Closing the Gap on Unfunded Pension LiabilitiesCategories: Uncategorized
For many local governments, pension liabilities alongside rising contribution rates have created a significant strain on the budget. Estimated to total between $4 and 6 trillion nationwide, both state and local agencies are under pressure to address these liabilities to ensure long-term fiscal and budgetary health.
Until recently there were few outlets to address both pension costs and obligations, but in 2015, PARS pioneered the nation’s first multiple employer Section 115 trust designed specifically for prefunding these benefits. Today, this trust serves over 450 agencies with over $5 billion in assets and is the largest and fastest growing of its kind in the nation.
But why prefund pension liabilities and how does the PARS trust program work. Below we get into more detail.
What is the PARS Pension Prefunding Trust?
The PARS Pension Prefunding Trust is an IRC Section 115 compliant trust vehicle designed for local governments to set aside funds for future pension costs and liabilities. Participating agencies maintain local control over assets and investments and can use the funds in in the trust at any time for pension related costs.
An agency can benefit from the trust if: (a) its pension contribution rates have been increasing or are volatile, (b) there is a desire to maintain or increase the pension funding status, (c) the agency has a source of funds available that it doesn’t want to use for ongoing operating expenses, or (d) the agency wants to proactively prepare for financial downturns or tough economic periods.
Why prefund pension liabilities?
There are numerous benefits of prefunding pension liabilities in a legally compliant Section 115 trust. These include:
- To prudently manage long-term pension costs and obligations
- Pension assets can be locally-controlled compared to entrusting them with a state/regional system
- Assets can be diversified so there is potential for higher investment returns than other types of accounts
- Funds in the trust are protected from diversion to other uses more than a budget reserve account
- The trust can serve as a rainy-day fund for pension-related costs if revenues are impaired based on economic or other conditions
- Assets in the trust can help to stabilize contribution rates/increases
- An agency’s overall diversification of investments is increased when utilizing the trust as funds are invested differently to the retirement system
- By taking steps to actively address future obligations, an entity’s credit rating can be favorably impacted
How can assets in the Trust be used?
Funds in the trust are held separate from the retirement system with participating agencies maintaining full control of their contributions and investments. Assets can be used to:
A) Pay the retirement system directly
B) Reimburse the agency for the last 2 years’ worth of pension related costs
Why is the PARS Section 115 Trust the best choice for your Agency?
PARS’ program stands out from the competition as a result of the following key features:
- Investment platform designed and managed by industry leaders Vanguard and U.S. Bank, that offers flexible investment strategies for all risk tolerance levels
- Full-service approach that includes ready-to-go documents, consulting and hands-on support
- Value added extras that include compliance monitoring as well as annual audit and GASB reporting support
- Simple, low fee structure with no start-up or termination costs
- Unique option to prefund retiree healthcare (OPEB) within the same trust for fee and administrative efficiencies
The PARS Pension Prefunding Trust offers legally compliant signature ready documents that allow the program to be adopted quickly and easily. For more information, or to open an account, please contact:
Maureen Toal, Executive Vice President
(844) 540-6732 | firstname.lastname@example.org
Kathryn Cannie, Senior Manager, Eastern Region
(617) 549-6555 | email@example.com