations, with stakeholder comments, go forward to the full board at its next meeting. 

The board will meet from 8 to 11 a.m. Oct. 17 at the Capitol Extension, committee Room E1.012 at 1400 N. Congress Ave. in Austin. Click here for more information.

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