In recent years, observers of public employee pensions have placed significant attention on the effect of rate-of-return assumptions on the size of actuarial funding ratios. While it is certainly valuable to understand the relative importance of the assumed discount rate, little attention has been given to understanding other ways that plan administrators can affect the calculation of their funding ratios. For example, the selection of a given actuarial cost method, the approach to amortizing the UAAL, the smoothing period of asset values, the selection of mortality tables, and more.

In this study, we simulate pension plan actuarial liabilities, normal costs, annual required contributions, and funding ratios by considering the many actuarial input factors and examining the relative effect of changes in those inputs. The simulations assume values for plan features for a typical public sector pension plan. The assumed values include age distribution, benefit formula, and other provisions. The actuarial inputs we examined include interest rate, salary growth rate, inflation rate, amortization period, actuarial cost methods, and mortality tables. The assumed values for a typical plan, as well as ranges of possible actuarial inputs, are all based on data collected from 126 public pension plans in the Public Plan Database (PPD) developed by the Center for Retirement Research at Boston College. Using this simulation, we investigate the results of the computation of pension liabilities, normal costs, annual required contributions, and funding ratios in different scenarios. The interaction effects of changes in actuarial inputs are also considered. The simulations provide evidence that the change in actuarial methods and assumptions can lead to significant changes in pension costs and liabilities, and provide opportunities for manipulating the pension funding status.