Foster & Foster 0 SEPTEMBER 7, 2014 LOUISIANA ASSOCIATION OF PUBLIC RETIREMENT SYSTEMS Actuarial...

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SEPTEMBER 7, 2014

LOUISIANA ASSOCIATION OF PUBLIC RETIREMENT SYSTEMS

Actuarial Standards and Required Disclosure

Shelley R. Johnson, ASA, MAAA

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Public pension plan funding has received increased national attention in the past few years as a result of the recent recession and the emerging focus on financial economics in the pension community

Result has been an influx of committees, panels, studies, formal recommendations regarding public pension plan funding

Less obvious to Boards are the changes affecting actuaries hired to value plan liabilities and assets and determine contribution requirements

Spotlight on Public Pension Funding

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ASB issues Actuarial Standards of Practice (ASOPs) to provide guidance to actuaries when performing professional services

ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment

Our Code of Conduct requires us to follow guidance in ASOPs, or be prepared to justify use of other procedures

There are currently 47 ASOPs, many of which are specific to actuarial services regarding pension plans

Actuarial Standards Board (ASB)

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ASOP #4: Measuring Pension Obligations and Determining Pension Plan Costs or Contributions (revised effective 12/31/2014)

Key changes: Modifications to language pertaining to disclosure of funded status

Disclosure of rationale for changes in cost or contribution allocation procedure (such as actuarial cost method or asset valuation method)

Qualitative description of the implications of the current funding policy on future contributions and funded status

Actuarial Standards Board (ASB)Recent ASOP Changes

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Key changes (continued): Prescribed assumptions or methods

o Previously required the actuary to state if a prescribed assumption/method was unreasonable unless set by law

o Revised to specify prescribed assumption method set by law is NOT deemed to be prescribed if the plan sponsor set the law (now must opine if actuary believes law requires unreasonable assumption/method)


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Key changes (continued): For plan provisions that are difficult to measure (e.g. gain-sharing

funding of benefit increases), the actuary should consider using alternative valuation procedures and must disclose a description of methods used so that another actuary could make a reasonable appraisal of the reasonableness of the actuary’s work.


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ASOP #27: Selection of Economic Assumptions for Measuring Pension Obligations (revised effective 9/30/2014)

Key Changes Guidance regarding reasonability of an economic assumption has

been changed from the “best-estimate” standard Incorporates changes made in ASOP #4 (regarding provisions that

are difficult to measure and assumptions/methods prescribed by law) Requires disclosure of rationale used in selecting each non-

prescribed assumption

Actuarial Standards Board (ASB) Recent ASOP Changes

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ASOP #35 Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations

Key Changes Consider likelihood and extent of mortality improvement in the future If choose not to project mortality improvement, must disclose it was

intentionally not projected

Actuarial Standards Board (ASB) Recent ASOP Changes

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Future trends in mortality improvement is currently the subject of extensive study/debate

Expect possible changes to ASOP in the future

Some pushing for required use of generational vs. static tables, which are significantly more complicated

May add administrative cost without providing corresponding improvement in results

Mortality Improvement

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Beginning a comprehensive review of the ASOPs as they pertain to public plan actuarial valuations

Currently soliciting the views various parties interested in the application of the ASOPs to public plan actuarial valuations (comments due in November)

Asking questions such as:– Should current ASOPS be revised to provide additional guidance (beyond

recent revisions) regarding appropriate public plan actuarial valuation practice and advice regarding funding levels?

– In general, the ASOPs are principles based and not rules based, therefore are generally not highly prescriptive. Should the ASOPs related to public plan actuarial valuations be more prescriptive? If so, in what areas?

