Magazine article Government Finance Review

Safeguarding against Errors in Pension Benefits: A Big Job at CalPERS

Magazine article Government Finance Review

Safeguarding against Errors in Pension Benefits: A Big Job at CalPERS

Article excerpt

According to a recent federal government audit, 8 percent of private-sector retirees nationwide who are in fully funded plans that terminate receive a smaller pension check than they are entitled to when they accept lump-sum payments. The audit, summarized in June 1997 by the Pension Benefit Guaranty Corporation, sampled 374 fully funded terminated plans covering 2,800 participants and found 13.7 percent were underpaid. These raw, unadjusted data were then extrapolated to determine the number of lump sums that were underpaid to participants in all fully funded terminated plans during the audit cycle.

The audit estimates that 8 percent of about 290,000 plan participants in 6,000 fully funded plans that were ended between January 1994 and December 1995 did not receive their full benefit when they accepted lump-sum payments. The audit concentrated on small terminated pension plans, which is where most errors in calculating lump-sum benefits occur. It found that the miscalculations were due primarily to the use of the wrong interest rate in determining the lump-sum amounts.

Members of the California Public Employees Retirement System (CalPERS), however, do not have to worry about getting shortchanged in their pension benefits. CalPERS employs numerous safeguards and provides customer services that create opportunities to verify that appropriate pension payments are made. The accuracy of benefit payments from CalPERS is validated by periodic staff audits and independent outside auditors, as are benefit calculation processes. CalPERS also conducts regular workshops to fully explain an employer's annual actuarial valuation and to gather input on new actuarial polices. In addition, annual statements are provided to members to help them understand how their retirement benefit is calculated.

Applying safeguards to the largest public pension fund in the United States is a big job. CalPERS has assets totaling more than $127 billion and pays retirement benefits to 321,312 payees per month, which includes retirees, beneficiaries, and survivors. For the fiscal year ended June 30, 1997, CalPERS offered nine retirement formulas and 55 employer contract choices. During the year, 14,889 new retirees were added to the CalPERS pension roll, which paid out $4.1 billion in benefits. Total membership tops 1 million.

Internal and External Audits. At CalPERS, internal and external auditors periodically review the administrative procedures, ensuring that appropriate and accurate pension benefits are calculated and paid. In addition, CalPERS periodically audits the internal process procedures, the processing of membership applications, the calculation methods for pre-retirement death and disability retirement benefits, and the processing of service retirements.

Independent external auditors also annually select a sample of CalPERS allowances to verify the accuracy of relevant retirement benefit information. Using this information, the auditors test the CalPERS database and calculation programs to ensure benefit payments are calculated accurately. In addition, the CalPERS Office of Audit Services performs compliance audits of contracting agencies. The audits focus primarily on whether the agencies are appropriately enrolling employees and accurately reporting member earnings. A total of 82 such audits were completed in fiscal year 1996-97.

When audits are performed, a risk factor is used which takes into account whether there are high amounts of special compensation, notable pay rate increases, and the conversion of sick leave to additional service credit at retirement. CalPERS staff conduct tests on payroll information submitted on retirement applications. When the calculation program is initially run, pay rates that exceed certain percentages are redflagged by discrepancy messages. Special compensation during a few years immediately prior to retirement which exceeds established threshold amounts is also flagged. …

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