PSPRS Offers New Trust Program to Help Employers Manage Pension Costs

July 20, 2021

Public Safety Personnel Retirement System
State of Arizona

Contact: Christian Palmer
Phone: 602-793-5090

PSPRS Offers New Trust Program to Help Employers Manage Pension Costs

Admin. Townsend: Section 115 trust "another tool" for employers

Arizona – PSPRS launched the Arizona Employers Pension Prefunding Program (AEPPP), a program that enables local governments to accumulate funds in a trust to prepare for future pension contributions and obligations.

Laws 2020, Chapter 79 (Senate Bill 1354), enacted in 2020, established AEPPP as a trust vehicle for participating employers of PSPRS, CORP, and EORP to set aside assets towards pension costs prior to sending funds on to the retirement system. Participation in the program is voluntary and provides employers with the flexibility to determine investment strategy, risk tolerance, and time horizon for their trust assets. Employers can use AEPPP assets to mitigate contribution rate volatility or make contributions to the PSPRS to reduce their pension liabilities.

The multiple-employer trust program is set up under Section 115 of the Internal Revenue Code and dedicated solely for prefunding defined benefit plan (pension) costs. Employers can choose to participate in AEPPP as part of their funding and pension-management strategies.

The AEPPP trust is distinctly separate from PSPRS as assets do not count towards PSPRS funding levels or reduce pension liabilities. However, assets in an IRC Section 115 trust can be used to offset pension obligations on an employer’s financial statements. Further, AEPPP provides employers with an option to irrevocably commit monies to fund their pension obligations, while still retaining some control over those assets prior to eventually making contributions to PSPRS, hence the term prefunding pension plan.

“PSPRS is excited to provide our members with this flexible new vehicle to help them prudently plan ahead for their long term PSPRS obligations,” said Michael Townsend, Executive Director of PSPRS. “We are proud to provide another tool as an option for employers to consider as they determine how to effectively continue managing their pension liabilities.”

AEPPP is designed as a comprehensive-service, pension prefunding trust approach and includes trust administration, investment management, trustee/custodian, trust documentation, compliance monitoring, auditing, reporting, and recordkeeping services.

AEPPP is administered on behalf of PSPRS by Public Agency Retirement Services (PARS), an experienced IRC Section 115 trust administrator that pioneered the pension prefunding trust concept with an IRS Private Letter Ruling in 2015. U.S. Bank, the nation’s fifth largest bank, will serve as trustee to safeguard participating employers’ assets, and can provide investment advisory and management services under a discretionary trustee arrangement. Vanguard Institutional Advisors oversees passively-managed investment strategies designed specifically for the trust program with very low fees that decrease as assets grow across all strategies. The Board awarded a third-party administrator contract on June 25, 2021, following a thorough and competitive Request for Proposal process.

“The PARS team looks forward to providing Arizona public employers with proven trust service providers to meet their pension prefunding objectives,” said Maureen Toal, Executive Vice President of PARS. “The trust was carefully crafted to meet strict federal requirements and has a favorable Private Letter Ruling from the Internal Revenue Service covering all employers that join the trust.”

AEPPP features and benefits include:

  • Stabilize pension costs
  • Diversified investment strategies for greater long-term earnings than are available with general fund investing
  • Flexibility and local control over contributions, disbursements, and investments
  • Low investment advisory and management fees with economies of scale pricing
  • Ready-to-go trust documents for streamlined set up of employer AEPPP trust accounts
  • Ability to use the trust as part of a pension bond funding strategy
  • Hands-on individualized service for each AEPPP member from the dedicated PARS team

“PSPRS’ collaborative approach with experienced Section 115 trust and investment providers will ensure that AEPPP members have access to the highest quality services for pension prefunding,” Townsend said. “The AEPPP is a turn-key approach with collective investment, compliance, and administrative economies of scale to simplify prefunding PSPRS costs through the trust. This may be particularly useful for employers that have established contingency reserve accounts to manage their pension obligations going forward.”

Employers interested in participating in the AEPPP can contact Maureen Toal, PARS Executive Vice-President, at 844-540-6732 or [email protected], or Clark Partridge, PSPRS Senior Executive Consultant at 602-245-4106 or [email protected].

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