New Actuarial Standard Requires Risk Disclosures in Pension Reports
The Actuarial Standards Board (ASB) has issued Actuarial Standard of Practice 51 (ASOP 51) entitled "Assessment and Disclosure of Risk Associated With Measuring Pension Obligations and Determining Pension Plan Contributions." The intent of this new standard is to require pension actuaries to better educate (and disclose to) employers and pension plan sponsors about the risks facing their plans such as (but not limited to) plan maturity measures. Cheiron anticipates no significant change in our communications because we have always sought to discuss risks with our clients. This alert describes some of the key features of the new standard and our view of the impact on plan sponsors in a question and answer format.
Q1. When does the new ASOP apply?
A1. ASOP 51 applies to pension actuarial valuations as of November 1, 2018 or later. For most pension plans, the 2018 valuation will not be subject to the new standard because the valuation date is before November 1. However, certain actuarial estimates performed on or after November 1, 2018 may be subject to the new standard.
Q2. What valuations does the new ASOP apply to?
A2. ASOP 51 applies to a "funding valuation" that is used to determine, or evaluate the adequacy of contributions, to the plan. ASOP 51 also applies to calculations to estimate the impact on plan contributions of proposed changes to plan benefit provisions, or to determine whether the proposed benefit provisions are supportable by specified contribution levels.
ASOP 51 does not apply to
- an accounting valuation that is used for financial reporting purposes,
- a valuation of other post-employment benefits (OPEB), such as medical benefits, or
- the performance of services in connection with applications for plan partitions or benefit suspensions under the Multiemployer Pension Relief Act of 2014.
Q3. What is risk and how is it assessed?
A3. In general, risk is the potential for actual future valuation results to differ from expected results because of future experience deviating from assumed experience. However, under ASOP 51, the actuary is to identify risks that may reasonably be anticipated to significantly affect the plan's future financial condition and to assess those risks. Examples of risks listed in ASOP 51 are:
- investment risk (investment returns different than expected),
- asset/liability mismatch risk (the potential that changes in asset values are not matched by changes in the value of liabilities),
- interest rate risk (the potential that interest rates will be different than expected),
- longevity and other demographic risks (the potential that mortality or other demographic experience will be different than expected), and
- contribution risk (the potential that actual future contributions are different from expected contributions, for example, because contributions are not made in accordance with the plan's funding policy).
While the assessment of risk is not required to be based upon numerical calculations, methods to assess risks that are identified in ASOP 51 include scenario tests, sensitivity tests, stress tests, and a comparison of actuarial liabilities using a discount rate derived from low risk investments to a corresponding actuarial liability based on expected investment earnings. These types of analyses are routinely incorporated in our P-scan projection model.
If, in the actuary's judgment, a more detailed assessment would be significantly beneficial for the intended users to understand the risks, the actuary must recommend performing such an assessment. There is a list of ten factors that the actuary should take into consideration in making this judgment. Examples of the factors are the size of the plan relative to the size of the plan sponsor, the funded status, the maturity, and significant changes in circumstances since the last assessment of risk.
Q4. What does this new ASOP mean for the annual funding valuation process for your plan?
A4. In general, Cheiron has routinely used various risk metrics, sensitivity tests and stress tests in its valuations for years that provide most, if not all, of the information required by the new ASOP. We may alter our actuarial reports and communications to more clearly identify the risks, disclose the results of any risk assessment, report current and historical "plan maturity measures," and make any other changes we believe would enhance our clients' understanding of the risks.
Q5. What "Plan Maturity Measures" must be reported?
A5. ASOP 51 requires that the actuary calculate and disclose plan maturity measures that are significant to understanding the risks associated with the plan. Examples of maturity measures listed in ASOP 51 are:
- the ratio of market value of assets to active participant payroll or, for a multiemployer plan, contribution base units (e.g., annual hours worked) (also referred to as the asset leverage ratio or asset volatility ratio);
- the ratio of retired life actuarial liability to total actuarial liability;
- the ratio of a cash flow measure (such as contributions less benefit payments and expenses) to market value of assets;
- the ratio of benefit payments to contributions; and
- the duration of the actuarial liability.
The actuary is required to provide commentary to help the intended user understand the significance of the disclosed plan maturity measures when assessing risk. As stated above, these requirements may require some modification of our reports to more clearly disclose the plan maturity measures.
If you have any questions about the new ASOP 51, please contact your Cheiron consultant.
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.