hy do we have so many underfunded pension plans in the public sector? Will additional contributions solve all the underfunded problems? Not necessarily.
It is like a bottomless pit. You can continue to pour in additional contributions. But if there is nothing to hold it, it will not fill up. There are two organizational issues that must be addressed in order to ensure proper management of a pension plan and its trust fund:
- a lack of a risk committee; and
- a lack of a retirement policy statement.
Most pension plans have a group of trustees. In the private sector, the board of directors or its appointed retirement committee makes decisions for the plan. The company's chief financial officer is usually involved in the decision process, particularly if any plan-related changes will affect the company's bottom line. For this reason, it is always a good idea to formally establish a risk committee for all pension plans.
In the public sector, most often, the trustee group does not include the CFO or risk manager. The trustees are made up of respective representatives of the plan participants, citizens and plan sponsor.
The trustees are responsible for making decisions for the pension plan (with the assistance of the benefits department and outside professionals) that cover the following:
Most plan trustees are doing a good job on the first five items, but on other issues require risk evaluation and financial skills. These items should be handled by a risk committee.
At least one member of a risk committee needs to be familiar with and responsible for the plan sponsor's financials. Thus a risk committee must consist of at the least the plan sponsor's CEO or CFO and a risk manager.
The three key objectives of the risk committee are to make sure the pension plan meets the objectives of the plan sponsor, plan funding is sustainable and the risks associated with a retirement plan are properly evaluated and managed. In order for the risk committee to achieve its objectives, it needs a retirement policy statement.
An RPS should contain the following key elements:
nThe role of a pension plan with respect to the plan sponsor's total reward program for its employees. Plan changes should conform to the RPS prior to making any plan amendments.
- Annual targeted contribution that is sustainable.
- Identification of key risks associated with sponsoring a pension plan. The committee shall also constantly evaluate and manage these potential risks.
Establishing a risk committee and a retirement policy statement are a good starting point to better manage a plan sponsor's retirement plans. Proper management will result in pension benefits that are sustainable. It will create a win-win situation for the employees and the employer.
Kien Liew is a consulting actuary of PensionBenefits Inc., Plano, Texas.