PARS Brings First-of-Its Kind ‘Combination’ Trust to Pennsylvania

Categories: National Developments,OPEB/GASB 45/75,PARS News,Pension Rate Stabilization
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Combination trust to set aside funds for both pension and OPEB

On July 1, Public Agency Retirement Services (PARS) introduced Pennsylvania’s first IRS-approved, Section 115 Post Employment Benefits (PEB) trust, uniquely designed for the prefunding of both pension and/or OPEB liabilities. PARS pioneered this cutting-edge program in 2015, which has rapidly grown to over 400 public agencies and $2.6 billion in assets.

How does it work?

This locally controlled irrevocable trust, in partnership with U.S. Bank and Vanguard, can pay out directly to your retirement system or reimburse your municipality for OPEB and/or pension related costs. You can prefund for pension, for OPEB, or both, and have complete flexibility over the amount and frequency of contributions.

Why Use the Trust and Not Our Own Pension?

  • Diversified Investing – Assets in the trust can be diversified which is likely to result in better longer term returns than your general fund or reserve account
  • Stabilize Rates – Operates like a pension rate stabilization fund. When rates go up, trust funds can be used to smooth out the increases
  • Improve Funding Ratio – Trust funds can be tapped to keep the funding ratio from dipping below a certain level
  • Rainy Day Fund – Distributions can be made to provide budgetary support during adverse financial conditions
  • Secure from Diversion – Funds in the Trust are protected from other uses
  • Favorable Credit Rating – Rating agencies look more favorably on municipalities that actively manage their pension liabilities
  • Economies of Scale – Total assets are combined for fee reduction purposes if funding both the pension and OPEB account

Why Use the Trust and Not Our Own Pension?

As one Pennsylvania agency remarked – any extra contributions beyond their annually required funding go into “actuarial abyss”. Additional pension funding is often amortized over a number of years and your agency may have limited control. Therefore, a side trust with PARS might work better for your needs.