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137.00.1-4. Definition of “actuarial Soundness”

AR ADC 137.00.1-4Arkansas Administrative Code

West's Arkansas Administrative Code
Title 137. Lopfi-Local Police and Fire Retirement System
Division 00.
Rule 1. Arkansas Fire & Police Pension Review Board Rules and Regulations
Ark. Admin. Code 137.00.1-4
137.00.1-4. Definition of “actuarial Soundness”
Currentness
Under law, the financial objectives of the Local Plans shall be to establish and receive contributions which will remain approximately level from year to year and will not have to be increased for future generations of citizens. The law specifies that this objective is achieved when contributions received each year by a Local Plan are sufficient both, (1) to fully cover the costs of benefit commitments being made to employees for their service being rendered in such year and, (2) to make a level payment which, if paid annually over a reasonable period of future years, will fully cover the unfunded costs of benefit commitments for service previously rendered.
1. The financial objectives discussed above must be met in order for a Local Plan to be considered “actuarially sound.”
2. All computations of actuarial condition shall be based upon assumptions of future financial experiences and funding methods which are either established by or approved by the PRB.
3. From the date of the adoption of this rule, the tests described below shall be used to evaluate benefit increase requests from the Local Plans and to determine if pension recipients are eligible for benefits mandated by law for Local Plans which are “actuarially sound.”
A Local Plan that is designated as “actuarially sound” must meet one of the following conditions:
1. The Contribution Test and the Short Condition Test; or
2. The Contribution Test and the Funded Percentage Test; or
3. Cash Flow Projection Valuation
4. Alternate Cash Flow Projection Valuation
Contribution Test
The contributions made to the Local Plan must be equal to or more than the actuarially computed contributions to pay for the Local Plan's proposed total benefits. Such computed contributions shall consist of the following items:
1. Normal Cost; and
2. An amortization of unfunded accrued liabilities over a period of future years as defined in the table below.
Short Condition Test
The Local Plan's current assets (cash and investments) must be sufficient to cover:
1. Active member contributions on deposit; and
2. The proposed total liabilities for future benefits to present retired lives and inactive members; and
3. A portion of the proposed total liabilities for service already rendered by active members. The portion is defined in the table below.
Funded Percentage Test
The Local Plan's current assets (cash and investments) must be sufficient to cover a portion of the proposed total liabilities of all participants of the Local Plan. The portion is defined in the table below.
Testing Dates as of December 31
Amortization of Unfunded Active Liabilities
Amortization of Unfunded Retiree Liabilities
Active Liability-Short Condition Test
Funded Percentage Test
1994
18
9
55%
82%
1995
16
8
60%
84%
1996
14
7
65%
86%
1997
12
6
70%
88%
1998
10
5
75%
90%
1999
9
5
80%
92%
2000
8
5
85%
94%
2001
7
5
90%
95%
2002
6
5
95%
96%
2003 & after
5
5
100%
97%
Cash Flow Projection Valuation
If the Local Plan has 50 or more participants, the Local Plan may show “actuarial soundness” using a Cash Flow Projection Valuation. This valuation will project the assets, future income, and future benefit obligations of the Local Plan. The assumptions used in this valuation shall be based upon the same assumptions used by the PRB for regularly scheduled valuations. The Cash Flow Projection Valuation must show that the current assets projected with future income will always be sufficient to cover all benefit obligations. A Cash Flow Projection Valuation is not required to be done on a regular basis, but will only by completed when requested by the Local Plan and at the expense of the Local Plan.
Alternate Cash Flow Projection Valuation
If a Local Plan has less than 50 participants, the Local Plan may show “Actuarial Soundness” using an Alternate Cash Flow Projection Valuation as defined in this paragraph. This valuation will project the assets, future income and future benefit obligations of the Local Plan. The assumptions used for an Alternate Cash Flow Projection Valuation will not necessarily be the same assumptions used by the PRB for regularly scheduled valuations, because of the small number of fund participants. The Alternate Cash Flow Projection Valuation must show that the current assets projected with future income will always be sufficient to cover all benefit obligations. An Alternate Cash Flow Projection Valuation is not required to be done on a regular basis, but will be completed when requested by the Local Plan and at the expense of the Local Plan.
For a Local Plan to be able to use the Alternate Cash Flow Projection Valuation, it must also meet the following conditions:
1. The Local Plan uses a PRB Recognized Investment Management and Trust Arrangement.
2. The local pension board, as well as the local city council, must certify to the PRB that they understand the risks involved in using a cash flow model for a small group.
An investment management and trust arrangement will be a Recognized Investment Management and Trust Arrangement by the PRB if it contains the following independent and separately accountable components:
1. Investment Advisory and Reporting, including, but not limited to
a. Pension plan prudent asset allocation advice
b. Choosing independent investment managers or funds
c. Reporting the results of the investment managers versus their benchmark at least quarterly.
2. Investment Management, including, but not limited to
a. Investing plan assets on a plan-specific basis which pertains to the stated asset allocation designated by the local pension board with the assistance of the investment advisor
b. Regular reporting of results through the recognized investment management and trust arrangement.
3. Trust, Custodial and Administrative Services, including, but not limited to
a. Trust and/or custodian agreement with an independent trustee and/or custodian
b. Year-end plan financial reporting to the PRB.

Credits

Adopted Feb. 16, 1983; Amended Mar. 23, 1994; Amended Mar. 26, 2002; Amended Dec. 4, 2003; Amended Sept. 21, 2006; Amended Sept. 20, 2007. Amended Jan. 1, 2015.
Current with amendments received through February 15, 2024. Some sections may be more current, see credit for details.
Ark. Admin. Code 137.00.1-4, AR ADC 137.00.1-4
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