(July 26, 2012) — Actuaries are pushing back against a commonly held standard for what constitutes healthy funding for a pension plan in the United States.
Pension plans need to employ a host of metrics to determine their proper funding level and not rely solely on a numerical benchmark, a brief issued by the American Academy of Actuaries, the professional association that represents actuaries across the US, argues. The group claims that the notion that a funding ratio of 80% guarantees a plan is sufficiently funded is false and pernicious.
“Any realistic assessment of a pension plan should include several measures, not just one,” said Don Fuerst, a senior pension fellow with the Academy. “Somehow 80% has become a perceived standard but that is a myth we need to replace with facts.”
Instead of relying on one measure, the group urges pension plans to instead look at four factors when determining whether their funding levels are sufficient: the relative size of the liabilities compared with the financial resources of the plan sponsor; the financial integrity of the plan sponsor; the funding policy of the plan; and the risk level and investment strategy of the fund’s assets.
“The 80% myth can lead to a dangerous slippery slope,” Fuerst added. “It could evolve into an inadequate target if not challenged. Pension plans should have a strategy in place to attain or maintain a funded status of 100 percent or greater over a reasonable period of time.”
The Academy’s advice is more germane for US public plans than corporate plans, which face regulatory penalties if their funding levels fall below 80%, say pension experts. Public pensions across the country face funding issues, and there is debate over the correct discount rate that funds should use to calculate their liabilities. Last month, the Governmental Accounting Standards Board agreed to tighten accounting standards for public pensions, a move that will greatly exacerbate many plans’ underfunding, as highlighted by an analysis from the Center for Retirement Research at Boston College.