Actuarial Standards Board Hearing on Public Pension Issues
July 9, 2015
Polaris Room, Concourse Level, Ronald Reagan Building and International Trade Center
1300 Pennsylvania Ave NW, Washington, DC 20004
The funding of public pension plans is a matter of considerable public interest. Stakeholders including individuals, organizations, and media outlets are engaged in a vigorous public dialogue on the topic.
As the standards-setting body for actuaries in the United States, the Actuarial Standards Board (ASB) is charged with establishing and improving guidance for credentialed actuaries practicing in the U.S., and in July 2014 the ASB issued a Request for Comments (RFC) on ASOPs and Public Pension Plan Funding and Accounting.
In order to solicit the broadest possible input on proposed standards, the ASB will hold a public hearing on the proposed actuarial standards of practice (ASOPs) applicable to actuarial work regarding public pension plans on July 9, 2015. The ASB urges interested parties to attend the hearing and/or offer comments per the guidelines below.
The ASB is accepting requests from those interested in presenting at the hearing as well as written comments from other interested parties. (See the bottom of this page for details on applying to speak or submit written testimony.) The ASB will use information obtained through this hearing as it considers next steps in the evolution of ASOPs. Note that any additional guidance could potentially also be applied to non-public sector plans.
Type of Input Requested
The ASB is seeking particular input on certain issues. For the public hearing, the ASB is most interested in specific suggestions for improvements in pension-related ASOPs within the topic areas listed below. Suggestions should be specific and should describe both what is to be done and how it is to be done.
The ASB will use information obtained during this hearing as it considers next steps in the evolution of ASOPs applicable to pension plans. The ASB specifically requests suggestions regarding new guidance that may be added to existing or new ASOPs that is related to the four areas described above.
Along with the suggestions for new guidance, please address the following:
- A statement of rationale for including the suggested guidance in ASOPs and the reason for the provision
- Who will benefit from the proposed suggestion
- Whether or not the suggestion has broader application beyond public sector plans
The ASB has generally preferred broad and principled application of ASOPs that apply to a wide range of facts and circumstances. Specific additional guidance applicable to public plan actuarial valuations could potentially also be applied to non-public sector plans. Additionally, suggestions:
- Should be broad enough to apply to all actuaries working in the area covered by the ASOP (not just the “lead actuary”)
- Should mandate appropriate actuarial practice
- Should not encourage bad practice or allow for work that is misleading
- Cannot violate anti-trust or other applicable laws
Responses to the Request for Comments (RFC) on the ASOPs and Public Pension Plan Funding and Accounting covered a broad range of topics and included many suggestions for changes in Actuarial Standards of Practice. The ASB requests further input on specific topics covered in the RFC, including whether you support a particular suggestion and, if you do, additional details as to how the suggestion could be implemented (e.g. what should be disclosed, what should be permitted, what should be prohibited, criteria for allowance of practices, etc.). The ASB also wants to know the rationale behind your position.
In December 2014, the ASB issued an Exposure Draft (ED) entitled Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions, which provides proposed guidance that would be applicable to both public and private sector plans. The ASB is currently accepting written comments (through May 29, 2015) on this ED. To the extent you have comments related to this ED, we request that you submit them in writing prior to the deadline. Since the comment period for this ED is underway, the topics covered in this ED will not be the focus for the hearing.
Specific Topics of Interest:
With that in mind, the ASB is particularly interested in input on the following topics for the public hearing:
- Contribution/Cost Allocation Procedures
Some comments suggested that the ASOPs, which are generally principles-based, should contain more principles as to what constitutes a sound funding policy. For example, one comment suggested that one principle should be that the funding policy should be expected to achieve full funding over the expected working lifetime of current workers. Other suggestions included requiring the calculation of an Actuarially Required Contribution (ARC), which would have to satisfy certain constraints. Others suggested requiring disclosure, including an historical disclosure, of actual contributions versus those required or versus ARC amounts.
An actuarial cost method and one or more amortization methods are often components of a contribution or cost allocation procedure, along with an asset valuation method, and sometimes direct rate smoothing. The recently revised ASOP No. 4 added a requirement that the actuary provide a qualitative description of the implications of the contribution allocation procedure on future expected plan contributions and funded status. If any additional guidance is needed for public plans, should it apply to the overall contribution or cost allocation procedure, to specific components, or to both? Should this additional guidance also be extended to private plans? If not, why not? Additional guidance in this area could take different forms, such as defining whether a contribution or cost allocation procedure is “reasonable” or requiring disclosure of certain characteristics of the procedure. What form should any additional guidance take?
- Amortization Methods
A number of comments discussed the issue of negative amortization—when the amortization payment is less than the interest on the unfunded actuarial accrued liability. These comments focused on requiring additional disclosures when negative amortization is present and noting that acceptable amortization methods must cover the interest on the unfunded accrued actuarial liability.
Some comments recommended restricting the period over which unfunded actuarial accrued liabilities could be amortized. Suggestions included 30 years and expected working lifetime. Alternatively, additional disclosure could be required when amortizations periods exceed some limit. A different comment suggested requiring shorter amortization periods for changes affecting retired populations as opposed to active populations.
One comment suggested the actuary should calculate and disclose an implicit amortization period for fixed rate plans.
Some comments suggested that the pension ASOPs should contain stronger guidance or additional constraints regarding reasonable assumptions, sometimes out of concern for instances of what the comments viewed as unreasonable assumptions (this is apart from assumption considerations specific to alternative liability measurements, discussed in the next section). Specific suggestions included proscribing certain old mortality tables; further strengthening guidance regarding the assumption for future mortality improvement (presumably beyond the recent strengthening of ASOP 35 in this regard); instituting specific requirements for regular experience studies or gain/loss analyses; and establishing more prescriptive boundaries around certain assumptions.
- Alternative Liability Measures
A number of comments and other publications have suggested the calculation, and disclosure in the actuarial report, of alternative liability (and sometimes associated normal cost) measurements for public pension plans. Suggested alternative liability measurements included: (1) a “solvency” or “settlement” liability based on the estimated costs of transferring all risk, including investment and mortality risk, to an insurance company; (2) a liability based on a Treasury yield curve, to approximate the cost of eliminating almost all investment risk; (3) a liability based on discount rates commensurate with the level of risk of the underlying benefit promise; and (4) a liability based on a high quality corporate yield curve, for comparability to the discount rate basis used by private sector plan sponsors. If your answer is yes to any of these, then the ASB would like your input on why the alternative measurement should be required and whether this requirement should be extended to pension plans beyond public pension plans.
Click here to view comments in their entirety.
Last Revised: May 2015
Document Status: Request for Input