Actuaries Debunk Myth that 80% Pension Funded Ratio Alone Constitutes ‘Actuarially Sound;’ Recommend Comprehensive Criteria to Judge Pension Fund Health
Recommend Comprehensive Criteria
to Judge Pension Fund Health
WASHINGTON (July 31, 2012)—The American Academy of Actuaries cautioned today that a commonly used measure for considering a pension plan healthy—its funded ratio—fails to provide a sufficient measure on its own of a plan’s financial health.
“Any realistic assessment of a pension plan should include several measures, not just one,” said Senior Pension Fellow Don Fuerst. “Somehow 80% has become a perceived standard but that is a myth we need to replace with facts.”
In a new Issue Brief, The 80% Pension Funding Standard Myth, the Academy offers fuller criteria for judging the actuarial soundness of a pension plan. Understanding a pension plan’s funding progress should not be reduced to a single measure or benchmark at any single point in time.
Multiple funding ratios should be examined over several years to determine trends, and other factors should be considered when assessing fiscal soundness including:
· The size of the pension obligation compared to the financial resources of the sponsor;
· The financial health of the plan sponsor;
· The funding or contribution policy of the plan; and
· The investment strategy and risk level of the plan 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 Issue Brief is part of the Academy’s response to a report issued earlier this year by U.S. Senator Orrin Hatch, ranking member of the Senate Finance Committee, State and Local Government Defined Benefit Pension Plans: The Pension Debt Crisis that Threatens America. The Academy criticized use of the 80% standard in a letter this week to Senator Hatch.