Task Force Recommends Changes in Actuarial Standards for Pension Plans
In June, the Actuarial Standards Board (ASB) released the report of a Pension Task Force (PTF) that was created (in December 2014) to review public pension input from various sources and to develop recommendations for the ASB. The PTF completed its work and delivered its report to the ASB at the end of February. The primary recommendations of the PTF include:
- Calculation and disclosure of a solvency value
- Improved management of assumptions
- Clarification of existing guidance regarding assumptions
- Additional guidance regarding methods
- Calculation and disclosure of contribution requirements and funded status associated with a reasonable actuarially determined contribution
- That the actuary provide an opinion statement about the reasonableness and consistency of assumptions and methods
- Special disclosures applicable to specific situations, including where the contribution requirement is less than the normal cost plus interest on the unfunded accrued liability
The ASB released the report on June 30 and announced that the ASB has directed its Pension Committee to draft appropriate proposed modifications to the pension actuarial standards of practice. None of the recommendations of the PTF can be implemented until exposure drafts of changes have been released, comments have been considered and final standards adopted.
This Alert reviews highlights of the PTF report and the recommendations to the ASB.
The ASB promulgates standards of practice for actuaries. A number of the actuarial standards of practice (ASOPs) pertain to the work actuaries perform with respect to defined benefit pension plans (pension ASOPs or pension standards). The pension ASOPs apply to work performed irrespective of the entity who is the plan sponsor. Thus, the ASOPs apply to work performed for public plans and also to private plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA), as amended.
In recent years, a number of concerns have been expressed about financing and measurement issues associated with public pension plans. Many suggestions have been made to the ASB to modify the ASOPs with respect to public pension plans.1 In response, the ASB formed the PTF to review the input that had been received and make recommendations to the ASB.
The PTF considered the comments and suggestions including the opinions expressed at a public hearing held by the ASB. The PTF made its report to the ASB on February 29, 2016. The ASB released the report on June 30, 2016 and also directed its Pension Committee to draft appropriate proposed modifications to the pension ASOPs.
Despite the fact that the impetus for the formation of the PTF was the proposals regarding public plans, the PTF recommended that any changes to the pension ASOPs apply for all pension plans. Accordingly, the recommendations, if adopted, would apply to private single-employer plans and multiemployer plans as well as public plans.
Many of the recommendations are technical in nature and suggest clarification of the existing pension standards. Other recommendations provide additional requirements that would impact the work of pension actuaries.
Arguably, the most controversial recommendation is the requirement that a solvency value be calculated and disclosed for every pension funding valuation. If adopted, the pension standards of practice would require the actuary to calculate and disclose the value of accrued benefits using U.S. Treasury rates. The PTF suggested that it could be misleading to show traditional values by themselves, that an alternative liability measurement provides important information about risk and may encourage better decisions regarding the financing of the plan, and that the disclosure will help advance the actuarial profession.
Cheiron Observation: The disclosure of a solvency value has long been the objective of financial economists. We expect there to be significant debate over the usefulness of such a disclosure as well as the technical details of the actual disclosure. If such a disclosure is eventually required, it will be important for plans to communicate what the disclosure means and what it does not mean.
Governmental Accounting Standards Board (GASB) Statements 67 and 68 have eliminated the Annual Required Contribution that was a de facto national contribution benchmark and placed the emphasis on an Actuarially Determined Contribution. Therefore, a number of the PTF suggestions are directed at providing additional guidance in the selection of actuarial methods and ultimately defining what constitutes a reasonable Actuarially Determined Contribution.
Cheiron Observation: Depending on the standards eventually adopted, some contributions that are currently reported as Actuarially Determined Contributions may no longer qualify for that designation. Plans that perpetually contribute less than normal cost plus interest on the unfunded liability, use a rolling amortization method, or use statutory contribution rates, may want to watch these developments closely.
The other recommendations of particular interest are those relating to the method and assumptions. The recommendations will likely make the actuary opine on the reasonableness of the method and assumptions selected by others (such as a board of trustees).
Action Needed: Those interested in specifics and reasoning for all of the PTF's recommendations should read the entire report, which can be found at this link.
The report of the PTF and the ASB's direction to its Pension Committee are the start of a process to modify the pension standards. The Pension Committee of the ASB will consider the report and the recommendations and will likely draft specific changes to the pension ASOPs. The draft changes, if approved by the ASB, will then be published for comment in an exposure draft. Assuming (as likely) that comments are made with respect to the exposure draft, the Pension Committee will then consider the comments and either draft final revisions to the pension ASOPs or draft revised changes for release in a second exposure draft.
Eventually, the Pension Committee will draft final changes to the pension ASOPs, which, after adoption by the ASB, will take effect prospectively. Generally, the effective date of changes in the pension standards is for measurement dates (that is, valuation dates) that are six months or more after the publication of the final revised pension standards.
Accordingly, there is no current requirement that actuaries implement or consider the recommendations in the report of the PTF (although some actuaries have already been using some of the recommended practices). Any mandated changes will apply to future years.
Cheiron consultants can discuss the impact of the recommendations with you. When changes to the ASOPs to reflect the PTF recommendations are published in an exposure draft, you may want to submit comments.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.
1 For a longer discussion of the background, see the Background section of the report of the PTF.