#asops

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The Actuarial Standards Board (ASB) has issued a request for comments regarding the standards governing actuarial work for public pension plans.   Currently there are no standards specific to public pension plans, and guidance is provided by those standards of practice applicable to defined pension plans generally.

In its request for comments, the ASB noted the increased scrutiny of public pensions in recent years and several papers released by major actuarial organizations and others related to public pension plan funding.  As a result the ASB plans a "comprehensive review" of actuarial standards regarding their application to public plans.

The ASB requested comments on these topics:

1. Public plan funding and associated actuarial valuations are less uniformly regulated than those of private sector pension plans. Actuaries may be asked by their principal to advise on funding levels. Is additional guidance needed, beyond that in the recently revised pension ASOPs, regarding appropriate public plan actuarial valuation practice to assist actuaries in performing their work and advising their principal? Why or why not? 

2. If yes to question 1, in what areas is additional guidance needed?

3. If yes to question 1, should that guidance take the form of a separate public plan actuarial valuation standard or be incorporated within the existing ASOPs? Why or why not? 4. In general, the ASOPs are principles based and not rules based. As a result, the ASOPs are generally not highly prescriptive. Should the ASOPs related to public plan actuarial valuations be more prescriptive? If so, in what areas? 5. The ASOPs have provided guidance that has been applicable to all areas of practice in the pension community (for example, private sector, multiemployer, public sector). If you believe that additional guidance is needed for public plan actuarial valuations, should any of that additional guidance also apply to non-public sector plans? Why or why not? 6. The current definition of an “intended user” of an actuarial communication is “any person who the actuary identifies as able to rely on the actuarial findings” (ASOP No. 41, Actuarial Communications, section 2.7). Should the ASOPs require the actuary 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? Why or why not? If so, should this requirement be extended to all pension practice areas? Why or why not?

Two leading organizations of the US actuarial profession issued papers in February regarding public pension plan financial reporting and the funding of public pension liabilities.   The situations facing public pension plans have had high visibility in the recent past as the contributions necessary to fund promised benefits take up an increasing percentage of state and local government budgets and as the country watches the Detroit bankruptcy where promised public pension benefits may be cut in the city's reorganization plan.   The papers released by the American Academy of Actuaries and the Society of Actuaries attempt to present policymakers, plan sponsors, the actuarial profession and the public with reasoned discussions of the policies and economic realities which impact pension funding.  

The American Academy of Actuaries published its issue brief titled Objectives and Principles for Funding Public Sector Pension Plans.   The document talks about the need to balance three primary objectives of 

Benefit Security

Contribution Stability and Predictability, and 

Generational Equity

The Academy's issue brief speaks more at a high level, explaining these objectives and how different approached to public pension plan reporting and funding methods can impact these objectives.   The issue brief does not make many specific recommendations but instead attempts to provide a context for ongoing improvement of public pensions.

The Blue Ribbon Panel of the Society of Actuaries was much more willing to make specific recommendations in its Report on Public Pension Funding.  While reciting similar objectives for pension plan funding, the Blue Ribbon Panel Report is much more a description of recommended best practices in this area, with specific recommendations for such things as asset smoothing, stress testing, funding methods, and investment risk disclosures.

The panel recognized that its recommendations were going beyond the standard of practice for public pension actuaries currently:

In addition, because there may be differences of opinion regarding the appropriateness of funding assumptions and methods, the Panel believes that the actuary should opine on the reasonableness of the selected assumptions and methods in his/ her actuarial funding report. This extends the actuary’s duty to opine beyond today’s standards (that assumptions and methods meet Actuarial Standards of Practice (ASOPs)).

The Panel also believes that the current range of funding assumptions and methods in use is overly broad and recommends narrowing the range of practices with respect to various funding assumptions and methods.

The Panel requests that the Actuarial Standards Board (ASB) actively consider the recommendations made herein and take steps to incorporate them into ASOPs if needed to achieve the objectives of the Panel’s recommendations. 

The Actuarial Standards Board has adopted revised versions of two important actuarial standards of practice (ASOPs) for the calculation of pension plan liabilities which will go into effect in 2014.   The revised ASOPs are ASOP 4 on Measuring Pension Obligations and Determining Pension Plan Costs or Contributions  and ASOP 27 on Selection of Economic Assumptions for Measuring Pension Obligations.

