Legal Definitions - actuarially sound retirement system

An actuarially sound retirement system is a pension or retirement plan that has been professionally evaluated and determined to possess sufficient financial resources, or a robust strategy to acquire them, to meet all its promised future benefit payments to retirees. This assessment typically involves expert analysis of factors like expected contributions, investment returns, and the lifespan of beneficiaries to ensure long-term financial stability.

• Example 1: Corporate Pension Plan
  "Tech Solutions Inc." offers a traditional defined-benefit pension plan to its employees. Each year, the company's financial team works with independent actuaries to assess the plan's health. The actuaries analyze the current value of the plan's investments, the number of employees nearing retirement, their projected lifespans, and the expected investment returns over the coming decades. Based on this analysis, they determine the necessary contributions from both the company and its employees to ensure that the plan will have enough money to pay out all promised benefits to current and future retirees, even 30 or 40 years from now. This diligent, data-driven approach keeps the plan actuarially sound.

  This example illustrates the term by showing how a company proactively uses expert financial projections (from actuaries) and adjusts contributions to guarantee that the retirement fund will always have sufficient assets to cover its long-term obligations to its employees.

• Example 2: State Public Employee Retirement System
  The "Midland State Public Employees' Retirement System" manages pension funds for teachers, police officers, and other government workers. Periodically, the system's board commissions actuaries to perform a comprehensive valuation. These actuaries project future payouts based on factors like the demographics of the workforce (e.g., average age, expected retirement rates), anticipated salary increases, and the fund's investment performance. If the actuaries determine that the current contribution rates from the state and its employees, combined with expected investment returns, are insufficient to cover future benefits, they will recommend adjustments. These might include increasing contribution rates, modifying benefit formulas for new employees, or seeking additional funding from the state legislature to maintain the system's actuarial soundness and ensure it can meet its commitments to all retirees.

  This example demonstrates the term by highlighting how a large public system relies on regular actuarial assessments to identify potential funding gaps and implement necessary changes (like adjusting contributions or benefits) to ensure its long-term financial viability and ability to pay all promised pensions.