CGFO Pension Administration 2 — Questions and Answers
Question 1: Which actuarial cost method spreads the total projected benefit cost over the employee's entire working career?
- Projected Unit Credit
- Entry Age Normal (Correct answer)
- Aggregate Cost Method
- Frozen Initial Liability
Correct answer: Entry Age Normal
The Entry Age Normal method allocates pension costs evenly as a level percentage of pay from the date of hire to expected retirement.
Question 2: A government pension plan's Unfunded Actuarial Accrued Liability (UAAL) is best described as:
- The difference between actuarial assets and the actuarial accrued liability (Correct answer)
- The total projected benefit payments over 30 years
- The amount needed to fund current retiree benefits for one year
- The excess of contributions over benefit payments
Correct answer: The difference between actuarial assets and the actuarial accrued liability
UAAL represents the portion of the actuarial accrued liability not covered by actuarial assets, reflecting the plan's unfunded obligation.
Question 3: Under GASB 68, what amount must a government employer recognize on its balance sheet related to defined benefit pensions?
- Annual required contribution
- Net pension liability (Correct answer)
- Actuarial accrued liability
- Present value of projected benefits
Correct answer: Net pension liability
GASB 68 requires employers to recognize a net pension liability (NPL) on their statement of net position, measured as total pension liability minus plan fiduciary net position.
Question 4: The 'corridor method' in pension accounting is used to:
- Smooth the recognition of actuarial gains and losses over time (Correct answer)
- Calculate the cost of living adjustment for retirees
- Determine vesting schedules for new employees
- Allocate investment income to individual member accounts
Correct answer: Smooth the recognition of actuarial gains and losses over time
The corridor method defers recognition of actuarial gains and losses outside a defined band, smoothing their impact on pension expense.
Question 5: Which type of governmental pension plan guarantees a specific monthly benefit based on salary and years of service?
- Defined Contribution Plan
- Defined Benefit Plan (Correct answer)
- Hybrid Plan (DC portion)
- Money Purchase Plan
Correct answer: Defined Benefit Plan
A defined benefit plan promises a predetermined retirement benefit, typically calculated using a formula involving final salary and service years.
Question 6: A government employer's Annual Required Contribution (ARC) under GASB 25/27 is composed of which two elements?
- Normal cost plus amortization of UAAL (Correct answer)
- Total benefit payments plus administrative costs
- Employee contributions plus employer match
- Investment return plus actuarial gain
Correct answer: Normal cost plus amortization of UAAL
The ARC equals the normal cost (cost of benefits earned in the current year) plus the amortization of any unfunded actuarial accrued liability.
Question 7: Which discount rate standard applies when measuring the Total Pension Liability under GASB 67/68?
- The expected long-term investment return on plan assets for all projected benefit payments
- The municipal bond rate for all projected benefit payments
- A blended rate using plan asset return for funded benefits and municipal bond index for unfunded benefits (Correct answer)
- The 10-year Treasury rate
Correct answer: A blended rate using plan asset return for funded benefits and municipal bond index for unfunded benefits
GASB 67/68 requires a blended discount rate: the plan's expected investment return for projected payments covered by current assets, and a tax-exempt bond index for any remaining unfunded payments.
CGFO Pension Administration 2
Which actuarial cost method spreads the total projected benefit cost over the employee's entire working career?