From the ASB website:

ASB Adopts Revised Version of ASOP No. 4

The ASB recently adopted a revised version of ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions. Key changes from the current standard include modifications to language pertaining to disclosure of funded status; disclosure of rationale for changes in cost or contribution allocation procedure; assessment of contribution allocation procedure or funding policy; prescribed assumptions or methods; and plan provisions that are difficult to measure. The adopted ASOP No. 4 was exposed twice between January 2012 and May 2013, generating a total of 30 comments. ASOP No. 4 will be effective for any work product with a measurement date on or after December 31, 2014. The final version can be viewed under the tab “Current Actuarial Standards of Practice.”

ASB Adopts Revised Version of ASOP No. 27

The Actuarial Standards Board has several exposure drafts for new actuarial standards of practice and revisions to existing standards.   All of these proposed changes are important for actuaries who practice in the related subject areas.   The ASOPS can provide the standard of care in professional negligence cases brought against an actuary.

The ASB offers an opportunity for interested parties to comment on the draft proposed standards.  The drafts with pending comment deadlines are:

ASOP No. 25 Revision (second exposure draft) Credibility Procedures Comment deadline: September 30, 2013

Principle-Based Reserves for Life Products Comment deadline: December 16, 2013

Modeling (exposure draft)  Comment deadline: September 30, 2013

Life Settlements Mortality (exposure draft)  Comment deadline: July 31, 2013

ASOP No. 6 Revision (second exposure draft) - Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Prefunding Contributions.

The Actuarial Standards Board has adopted its newest actuarial standard, ASOP 46, Risk Evaluation in Enterprise Risk Management.   As defined in ASOP 46, "enterprise risk management" is 

The discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing the organization’s short- and long-term value to its stakeholders.

The scope then of the new standard is defined as:

This standard applies to actuaries when performing risk evaluation professional services for the purposes of enterprise risk management (ERM).  

Risk evaluation is often performed as one part of an ERM control cycle. Within a typical ERM control cycle, risks are identified, risks are evaluated, risk appetites are chosen, risk limits are set, risks are accepted or avoided, risk mitigation activities are performed, and actions are taken when risk limits are breached. Risks are monitored and reported as they are taken and as long as they remain an exposure to the organization. 

This standard focuses on five aspects of  risk evaluation: risk evaluation models, economic capital, stress testing, emerging risks, and other risk evaluations.  Guidance for activities related to risk treatment is addressed in proposed ASOP,  Risk Treatment in Enterprise Risk Management.  

This standard does not apply to actuaries when performing risk evaluation professional services that are not for the purposes of ERM. Examples of risk evaluation services that may be performed for purposes other than ERM include pricing of insurance products, and the evaluation of liabilities of insurers and pension plans.  

There is an article in the September/October issue of Contingenicies regarding Actuarial Standard of Practice 41 on Actuarial Communications which became effective on May 1, 2011.   This standard applies to all actuarial disciplines and concerns how actuaries express the results of their work to the users of that work.  The article, titled Let's be Perfectly Clear, was written by James Gutterman, FSA, who is currently a member of the ABCD.  Gutterman offers some thoughts about how to handle disclosing materials which were relied upon in developing actuarial estimates, and how to handle the situation of a principal who directs the actuary to use an unreasonable assumption.  

For the latter situation, Gutterman states:

Once again, it comes down to the clarity of an actuary’s communication and appropriate disclosure of his or her views concerning the assumptions used. One possible approach here—in addition to stating prominently (not burying it in a footnote to a supporting exhibit in the report) that use of this mortality table is unreasonable—would be to assert in writing that the report should be provided to others only in its entirety. In this manner, when journalists from the local XYZ Tribune look at the actuarial report, they will be able to recognize why liabilities suddenly have decreased by 50 percent, why the plan actuary used a particular table, and why that actuary considers its use to be inappropriate.

The Actuarial Standards Board has released two exposure drafts for proposed revisions to two of the actuarial standards of practice related to defined benefit plans:  

ASOP No. 4 revision – Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.

Comment deadline: May 31, 2012

ASOP No. 27 revision (second exposure) - Selection of Economic Assumptions for Measuring Pension Obligations

Comment deadline: May 31, 2012