Actuarial Standards Board Recent Request for Comments Regarding Potential

Future Changes to ASOPs

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The current definition within ASOPs of an “intended user” of an actuarial communication is “any person who the actuary identifies as able to rely on the actuarial findings” (very broad)

Should the ASOPs require actuaries for public pension plans to perform additional, significant work (which would be incorporated in the guidance provided in the ASOPs) that is not requested by the principal if that work provides useful information to individuals who are not intended users? If so, should this requirement be extended to all pension practice areas? (emphasis added)

Actuarial Standards Board Recent Request for Comments Regarding

Potential Future Changes to ASOPs

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The American Academy of Actuaries (AAA) - Feb 2014

Issue Brief on Public Plan Funding

Society of Actuaries (SOA) - Feb 2014:

Report of the Blue Ribbon Panel on Public Pension Plan Funding

The Government Finance Officers Association (GFOA) - Mar 2013

Core Elements of a Funding Policy

The Conference of Consulting Actuaries (CCA) - Feb 2014

Actuarial Funding Policies and Practices for Public Pension and OPEB Plans (Discussion Draft)

Recent Publications

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The reports have similar focus, which we can generally agree on: Funding adequacy/Benefit security Intergenerational Equity Cost Stability

Devil is in the details: Recommended disclosures

To be clear: Disclosure is not bad if you have nothing to hide Concern here is excess information can be confusing to many

users Administrative expense, particularly for smaller plans

Recent Publications

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Questions?

Gary S. Curran, FCA, MAAA, ASA, EA

CONSULTING ACTUARY

G. S. Curran & Company, LTD.10555 N. Glenstone PlaceBaton Rouge, LA 70810 (225) 769-4825

Actuarial Science:Actuarial Science:Marriage of Marriage of

Actuarial Science:Actuarial Science:Marriage of Marriage of

WITH Probability & Statistics

Finance & Economics

Fundamental Concept:Fundamental Concept:

Actuarial Present Value

Value today of an amount to be paid in the future.

Financial Present Value:Financial Present Value:

You must pay $1,000 10 years from now.

If you can invest and earn 7.2% interest,

You would only need $500 today.

$500 compounded annually for 10 years @ 7.2% interest = $1,000


Year Beginning Amt. X interest = Accumulated Value1 $500.00 1.072 $5362 $536 1.072 $5743 $574 1.072 $6164 $616 1.072 $6605 $660 1.072 $7076 $707 1.072 $7587 $758 1.072 $8128 $812 1.072 $8719 $871 1.072 $93310 $933 1.072 $1,000

The Financial Present Value of $1,000 in 10 years @ 7.2% is $500.


Actuarial Present Value:Actuarial Present Value:

Actuarial Present Value is similar to Financial Present Value, but it uses large groups and probability to produce a more realistic cost of a liability.Ex: If you owe money to a large number of people at some point in the future, it is likely that not all of the people will survive to the time that the benefit is to be paid out.

Suppose we have 100 people (age 60), and we wish to pay each of them $1,000 in 10 years if they survive.

Now, suppose that the probability of surviving from age 60 to 70 is 90%.


What is the Actuarial Present Value of $1,000 to be paid to the 100 people if they survive from age 60 to 70?


If we were to pay all 100 people, we would need: 100 X 500 = $50,000

But, we only need to pay 90% since only 90% of the group will survive.


Therefore, the Actuarial Present Value of $1,000 payable to 100 people currently age 60 who survive to age 70 is:


Note: the $45,000 will grow to $90,000 in 10 years, and of the original 100 people, only 90 will be alive at age 70, so we have $1,000 for each survivor.


The Actuarial Present Value of benefits for the pension plan is the sum of all of the actuarial present values of all of the possible benefits to be paid to every member of the plan.

Actuarial Present Value for a Pension Plan




Retirement Benefit Disability Benefit Survivor Benefit Vested Benefit Refunded Benefit

Included Expenses (i.e., benefits):



Employee Contributions Employer Contributions

Included Income:



Actuarial Present Value of Future Benefits =

Assets +

Actuarial Present Value of Future Contributions

Equation of Balance:

Actuarial Present Value of Future Benefits

Actuarial Present Value of Future Benefits

Actuarial Value of Assets

Present Value of

Future Employee Contributions

Present Value of

Future Employer Contributions

Unfunded Accrued

Liability

Employer CostEmployer Cost

Current Amortization Payment

Future

Payments

Current Normal Cost

Future Normal

Costs

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