Pension Reform and Transition Costs
North Dakota Interim Retirement Committee
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Transition Costs: Myths vs. Reality
The supposed sources of transition costs are based not in law or practice, but rather
actuarial preference:
1. Amortization Policy: When considering prospective plan design changes,
actuaries may recommend that it would be prudent to accelerate the paydown of
unfunded pension liabilities to mitigate risk, and potentially also level out annual
contributions into equal annual installments instead of a percent-of-payroll based
figure, like today.
•
There is no legal requirement at the federal or state level, nor any government accounting
standard, mandating that pension contribution rates increase when adopting pension reform
in order to accelerate unfunded liability payoff.
However, paying off pension debt faster is a good policy no matter what. We believe that it is
prudent to pay down existing unfunded liabilities as fast and level as possible-regardless of
whether or not you adopt a new plan design.
Using an accelerated amortization method is likely to result in increased contribution rates
towards the unfunded liability for the first few years, but such a change would also mean
paying much less in the long run due to avoided interest costs.
Long-term costs are always the proper anchor for determining prudent pension policy, new
plan design or not.
May 23, 2022View entire presentation