CGFO Pension Administration 4 — Questions and Answers
Question 1: A government pension plan's 'experience study' is conducted to:
- Audit the plan's investment manager performance
- Review and update actuarial assumptions based on actual plan experience (Correct answer)
- Assess compliance with federal tax-qualification rules
- Evaluate benefit adequacy compared to peer plans
Correct answer: Review and update actuarial assumptions based on actual plan experience
An experience study compares actual demographic and economic outcomes (mortality, turnover, salary growth) to prior assumptions so they can be updated for future valuations.
Question 2: The 'mortality table' used in pension valuations primarily affects the calculation of:
- Investment return projections
- The present value of lifetime benefit payments (Correct answer)
- Annual employee contribution rates
- Administrative expense allocations
Correct answer: The present value of lifetime benefit payments
Mortality tables determine how long retirees are expected to live and thus how many benefit payments must be funded, directly affecting the liability calculation.
Question 3: Which of the following best describes a 'DROP' program (Deferred Retirement Option Plan) in public pensions?
- An early retirement window offering a lump-sum incentive to retire within a specific period
- A program allowing employees to retire while continuing to work and accumulating a lump-sum benefit (Correct answer)
- A benefit reduction applied when retiring before the normal retirement age
- A mechanism to defer Cola payments during financial stress
Correct answer: A program allowing employees to retire while continuing to work and accumulating a lump-sum benefit
A DROP allows eligible employees to retire (and stop accruing new benefits) while continuing to work, with pension payments accumulating in an account paid out upon actual separation.
Question 4: Under GASB 67, a pension plan that is a 'cost-sharing multiple-employer' plan means:
- Each employer has a separate pool of assets dedicated to its employees only
- Multiple employers pool their assets and obligations so risks and costs are shared (Correct answer)
- Employees may move assets between different employer plans freely
- Each employer calculates its own discount rate independently
Correct answer: Multiple employers pool their assets and obligations so risks and costs are shared
In a cost-sharing multiple-employer plan, participating employers pool assets and liabilities, sharing actuarial risks and reducing volatility for individual employers.
Question 5: The 'normal cost' component of a government pension plan's annual required contribution represents:
- The cost to fund benefits already earned by all current retirees
- The present value of pension benefits employees earn during the current year (Correct answer)
- The amount needed to eliminate the UAAL over 30 years
- Investment management fees charged by the pension fund
Correct answer: The present value of pension benefits employees earn during the current year
Normal cost is the actuarial value of the retirement benefits earned (accrued) by active employees during the current fiscal year.
Question 6: Which investment policy statement element is most critical for a pension fund fiduciary to establish?
- Name of all approved brokers
- Target asset allocation and acceptable ranges by asset class (Correct answer)
- Specific securities to be purchased each quarter
- Maximum single-stock position equal to 50% of portfolio
Correct answer: Target asset allocation and acceptable ranges by asset class
The target asset allocation with acceptable ranges provides the strategic framework for investment decisions and documents the fiduciary's risk-return framework.
Question 7: A government pension plan's 'funded status' worsened significantly despite strong investment returns. The most likely cause is:
- Benefit improvements were granted without additional funding (Correct answer)
- Employee headcount decreased during the year
- The plan converted from defined benefit to defined contribution
- Administrative expenses exceeded budget
Correct answer: Benefit improvements were granted without additional funding
Granting retroactive benefit enhancements increases the actuarial accrued liability immediately, potentially worsening funded status even when investments perform well.
CGFO Pension Administration 4
A government pension plan's 'experience study' is conducted to: