CGFO Pension Administration 5 — Questions and Answers
Question 1: When a government reduces pension benefits for current employees, which legal doctrine often protects those benefits from reduction?
- Sovereign immunity doctrine
- Contractual or property rights doctrine under state constitutions (Correct answer)
- Federal ERISA preemption
- The full faith and credit clause
Correct answer: Contractual or property rights doctrine under state constitutions
Many state courts have held that accrued pension benefits constitute a contractual or vested property right that cannot be unilaterally reduced by the government employer.
Question 2: The 'open group' actuarial valuation method for a pension plan includes:
- Only current plan members with no projection of future hires
- Current members plus an assumed stream of future new entrants (Correct answer)
- Only retirees currently receiving benefits
- Members who have terminated but not yet begun receiving benefits
Correct answer: Current members plus an assumed stream of future new entrants
The open group method projects the plan's financial position including both current and expected future members, providing a long-term sustainability perspective.
Question 3: Which type of pension risk is defined as the possibility that actual investment returns will be lower than the assumed rate?
- Longevity risk
- Investment risk (Correct answer)
- Inflation risk
- Demographic risk
Correct answer: Investment risk
Investment risk is the possibility that portfolio returns fall short of actuarial assumptions, resulting in larger-than-expected unfunded liabilities and contribution increases.
Question 4: In a government defined benefit pension plan, 'final average salary' is most commonly calculated as:
- The highest single year of earnings in the final 10 years
- The average of the highest 3 or 5 consecutive years of earnings (Correct answer)
- The last paycheck before retirement multiplied by 12
- The median salary over the entire career
Correct answer: The average of the highest 3 or 5 consecutive years of earnings
Most public pension plans define final average salary as the average of the three or five highest consecutive years, used as the benefit formula base.
Question 5: A government pension plan trustee discovers that the plan's investment consultant has an undisclosed financial relationship with a recommended fund manager. This primarily violates:
- The plan's asset allocation policy
- Fiduciary duty of loyalty and conflict-of-interest rules (Correct answer)
- GASB 67 disclosure requirements
- IRS tax-qualification standards
Correct answer: Fiduciary duty of loyalty and conflict-of-interest rules
Undisclosed conflicts of interest violate the fiduciary duty of loyalty, which requires that advisors and trustees act solely in the interest of plan participants.
Question 6: The 'amortization period' used in pension funding policy refers to:
- The time horizon over which plan investments are projected to grow
- The number of years over which the unfunded actuarial accrued liability is scheduled to be paid off (Correct answer)
- The average remaining service life of all active employees
- The period before a member becomes fully vested in their benefit
Correct answer: The number of years over which the unfunded actuarial accrued liability is scheduled to be paid off
The amortization period is the timeframe (commonly 15–30 years) over which the UAAL is systematically paid down through additional contributions above normal cost.
Question 7: Under GASB 74/75, other post-employment benefits (OPEB) such as retiree health insurance are required to be:
- Funded on a pay-as-you-go basis only
- Reported on the employer's balance sheet as a net OPEB liability similar to pensions under GASB 68 (Correct answer)
- Excluded from government financial statements entirely
- Disclosed only in supplementary statistical tables
Correct answer: Reported on the employer's balance sheet as a net OPEB liability similar to pensions under GASB 68
GASB 74 and 75 extended GASB 67/68's pension reporting model to OPEB, requiring employers to recognize a net OPEB liability on their statement of net position.
CGFO Pension Administration 5
When a government reduces pension benefits for current employees, which legal doctrine often protects those benefits from reduction?