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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 used by corporate plan sponsors and actuaries to establish discount rates used to value private pension liabilities in compliance with SEC and FASB requirements. The University may substitute another standard liability index in accordance with any shifts in common practice of valuing pension liabilities.
   2. Plan Contributions – The Actuarily Determined Contribution (ADC) for the Plan is equal to the normal cost payment plus an amortization payment on the unfunded actuarial accrued liability (if applicable). In determining the ADC, the University will follow standard actuarial practices, working in conjunction with the Plan’s independent actuary. Differences between actual and expected experience and their related impact on the amortization payment must be amortized on a closed basis.  For purposes of this policy, regardless of actuarial determination, the amortization payment component of the ADC shall not be lowered below the level in existence when this policy was adopted until the Plan is fully funded on an actuarial basis utilizing an expected investment return / liability discount rate as prescribed by Section C.1.b. “Expected Investment Return / Liability Discount Rate.” With the inclusion of this special provision for amortization payments, the University’s required Plan contribution shall be referred to as the Minimum Actuarily Determined Contribution (MADC). The University shall make the MADC into the Plan on an annual basis. 
   3. Cost Stabilization – Until depleted, the Plan’s Stabilization Fund is intended to be the primary means to provide cost stabilization to Plan contributions.  The Stabilization Fund can be used to help fund year over year increases to the MADC (as applicable).
      
      As another means of cost stabilization, it is possible that the provisions of Section C.2. “Plan Contributions” may result in Plan contributions in certain years being higher than what is actuarily required (years in which the MADC is greater than the ADC).  Given the objective to help provide cost stabilization for the Plan, it is the explicit intent of this policy that excess contributions in one year (the amount by which the MADC exceeds the ADC) may be used to help offset other years in which the MADC exceeds the level of the prior year MADC.  The University can only utilize unused excess contributions from the previous five years towards the current year contribution.
      This policy explicitly acknowledges that efforts to provide cost stabilization may not be effective during periods of financial markets duress.  To the extent this (or any other factors) cause the actuarily determined funded status of the Plan to fall below 75%, the Executive Vice President for Finance and Operations should develop formal recommendations for the Board Finance Committee to improve the funded status of the Plan, which should include a review of investment risk, required contributions and the management of the Plan’s liabilities.
   4. Plan Benefits – given the magnitude of the Plan’s liabilities and the additional risks inherent in managing a closed plan, under no circumstances shall Plan benefits be increased above levels in place at the time of this policy’s adoption.
   5. Actuarial Review / Transparency – The University shall continue to engage an independent actuary to prepare an annual valuation of the Plan, as well determine the Plan’s annual ADC/MADC requirement.  The Plan’s independent actuary shall also conduct a formal review of the Plan’s actuarial assumptions not less than every five years.  Actuarial reports shall be made available to the Board on an annual basis as well as other internal and external constituents of the Plan and University.
4. Other Matters
   
   The Board of Curators delegates to the Executive Vice President for Finance and Operations of the University the following responsibilities with respect to the Plan:
   1. Recommend contributions to the Plan.
   2. Recommend annuity, mortality and other tables as may be useful in actuarial determination.
   3. Recommend actuarial valuations made by experts retained for that purpose.
   4. Maintain data necessary for actuarial valuations of the assets of the Plan.
   5. Maintain accurate records for the Plan.

(NOTE: Section D - Other Matters is currently contained within the Investment Policy for the Retirement Plan (CRR 140.015).  These items are being relocated to this new policy.)