Do Government Pension Plan Sponsors Know Their Risk?

It has been just over a year since the Actuarial Standards Board introduced Actuarial Standard of Practice No. 51 (ASOP 51) which requires actuaries to disclose certain risks to plan sponsors. ASOP 51 directs the actuary to assess and disclose risks to the pension plan, but it does not require a detailed analysis of each risk be performed. Instead, it requires an actuary to recommend a more detailed analysis of specific risks when they believe it would be significantly beneficial to the plan sponsor.

While ASOP 51 applies to all pension plans, governmental plans have their own unique risks to consider. Let’s discuss a few of those risks that impact governmental plan sponsors and where additional analysis may help you better understand the pension plan risks.

Do Government Pension Plan Sponsors Know Their Risk?

Contribution Risk

There have been several states that have enacted laws aimed at requiring governmental agencies to make a certain level of contribution to their pension plans, however, that is not the case in all states. Even with those laws, there may be a risk that contributions are not adequate to fund the pension plan if the law does not require appropriate actuarial consideration in setting the required contribution amounts. Making lower contributions than are actuarially sound increases the risk to the plan and plan sponsor. Inadequate contributions will increase future appropriate contributions, which may be hard or impossible to make. Negative press and possible intervention or solvency issues would be the worst result.

Plan sponsors should check their historical contributions relative to the Actuarially Determined Contribution (ADC). They should consider additional analysis for situations that may be possible. For example, a simple multi-year projection assuming that the plan funds a set percentage, like 80%, of the ADC to see how it impacts the plan. This can provide valuable information on how future contributions would increase.

Investment Risk

For governmental pension plans, the accounting rules allow for the discount rate to be set to the expected Long-term Rate of Return (LTRR) of the plan’s asset portfolio.

This can lead plan sponsors into choosing a more risky portfolio than is appropriate to increase the assumed discount rate; however, doing this adds market risk to the plan. If the assets have a large drop in a single year or do not perform as expected over time, then the ADC will increase.

While a stochastic study (randomly generated trials) of the assets will provide the best insight into the investment risk, government plan sponsors may not have the budget to pay for such a study. Instead, you could look at shocks to the portfolio. Scenarios can be either historical, like asking. “What if the Great Recession were to happen again?”, or simplistic, like asking, “What if we had a 20 percent loss on equities?”. Then you could see how those scenarios impact the plan.

Demographic Risk

Governmental pension plans may have provisions for Cost-of-Living Adjustments (COLAs) or unreduced early retirement benefits. In all plans, the assumptions used by the actuary are not going to exactly match participant behavior, but when the plan has an increasing benefit or additional subsidy like these provisions, these demographic differences have a more pronounced impact on the plan.

If your plan has COLAs, unreduced early retirement benefits, or other subsidies that may increase liabilities to the plan, you should consider additional analysis. Such analysis can be simple scenarios or more robust. However, frequent assumption analysis and appropriate revisions to the assumptions to the most recently available information is a good way to reduce demographic risk.

Questions? Do you need help in assessing risk to your public plan? Contact the Findley consultant you normally work with or reach out to Matthew Gilliland directly with the form below.

Published June 29, 2020

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Finally! An Answer to Local Taxation of Non-Qualified SERP Benefits in Ohio

Qualified retirement plan benefits paid by pension or 401k plans have always been exempt from local taxes in Ohio.  Non-qualified retirement plans (often referred to as “Supplemental Executive Retirement Plans” or “SERPs”) are often designed to enhance retirement benefits for executives over and above the benefits provided through the qualified plans offered by the employer.  Over the last several years there has been disagreement between cities in Ohio and SERP eligible executives over whether benefits paid by SERPs are retirement plan benefits, exempt from local taxes, or deferred compensation benefits, subject to local taxes when such benefits become vested using FICA and Medicare (“FICA”) taxation rules.

