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QBS 24 (A) Public plan risk exposure and ways to mitigate them - Coggle…
QBS 24 (A)
Public plan risk exposure and ways to mitigate them
How public plans differ from private plans
1)
Less oversight
2)
Diffuse governance
3)
Budgeting process and accounting standards
4)
Hgiher public transparency
5)
DROP feature
6)
Pre-tax ee cot common
7)
COLAs are common
8)
Design issues
Public plans need to balance
1)
fulfiling promises to retirees
2)
maintaining reasonable pay and benefits for ee
3)
a reaosnable tax assessment
Risk mgmt system should established policies and mechanisms to support:
1)
Continuous funding
2)
Education of administration and ees
3)
Avoiding misaligned/mispriced plan provisions
4)
identifying stakeholder objectives that clash with system objectives
Approach taxpayers should consider implementing to manage risk
1)
Report liability on a market basis
2)
Freeze future DB accruals (hard freeze pereferable sinon soft freeze)
3)
Invest existing DB assets in matching treasuries
4)
provide DC prospectively
5)
Allow ee to participate in social security prospectively
6)
Adress remaing deficit:
-Reduce ancillary benefits
-Amortize directly with coy
-Fund by issuing bonds
Increasing stress on public plans
1)
insufficient funding
2)
excessive benefit level
3)
inappropriate benefit design
Three common contributors of stress
1)
slippery slope of skipping contributions - however, contributions may be reuqired by state law
2)
managing surpluses
3)
asset liability mismatch
4)
No single cotrolling autority - competing objectives
Three main fiancial levers to control risk
1)
Benefit level
2)
Contributions paid by ees and ers
3)
investment policy
Public pension stakeholders
1)
Society/tax payers - bears risk
2)
Public ees
have a large stake
want generous benefit and make significant ee contributions
3)
Unions
Want to maximize benefits
4)
Public sector ERs
want benefits to attract and retain needed workforce
5)
retirement system governing body
oversees funding and plan admin
6)
Legislative body (elected officials)
have short term focus
set benefit levels
may also enact funding requirements
Defining objectives of the system
may be difficult due to competing interests
consensus is critical
Considerations
1)
sustainability
2)
equitabile costs for taxpayers (intergen risk)
3)
appropriate funding
4)
beenfit design (appropriate to attract and retain ee but not gamebale)
5)
governance that mitigates the competing objectives of stakeholders
Diffuse governance structure without the proper accountability can lead to the following operational risks
1)
Mnaaging risks without the proper expertise
2)
not having the proper risk analytic tools to understand risk
3)
false sense of security that long term risk is minimal - little incentive to hedge risk
4)
Not recognized evolving plan maturity risk
Systemic risk
Longevity risk affecting pool as a whole
Tail risk
Lower tax revenue when contributions increase
Funding dysfunction occurs when:
1)
ER not required to make needed cot
2)
Non-actuarial method used to determine cot
3)
benefits not adjusted if cot insufficient
4)
there are not surplus restrictions