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AAA Task Force Lists Public Pension Plan Perils

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Actuaries have come up with a list of structural problems that can divorce the benefits a public pension plan promises from the benefits the plan can deliver.

Members of the Public Plans Practices Task Force at the American Academy of Actuaries, Washington, have included the list in a report developed to look at the financial problems facing public employee retirement plans.

Many problems are the result of “breakdowns in structural incentives,” task force members say in the report.

“Funding dysfunction” can affect public pension plans when the plans have a funding mechanism that includes no mechanisms for forcing the employer to supply the promised funding; an “unspecified or non-actuarial” method of contribution determination; an unclear method for keeping “perceived surplus from favorable experience” in the plan, to protect the plan against future problems; or a failure to quantify and limit the risk the sponsoring entity is taking, task force members say.

Misalignment between principals and agents can occur, the task force members say, when plan provisions encourage stakeholders to manipulate pay figures to increase members’ pension benefits or make retroactive benefits increases.

In other cases, the task force members say, plan finances suffer as a result of an “overly broad dispersion of control” that “occurs when checks and balances act against truly effective system-wide risk management.”

When a retirement system, a public-sector employer, a legislature and an executive branch all share authority over a pension plan, that can make making important decisions and getting a bird’s eye view of the risks a plan is taking hard to achieve, task force members say.


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