SERP participants have alleged that SERPs are retirement benefits which should be exempt from local taxes just like qualified retirement plan benefits. Cities have argued that non-qualified SERPs are taxable compensation to the executive. The disagreement rose into the public eye in 2015 in the case of MacDonald vs. Shaker Heights when the Ohio Supreme Court ruled in favor of MacDonald. The local tax ordinance in that case did not exclude SERPs and further, did not specifically define “pension benefits” which were exempt from local taxation. After this ruling, many cities amended their tax ordinance to define pensions as benefits paid only by a qualified retirement plan. Many taxpayers have argued these Ohio cities should not be able to tax retirement benefits….whether paid by a qualified or non-qualified plan. But there has been little or no guidance from Ohio on the issue…..until recently.

local taxation and non-qualified SERP benefits

What’s New in 2020?

Ohio House Bill 166 amended ORC 718 and clarifies the definitions of “pension” and “retirement benefit plan”. This prevents cities from defining such terms in their tax ordinances to require taxation of non-qualified pensions and retirement benefits.  All pensions and benefits paid out of a retirement benefit plan are exempt from local taxes if the benefits meet the following criteria:

  • The benefits are provided by the Employer and not through a deferral of wages by the employee;
  • The benefit payments must be due after or at termination of employment; and
  • The plan is designed to deliver the benefits because of retirement or disability

HB166 does not define “retirement”; therefore, it will be up to plan documents to define what constitutes a retirement. Retirement definitions vary from plan to plan, but it is typically defined by age and/or years of service. Wage continuation, severance payments, and payments of accrued vacation are specifically not included in retirement plan benefits.

Thus, whether paid by a qualified or non-qualified plan, if these criteria are met, the benefits are retirement plan benefits exempt from local taxes in Ohio. Eligibility for the exemption in SERPs is going to be a facts and circumstances analysis comparing the plan design to the criteria above and intent of the plan. The new rules were made effective January 1, 2020. SERP benefits taxed by municipalities prior to 2020 are not refundable. However, eligible SERP benefits which become vested on or after January 1, 2020, even if they have accrued over a long career, are exempt from local taxes.

Taxation Timing

SERPs are subject to FICA taxes under special rules….the present value of the benefit is generally taxed when the benefit becomes vested, even if this is prior to payment.  There is an exception for non-account balance plans which benefits cannot be determined until retirement.  Ohio local taxes follow the FICA rules for tax timing. HB166 did not change these tax timing rules. However, if the benefits qualify as “pension” and “retirement benefit plans” under HB 166, the benefits are exempt from local tax if vested on or after January 1, 2020. Starting in 2020, collection and remittance of city income taxes for an eligible SERP is no longer necessary, assuming it meets the facts and circumstances analysis.

Ineligible Benefits

Examples of executive benefits that would be ineligible for the local income tax exclusion:

  • Benefits provided through elective deferrals on the part of the employee
  • Any payment of benefits prior to termination of service, retirement or disability
  • Benefits delivered through long term incentive plans, such as phantom stock plans, which do not promise benefits because of retirement or disability
  • Benefits under a plan which provides a participant with an election to be paid prior to retirement or disability, even if the participant did not make the election
  • Severance payments, payments made for accrued personal or vacation time, and wage continuation payments.


As a result of HB 166, the taxation of SERPs by Ohio municipalities has been resolved. Properly designed SERP benefits will be exempt from income tax by Ohio municipalities, just like qualified retirement plan benefits.

Many employers currently have a SERP; those plans should be evaluated to determine if it meets the exemption criteria. Employers should stop reporting and withholding local wages and taxes starting in 2020 if they deem the plan(s) to be a “retirement benefit plan”.

Some school districts within Ohio have their own income tax.  There are no changes to the taxation of school district income tax as a result of HB166. School District Income taxes follow Ohio taxing guidelines rather than FICA, so participants would be taxed when benefits are paid.

For questions regarding the impact of this legislation on your organization’s Non-Qualified SERP Benefits or how to navigate these changes, please contact the Findley consultant you normally work with, or Brad Smith below.

Published May 28, 2020

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