PROPOSED ACTUARIAL STANDARD OF PRACTICE
Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions
SECOND EXPOSURE DRAFT
TRANSMITTAL MEMORANDUM
June 2016
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions
FROM: Actuarial Standards Board (ASB)
SUBJ: Proposed Actuarial Standard of Practice (ASOP), Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions
This document is a second exposure draft of a proposed ASOP titled Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.
Please review this exposure draft and give the ASB the benefit of your comments and suggestions. Each written response and each response sent by e-mail to the address below will be acknowledged, and all responses will receive appropriate consideration by the drafting committee in preparing the final document for approval by the ASB.
The ASB accepts comments by either electronic or conventional mail. The preferred form is e-mail, as it eases the task of grouping comments by section. However, please feel free to use either form. If you wish to use e-mail, please send a message to comments@actuary.org. You may include your comments either in the body of the message or as an attachment prepared in any commonly used word processing format. Please do not password protect any attachments. If the attachment is in the form of a PDF, please do not copy protect the PDF. Include the phrase “ASB COMMENTS” in the subject line of your message. Please note: Any message not containing this exact phrase in the subject line will be deleted by our system’s spam filter. Also please indicate in the body of the e-mail if your comments are being submitted on your own behalf or on behalf of a company or organization.
If you wish to use conventional mail, please send comments to the following address:
Assessment and Disclosure of Risk
Actuarial Standards Board
1850 M Street, Suite 300
Washington, DC 20036
The ASB posts all signed comments received to its website to encourage transparency and dialogue. Unsigned or anonymous comments will not be considered by the ASB nor posted to the website. The comments will not be edited, amended, or truncated in any way. Comments will be posted in the order that they are received. Comments will be removed when final action on a proposed standard is taken. The ASB website is a public website, and all comments will be available to the general public. The ASB disclaims any responsibility for the content of the comments, which are solely the responsibility of those who submit them.
Deadline for receipt of responses in the ASB office: October 31, 2016
Background
The Pension Committee has been reviewing all of the pension-related standards and has been working on potential guidance regarding the assessment, disclosure, and management of pension risk as part of the larger review project. The Pension Committee believes that a new standard should be considered, with such standard to provide guidance on the assessment and disclosure of pension risk. Section 3.16 of ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions, revised December 2013, provides guidance to an actuary whose assignment includes an analysis of the potential range of future pension obligations, costs, contributions or funded status. Section 4.1(r) of the revised standard requires disclosure that future pension measurements may differ significantly from current measurements, possibly resulting from a number of factors. This section also requires the actuary to provide results of the analysis of the potential range of future measurements if the scope of the actuary’s assignment included such analysis, or a statement indicating that because of the limited scope of the assignment, such an analysis was not performed.
Section 3.4.1 of ASOP No. 41, Actuarial Communications, indicates that “the actuary should consider what cautions regarding uncertainty or risk in any results should be included in the actuarial report.” Section 3.3.2 of ASOP No. 4 says, “In conjunction with the related guidance in ASOP No. 41, the actuary should consider the uncertainty or risk inherent in the measurement assumptions and methods and how the actuary’s measurement treats such uncertainty or risk.”
The Pension Committee believes that additional guidance that expands on section 3.4.1 of ASOP No. 41 and section 3.3.2 of ASOP No. 4 would be helpful. Additionally, the Pension Committee believes that providing additional disclosures will help the intended users of the actuarial findings to have a better understanding of risks inherent in the measurements of pension obligations and actuarially determined pension plan contributions. Given the significance of the new guidance, the Pension Committee feels that such guidance should come in the form of a new standard of practice that adds to the requirements set forth in existing standards.
First Exposure Draft
In December 2014, the ASB approved a first exposure draft with a comment deadline of May 29, 2015. Fourteen comment letters were received and considered in making changes that are reflected in this second exposure draft. For a summary of issues contained in these comment letters, please see the appendix.
In July 2014, the ASB issued a Request for Comments on ASOPs and Public Pension Plan Funding and Accounting. After comments were received, the ASB appointed a Pension Task Force to review this and other input and to develop recommendations for consideration by the ASB. In July 2015, the ASB held a public hearing on public plan issues that have arisen during this process. In its announcement of the public hearing, the ASB specifically requested that comments related to the first exposure draft on the assessment and disclosure of risk be submitted in writing prior to the comment deadline. As such, the aforementioned fourteen comment letters constituted the comments considered by the Pension Committee. As the ASB considers the issues investigated by the Pension Task Force, additional changes to one or more of the pension standards of practice could be proposed.
Key Changes
- The scope of the proposed ASOP was expanded from applying only to actuaries when performing a funding valuation of a pension plan to applying also to actuaries when performing a pricing valuation of a proposed pension plan change that would, in the actuary’s professional judgment, significantly change the types or levels of risks of the pension plan.
- The scope of the proposed ASOP was modified to exclude actuarial services performed in connection with applications for benefit suspensions under the Multiemployer Pension Relief Act of 2014.
- The definition of risk was changed in section 2.3 to the potential of actual future measurements deviating from expected future measurements resulting from actual future experience deviating from actuarially assumed experience.
- The list of examples in section 3.3 was expanded to include contribution risk.
- Section 3.4 was modified to indicate that one or more assumptions selected for the assessment of risk should differ from the assumptions used to determine expected future measurements and should result in one or more plausible outcomes.
- In section 3.6, a requirement was added that if, in the actuary’s professional judgment, a more detailed assessment would be beneficial for the intended user to understand the risks identified by the actuary, the actuary should recommend to the intended user that such an assessment be performed.
- Section 3.7 of the first exposure draft requiring a mandatory quantitative assessment for large plans was removed.
- A new section 3.8 was added to require that the actuary identify and disclose relevant historical values of the plan’s actuarial measurements, and consider identifying and disclosing other historical information, that the actuary believes are significant to understanding the risks associated with the plan.
Request for Comments
The ASB would appreciate comments on all areas of the proposed standard and draws the reader’s attention, in particular, to the following questions:
- Do you believe that the addition of contribution risk in section 3.3 is consistent with the risk definition in section 2.3? If not, how would you modify the definition in section 2.3?
- Do you agree with the proposed guidance in section 3.6 that if, in the actuary’s professional judgment, a more detailed assessment would be beneficial for the intended user to understand the risks identified by the actuary, the actuary should recommend to the intended user that such an assessment be performed?
- Do you believe that the guidance in section 3.8 regarding the disclosure of historical actuarial measurements or potential disclosure of other historical information to assist in understanding the risks associated with the plan is appropriate? If not, what changes would you suggest?
The Pension Committee thanks former committee members Gordon C. Enderle and A. Donald Morgan, IV for their assistance with drafting this exposure draft.
The ASB reviewed the draft at the June 2016 meeting and approved its exposure.
Pension Committee of the ASB
Mita D. Drazilov, Chairperson
Margaret S. Berger Christopher F. Noble
Lawrence Deutsch Mitchell I. Serota
Tammy F. Dixon Judy K. Stromback
Fiona E. Liston Virginia C. Wentz
Alan W. Milligan
Actuarial Standards Board
Maryellen J. Coggins, Chairperson
Beth E. Fitzgerald Barbara L. Snyder
Christopher S. Carlson Kathleen A. Riley
Darrell D. Knapp Frank Todisco
Cande J. Olsen Ross A. Winkelman
The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.
Section 1. Purpose, Scope, Cross References, And Effective Date
1.1 Purpose
This actuarial standard of practice (ASOP) provides guidance to actuaries when performing certain actuarial services with respect to measuring obligations under a pension plan and calculating actuarially determined contributions for such plans, with regard to the assessment and disclosure of the risk that actual future measurements (for example, of pension obligations, actuarially determined contributions, or funded status as applicable) may differ significantly from expected future measurements. Throughout this standard, the terms “plan” and “pension plan” refer to a defined benefit pension plan.
Other actuarial standards of practice address measuring pension obligations, calculating plan costs or contributions, selecting actuarial assumptions for measuring pension obligations, and selecting and using asset valuation methods for pension valuations.
1.2 Scope
This standard applies to actuaries when performing a funding valuation of a pension plan. This standard also applies to actuaries when performing a pricing valuation of a proposed pension plan change that would, in the actuary’s professional judgment, significantly change the types or levels of risks of the pension plan.
This standard does not apply to actuaries performing services in connection with applications for benefit suspensions under the Multiemployer Pension Relief Act of 2014. This standard also does not apply to actuaries performing services in connection with other post-employment benefits, such as medical benefits. In addition, this standard does not apply to actuaries performing funding valuations or pricing valuations for social insurance programs as described in section 1.2, Scope, of ASOP No. 32, Social Insurance (unless an ASOP on social insurance explicitly calls for application of this standard).
This standard does not require the actuary to evaluate the ability of the plan sponsor or other contributing entity to make contributions to the plan when due.
For assignments where the actuary has been engaged to perform a risk assessment of the pension plan, the actuary should apply the guidance presented in this ASOP to the extent relevant. In some circumstances, the actuary’s assignment might include advising the plan sponsor on the management or reduction of risk; this standard does not provide guidance on such risk management.
If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4.
1.3 Cross References
When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.
1.4 Effective Date
This standard will be effective for any actuarial work product with a measurement date on or after twelve months after adoption by the Actuarial Standards Board (ASB).
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice.
2.1 Funding Valuation
A periodic measurement of pension obligations performed by the actuary that the plan sponsor may use to determine plan contributions or the benefit levels supportable by specified contribution levels. A funding valuation includes the determination of the minimum required contribution, as defined by the Employee Retirement Income Security Act of 1974 (ERISA).
2.2 Pricing Valuation
A measurement of pension obligations performed by the actuary to estimate the impact on the periodic cost or the actuarially determined contribution of proposed changes to plan benefit provisions.
2.3 Risk
The potential of actual future measurements deviating from expected future measurements resulting from actual future experience deviating from actuarially assumed experience.
2.4 Scenario Test
A process for assessing the impact of one possible event, or several simultaneously or sequentially occurring possible events, on a plan’s financial position.
2.5 Sensitivity Test
A process for assessing the impact of a change in an actuarial assumption on an actuarial measurement.
2.6 Stochastic Modeling
A process for estimating distributions of potential outcomes by allowing for random variations in one or more inputs over time.
2.7 Stress Test
A process for measuring the impact of adverse changes in one or relatively few factors affecting a plan’s financial condition.
Section 3. Analysis Of Issues And Recommended Practices
3.1 Overview
Measuring pension obligations and calculating actuarially determined contributions require the use of assumptions regarding future economic and demographic experience. However, an intended user of such measurement may not understand the effects of future experience differing from the assumptions used in the funding valuation or pricing valuation, or the potential volatility of future measurements resulting from such differences.
Guidance regarding methods and assumptions for measuring and determining pension costs, contributions, obligations, and funded status is provided in ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions; ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations; ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations; and ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations. In the event of a conflict between the guidance provided in this ASOP and the ASOPs listed above, this ASOP would govern.
3.2 Assessment of Risk
The actuary should include an assessment of each of the risks identified by the actuary in accordance with section 3.3, when performing an assignment covered by this standard. The standard does not require the assessment to be based on numerical calculations.
The assessment should take into account circumstances applicable to the plan (for example, funding policy, investment policy, funded status, plan demographics, etc.). This standard provides guidance on conducting such assessments, as well as on related communications and disclosures.
3.3 Identification of Risks to be Assessed
The actuary should identify risks that, in the actuary’s professional judgment, may reasonably be anticipated to significantly affect the plan’s future financial condition. Such risks may include the following:
a. investment risk (i.e., the potential that investment returns will be different than expected);
b. asset/liability mismatch risk (i.e., the potential that changes in asset values are not matched by changes in the value of liabilities);
c. interest rate risk (i.e., the potential that interest rates will be different than expected);
d. longevity risk (i.e., the potential that mortality experience will be different than expected); and
e. contribution risk (i.e., the potential that the plan’s funding policy is not consistent with an actuarially determined contribution, that actual contributions are not made in accordance with the plan’s funding policy, or that material changes occur in the anticipated number of covered employees, covered payroll, or other relevant contribution base).
This standard does not require the actuary to evaluate the ability of the plan sponsor or other contributing entity to make contributions to the plan when due. In addition, the actuary is not expected to provide investment advice.
3.4 Assumptions for Assessment of Risk
If the nature of the actuary’s assessment of risk requires the selection of assumptions, the actuary should use professional judgment in selecting these assumptions. One or more assumptions selected for the assessment of risk should differ from the assumptions used to determine expected future measurements and should result in one or more plausible outcomes.
The assumptions used for assessment of risk may be based on economic and demographic data and analyses. This information is available from a variety of sources, including representatives of the plan sponsor and administrator, investment advisors, demographers, economists, and other professionals. The actuary may benefit from becoming familiar with a range of views on the factors underlying each assumption. Views of experts or principals may be considered but the selection of assumptions for the assessment of risk should reflect the actuary’s professional judgment.
3.5 Methods for Assessment of Risk
If the nature of the actuary’s assessment of risk requires the selection of methods, the actuary should use professional judgment in selecting these methods. Methods may include, but are not limited to scenario tests, sensitivity tests, stochastic modeling, stress tests, and a comparison of a market-consistent present value to a corresponding present value from the funding valuation or pricing valuation.
The actuary should take into account the degree to which the methods and models reflect the nature, scale, and complexity of the plan. In using professional judgment, the actuary may take into account practical considerations such as usefulness, reliability, timeliness, and cost efficiency.
3.6 Additional Assessment of Risk
If, in the actuary’s professional judgment, a more detailed assessment would be beneficial for the intended user to understand the risks identified by the actuary, the actuary should recommend to the intended user that such an assessment be performed. In making this judgment, the actuary should take into consideration factors including, but not limited to, the following:
a. findings of the risk assessment that the actuary has performed;
b. the size of the plan;
c. the maturity of the plan;
d. the funded status of the plan;
e. the plan’s asset allocation;
f. any relevant characteristics of the contribution allocation procedure, such as a significantly backloaded contribution allocation procedure;
g. to the extent known by the actuary, indications that the plan sponsor or other contributing entity may not make current or future recommended contributions to the plan, whether based on recent history, new developments, external analyses, or other known factors;
h. the length of time since the last such assessment; and
i. any significant changes in circumstances since the last such assessment.
3.7 Plan Maturity Measures
Plan Maturity Measures—In addition to the requirements of section 3.2, the actuary should calculate and disclose plan maturity measures that, in the actuary’s professional judgment, are significant to understanding the risks associated with the plan. Examples include the following:
a. the ratio of market value of assets to payroll;
b. the ratio of retired life actuarial accrued liability to total actuarial accrued liability;
c. the ratio of net cash flow to market value of assets;
d. the ratio of benefit payments to contributions; and
e. the duration of the actuarial accrued liability.
The actuary also should provide commentary to help the intended user understand the significance of the disclosed plan maturity measures when assessing risk.
Since various plan maturity measures may convey similar information about risk, the actuary should use professional judgment in selecting the plan maturity measures to calculate and disclose.
3.8 Historical Information
If historical values of the plan’s actuarial measurements are reasonably available, the actuary should identify and disclose relevant historical values of the plan’s actuarial measurements that, in the actuary’s professional judgment, are significant to understanding the risks associated with the plan. Examples of such actuarial measurements include the following, expressed as dollar amounts, percentages, or in some other form, as appropriate:
a. funded status;
b. actuarially determined contribution;
c. actuarial gains and losses;
d. normal cost; and
e. plan settlement liability.
Since various plan historical actuarial measurements may convey similar information about risk, the actuary should use professional judgment in selecting the historical actuarial measurements to disclose.
If other historical information relevant to the actuarial measurements is reasonably available, the actuary should consider identifying and disclosing such historical information that the actuary believes is significant to understanding the risks associated with the plan. Examples include a comparison of actual contributions to actuarially determined contributions, plan participant count, and covered payroll.
The actuary also should provide commentary to help the intended user understand the significance of the disclosed historical actuarial measurements and the disclosed other historical information when assessing risk.
3.9 Reliance on a Separate Report
The actuary may rely on a separate report that the actuary has not produced, if that report contains the results of a risk assessment that, in the actuary’s professional judgment, is consistent with what the actuary would have produced for the given risk.
Section 4. Communications And Disclosures
4.1 Disclosures
Any actuarial communication prepared to communicate the results of work subject to this standard should comply with the requirements of ASOP Nos. 4; 23, Data Quality; 27; 35; 41, Actuarial Communications; and 44. In addition, such communication should contain the following disclosures when relevant and material:
a. the results of the risk assessment performed in accordance with section 3.2, including commentary about the specific circumstances applicable to the plan taken into account;
b. the risks identified, in accordance with section 3.3, including the rationale for selecting the risk and the actuary’s view of the significance of each identified risk;
c. if applicable, a description of each significant assumption or method upon which the actuary’s risk assessment depends, in accordance with sections 3.4 and 3.5;
d. if applicable, a recommendation to the intended user that a more detailed assessment be performed, in accordance with section 3.6;
e. the values of any plan maturity measures selected in accordance with section 3.7, including related commentary to help the intended user understand the significance of the plan maturity measures when assessing risk. Examples of these plan maturity measures and related commentary include the following:
i. if the actuary discloses the ratio of market value of assets to payroll, the actuary could describe the significance of this ratio with respect to contribution volatility;
ii. if the actuary discloses the ratio of retired life actuarial accrued liability to total actuarial accrued liability, the actuary could describe the significance of this ratio with respect to the plan’s asset/liability mismatch;
iii. if the actuary discloses the ratio of net cash flow to market value of assets, the actuary could describe how negative cash flow may amplify investment risk; or
iv. if the actuary discloses the ratio of benefit payments to contributions, where contribution rates are fixed, the actuary could describe the dependence upon stable investment returns to continue to provide benefits.
f. the historical values of any actuarial measurements and any other historical information relevant to the actuarial measurements selected in accordance with section 3.8, including related commentary to help the intended user understand the significance of this information when assessing risk.
An actuarial communication can comply with some or all of the specific requirements of this section by making reference to information contained in another actuarial communication or in a separate report that the actuary has relied on (in accordance with section 3.9). As discussed in ASOP No. 41, any referenced actuarial communication or separate report should be available to the intended users.
4.2 Deviation from Guidance in the Standard
If the actuary departs from the guidance set forth in this standard, the actuary should include the following where applicable:
a. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);
b. the disclosure in ASOP No. 41, section 4.3., if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and
c. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.
4.3 Confidential Information
Nothing in this standard is intended to require the actuary to disclose confidential information.
Appendix
The first exposure draft of the proposed ASOP, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions, was issued in December 2014 with a comment deadline of May 29, 2015. Fourteen comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Pension Committee carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the proposed changes.
Summarized below are the significant issues and questions contained in the comment letters and the responses to each.
The term “reviewers” includes the Pension Committee and the ASB. Unless otherwise noted, the section numbers and titles used below refer to those in the first exposure draft.
Click here to view the Appendix in its entirety.
Comments
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PDF Version: Download Here
Last Revised: June 2016
Document Status: Past Exposure Draft