Revised Actuarial Standard Will Require Disclosure of Market-Based Liability
The Actuarial Standards Board (ASB) has issued a revision to Actuarial Standard of Practice No. 4 (ASOP 4) entitled “Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.” ASOP 4 is an existing standard of practice that guides actuaries in performing work for pension plans. This alert describes one key change in the revised standard of practice, which is effective for valuations with a measurement date on or after February 15, 2023. The changes will primarily affect public pension plans.
While the ASOP revision includes changes to a number of technical items relating to funding calculations and related disclosures, the most controversial change is the addition of a requirement to calculate and disclose a "Low-Default-Risk Obligation Measure," which is the value of liabilities using an interest rate derived from low-default-risk fixed income securities. We will refer to this measure as the LDROM. The LDROM is to be calculated as part of the actuarial valuation of a pension plan. Examples of interest rates that meet these requirements are:
- U.S. Treasury yields;
- Rates implicit in settlement of pension obligations including payment of lump sums and purchases of annuities from insurance companies;
- Yields on corporate or tax-exempt general obligation municipal bonds that receive one of the two highest ratings given by a recognized ratings agency;
- Non-stabilized ERISA funding rates for single-employer plans; and
- Multiemployer current liability rates.
In essence, the LDROM is a market-based liability, although the name has been changed since the ASB first proposed the requirement to make the calculation in 2018.1 Whereas we expect the requirement to calculate and disclose the LDROM will require little or no additional work for either single-employer or multiemployer plans subject to ERISA, this will be a new requirement for public pension plans that may entail some additional work, particularly if the plan includes risk-sharing features.
For more information about the LDROM or other changes made to ASOP 4, 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.
1See the Cheiron Pension alert of July 24, 2018, which can be found at ASB Proposes Market-Based Liability Calculation.