Public pension plan funding policy: Effectiveness of amortization methods under stochastic returns
Amortization methods with short rolling periods better meet the intent of revised ASOP 4.
We examine how various amortization methodologies react to the volatility inherent in investment markets.
We present plan sponsors with a framework to understand their choice of amortization method.
One of the most important decisions made for public sector pension plans is adopting a funding policy that balances the needs of all stakeholders. In general, larger benefits require larger contributions. For a given benefit level, the purpose of a funding policy is to balance the level and volatility of contributions with the funded ratio of the plan. In this article, we examine various methods of amortizing liabilities and their impact on the contribution rates allocated to employers. This article covers the following methods used by plan sponsors:
- Layered method
- Rolling method
- Aggregate cost method
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Public pension plan funding policy: Effectiveness of amortization methods under stochastic returns
We explore, compare, and contrast various methods of amortizing liabilities and their impact on the contribution rates for public sector pension plans