The Public Sector Letter says the goals of a funding policy include contribution and budgetary predictability, to aid in accumulating funds with which to pay benefits, and assuring a fair sharing of costs across generations of taxpayers. The Letter states that a careful review of the approach to funding will enable stakeholders to gain a clearer understanding of costs and to develop a realistic plan to pay these over time.
Segal adds that funding policies can be modeled under alternative future circumstances that affect valuation results, such as investment returns, demo- graphic changes, or liquidity requirements. Available tools range from a simple sensitivity analysis to a full asset and liability modeling. The latter type of review provides a range of outcomes as to how funding might be impacted under different economic circumstances and can assist in setting both investment strategies and funding policy.
The appropriate time to be reviewing a funding policy is now, Segal says. In many cases, stakeholders will be reassured about the path they have been following after a review is conducted. In others, trustees and plan sponsors may discover the commitments they have made in the past will require greater contributions. And others may still find their commitments are no longer affordable and benefits need to be reevaluated.
To view the Public Sector Letter in its entirety, visit http://www.segalco.com/publications/publicsectorletters/nov2011.pdf.