The Texas Pension Review Board has changed pension funding guidelines after a year’s worth of work and significant input from Texas public employee pension systems. Speaking at the TEXPERS Summer Educational Forum in San Antonio, PRB Staff Actuary David Fee summarized the changes to the Trustees and administrative staff attending the event.

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According to the PRB, the guidelines advise public retirement systems and their sponsoring governmental entities on meeting long-term pension obligations. Additionally, the guidelines aim to facilitate and encourage communication between pension systems and their sponsors about how to fund pensions in a responsible manner.

“It’s not about your systems being on an island and trying to come up with solutions on your own,” Fee said. “It should be a joint process between you and your city or sponsor.”

Fee identified five key changes:

• Guideline 3 (Funded Ratios Trigger FSRPs): A new addition to Guideline 3 highlights a significant shift in the funding soundness restoration plan (FSRP) requirements effective from Sept. 1, 2025. The funded ratio now plays a role in triggering the FSRP, with a single valuation report showing a funded ratio below 65% being sufficient to initiate an FSRP if the funding period also exceeds 30 years. Consecutive valuations are no longer required to trigger the FSRP if both the funded ratio and funding period are on the wrong side of the applicable threshold.
• Guideline 4 (Overfunded Plans): A new provision addresses overfunded systems, advising that once 100% funded, contributions should continue to cover the normal cost until the funded ratio surpasses 120%. This ensures that liabilities are covered as they increase annually. Funding the normal cost keeps the full funding. Fee noted that when sponsors decrease funding, it is difficult to get them to increase again. The new provision seeks to prevent chronic underfunding after the pension is fully funded. 
• Guideline 5 (Target Funding Period Range): The previous range of 10- to 25-years is updated to a new goal of reducing the funding period to 20 years or less by September 1, 2035, and further to 15 years by Sept. 1, 2040. This aims to avoid negative amortization, ensuring unfunded liabilities are reduced. Fee noted that when systems reach the 18–23-year funding period they generally start to break even or pay down unfunded liabilities. Due to the FSRP requirement that all pension systems reduce the funding period below 30 years by Sept. 1, 2025, “All systems should be at a 30-year or less funding period,” Fee said. “If you have achievable assumptions there’s no reason that over the next 15 years [till 2040] you can’t get down to a 15-year funding period.”
• Guideline 6 (When Not to Enhance Benefits): After Sept. 1, 2040, any proposed benefit increases, or contribution decreases, should not be adopted if they lead to a significant extension of the funding period. Specifically, these changes should not result in a funding period that exceeds the greater of 15 years or the average future working lifetime of the current active members. This means that if the funding period is currently set at 10 years and there’s a desire to enhance benefits, the funding period can only be moderately increased to a maximum of 15 years or the average future working lifetime of the members, whichever is greater. The 15-year cap ensures that the pension system moves away from negative amortization and towards a state where unfunded liabilities are being actively reduced.
• New Guideline 7 (Taking Tiers into Account): When considering benefit decreases and contribution increases, it’s essential to analyze how these changes will affect the normal costs and contribution rates across different tiers of members. The goal is to ensure that members in each tier receive benefits commensurate with their contributions. The guideline does not prohibit making changes but emphasizes the importance of being well-informed about the impact on each tier.

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