CGFO Pension Administration 3 — Questions and Answers
Question 1: Under ERISA principles adapted for public plans, 'fiduciary duty of loyalty' requires pension trustees to:
- Maximize investment returns at any cost
- Act solely in the interest of plan participants and beneficiaries (Correct answer)
- Follow elected officials' investment directives
- Minimize employer contribution requirements
Correct answer: Act solely in the interest of plan participants and beneficiaries
The duty of loyalty obligates fiduciaries to act exclusively for the benefit of plan participants and beneficiaries, not for political, social, or employer interests.
Question 2: The 'prudent investor rule' in pension fund management requires trustees to:
- Invest only in government securities
- Manage the portfolio as a whole with risk-return considerations (Correct answer)
- Avoid all equity investments
- Match each investment to a specific future benefit payment
Correct answer: Manage the portfolio as a whole with risk-return considerations
The prudent investor rule requires fiduciaries to consider the risk and return of the total portfolio rather than judging each investment in isolation.
Question 3: A Cost-of-Living Adjustment (COLA) in a government pension plan is typically funded by:
- Employee payroll deductions designated for COLA
- Actuarial valuation projections built into contribution rates (Correct answer)
- Annual legislative appropriations separate from the pension fund
- Social Security offset payments
Correct answer: Actuarial valuation projections built into contribution rates
COLAs granted in a defined benefit plan are typically projected in actuarial valuations and funded through the ongoing contribution rate-setting process.
Question 4: Which funding ratio threshold is commonly cited as a benchmark for a 'healthy' public pension plan?
- 60%
- 70%
- 80% (Correct answer)
- 100%
Correct answer: 80%
An 80% funded ratio (actuarial assets ÷ actuarial accrued liability) is commonly referenced as the minimum benchmark for a reasonably healthy pension plan, though 100% is the true goal.
Question 5: A pension plan's 'assumed rate of return' directly affects employer contributions because:
- Higher assumed returns reduce the present value of liabilities and lower required contributions (Correct answer)
- Lower assumed returns reduce plan administrative costs
- Higher assumed returns require larger employee contributions
- The rate sets the minimum benefit payment to retirees
Correct answer: Higher assumed returns reduce the present value of liabilities and lower required contributions
A higher assumed investment return reduces the present value of future benefit obligations, resulting in lower calculated liabilities and employer contributions.
Question 6: In a government pension plan, 'cliff vesting' means an employee:
- Earns a gradual percentage of benefits each year
- Receives no benefit if employment ends before the vesting date, then full benefit once reached (Correct answer)
- Loses all benefits upon termination regardless of service
- Vests immediately upon hire
Correct answer: Receives no benefit if employment ends before the vesting date, then full benefit once reached
Cliff vesting provides zero benefit entitlement until a specific service threshold is reached, at which point the employee becomes fully vested.
Question 7: Which GASB standard first required state and local governments to disclose pension information in notes to financial statements?
- GASB 25
- GASB 27 (Correct answer)
- GASB 45
- GASB 68
Correct answer: GASB 27
GASB 27 (issued 1994) established accounting and financial reporting standards for employers' pension obligations, requiring note disclosures about pension plans.
CGFO Pension Administration 3
Under ERISA principles adapted for public plans, 'fiduciary duty of loyalty' requires pension trustees to: