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Bd. Min. 4-21-22.

1. Introduction - This policy establishes principles for the prudent financial management of the University’s Retirement, Disability and Death Benefit Plan (“the Plan”). 
2. Policy Objectives
   
   1. Recognize the Plan’s total pension liability as a significant debt of the University which must be managed accordingly. 
   2. Prioritize and protect University funding for Plan contributions needed to achieve and maintain full funding of the Plan, utilizing actuarial assumptions and risk levels appropriate for a closed plan.
   3. Provide cost stabilization provisions to protect the University’s operating budget - to the extent possible – from volatility in Plan contributions.
   4. Provide full transparency to internal and external constituents of the Plan and University. 
3. Financial Management Principles
   
   While closed to new participants since October 2019, annual benefit payments under the Plan are projected to continue growing through 2043; based on current mortality assumptions, benefit payments by the Plan will continue well past 2090.  At the time this policy was adopted, total remaining benefit payments over the life of the Plan were projected to be more than $19 billion.  Given the magnitude and longevity of the Plan’s liabilities, the following principles have been established:
   1. Expected Investment Return / Liability Discount Rate - Current governmental accounting standards utilize the same actuarial assumption for both the expected rate of return on the Plan’s investments and the discount rate applied to the Plan’s benefit liabilities.  This creates tension when managing risk, particularly for closed plans.  A higher discount rate results in a lower pension liability with lower required contributions, while the same higher expected investment return often results in a higher level of risk within the Plan’s investment portfolio.  A lower discount rate results in a higher pension liability with higher required contributions, while the same lower expected investment return often results in a lower level of risk within the Plan’s investment portfolio.
      
      
      
      With a pension plan closed to new participants, annual contributions going into the plan will decline over time, leaving a closed plan increasingly reliant on investment income and, ultimately, plan assets to fund the plan’s liabilities.  As such, reducing the risk and volatility of the plan’s investments becomes increasingly important as the plan matures in closure.  This represents the ultimate tradeoff in managing a pension plan under current governmental accounting standards – balancing an acceptable level of investment risk against the strain of pension contributions on operating budgets.
      
      
      
      Regardless of the actuarial assumptions used by the Plan, the University remains responsible for the actual benefit payment obligations under the Plan.  Any differences between what is assumed and what actually occurs will flow through to impact required Plan contributions, with corresponding impact to the University’s operating budgets.  As an example, while a higher expected investment return may result in lower Plan contributions initially, if the Plan’s realized investment returns are lower than what was expected, future contributions must necessarily increase to cover the shortfall.  Given the time value of money and the longevity of the Plan’s liabilities, any underfunding of contributions in the near term will almost always lead to significantly higher required contributions over time.
      
      
      
      Consistent with each of the objectives noted above, the following principle should govern the management of the Plan’s actuarial expected investment return / liability discount rate:
      1. When the actuarily determined funded status of the Plan exceeds 95%, the Executive Vice President for Finance and Operations, in consultation with the Board Finance Committee, should work with the Plan’s actuary to evaluate the feasibility of lowering the Plan’s expected investment return / liability discount rate by an amount that brings the funded status of the Plan back down to 95%, to the extent this can be accomplished without causing an increase in contributions already being paid into the Plan.  As the expected investment return / liability discount rate is lowered, the investment risk of the Plan’s investments should be lowered concurrently.
      2. At minimum, this practice should remain in place until the expected investment return / liability discount rate drops to a level equal to the FTSE Pension Index + 2%.  The FTSE Pension Index is commonly us