RISK MANAGEMENT

American Academy of Actuaries gives shared-risk model top retirement system grade

Retirement systems and ideas for reforming them have a new grading system from the American Academy of Actuaries.

Academy officials looked at five public and private retirement systems and reform proposals, and judged how well they meet the needs of participants, sponsors and other stakeholders.

Highest marks, A-, went to the Canadian province of New Brunswick, which in 2014 rolled out a shared-risk plan design model that provides defined benefits in an annuity form, divided into base and ancillary benefits.

A legislative proposal by former Senate Health, Education Labor and Pensions Committee Chairman Tom Harkin, D-Iowa, for privately run, universal retirement accounts also earned an A-.

The $10.6 billion South Dakota Retirement System, Pierre, earned a B+ for an employer and employee contributory defined benefit program in which new state employees are required to participate, with adjustments allowed if funding conditions are not met.

Earning C grades were the current traditional defined benefit plan and the current safe harbor defined contribution plan. Default provisions in good DC plans, such as automatic enrollment and escalation, “have proven very good features,” said Donald Fuerst, a senior pension fellow at the academy.

Grades were calculated by a task force of the academy's Pension Practice Council, which considered whether a retirement system is sustainable and follows good governance processes, while avoiding undue burdens on stakeholders. Grades are based on four principles in the academy's Retirement for the AGES initiative: alignment, governance, efficiency and sustainability.

Other retirement systems and reform proposals will be studied this year, Mr. Fuerst said, including “Secure Choice” proposals in several states for private-sector employees and a legislative proposal by Senate Finance Committee Chairman Orrin Hatch, R-Utah, that would expand the use of multiple employer plans, allow public DB plans to purchase private annuities, and create a “starter 401(k) plan” for small private-sector employers.

“What we are trying to do with this is point out some of the favorable characteristics, because those are the characteristics we'd like to see,” Mr. Fuerst said.

Detailed assessments containing the analysis of the five retirement systems and proposals are available on the AGES webpage of the academy's website.