Actuarial Standard of Practice No. 51
Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions
STANDARD OF PRACTICE
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: Actuarial Standard of Practice (ASOP) No. 51
This document is the final version of Actuarial Standard of Practice No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.
The Pension Committee has been reviewing all of the pension-related standards and has developed this standard to provide guidance regarding the assessment and disclosure of pension risk as part of the larger review project. 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, periodic costs, actuarially determined contributions, or funded status. Section 4.1(r) of ASOP No. 4 requires disclosure that future pension measurements may differ significantly from the current measurement. 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 the additional guidance in this new standard expands on section 3.4.1 of ASOP No. 41 and sections 3.3.2, 3.16, 4.1(r) of ASOP No. 4. Additionally, the Pension Committee believes that the additional disclosures required by this standard will help the intended users of the actuarial findings gain a better understanding of risks inherent in the measurements of pension obligations and actuarially determined pension plan contributions.
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 were reflected in the second exposure draft.
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 had 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.
Second Exposure Draft
The second exposure draft of this ASOP was issued in June 2016 with a comment deadline of October 31, 2016. The Pension Committee carefully considered the seventeen comment letters received. For a summary of issues contained in these comment letters, please see the appendix. Key changes made to the final standard in response to comment letters received on the second exposure draft include the following:
- In section 2 of this standard, various definitions were copied from ASOP Nos. 4 and 41 for such terms that were used in this standard.
- Contribution Risk was made a defined term and the definition was expanded.
- The definition of a Funding Valuation in section 2.7 was clarified.
- The guidance in section 3.2, Identification of Risks to be Assessed, was clarified to indicate that the actuary is not required “to evaluate the ability or willingness of the plan sponsor or other contributing entity to make contributions to the plan when due,” and is not required “to assess the likelihood or consequences of potential future changes in applicable law.”
- Guidance was added in section 3.3, Assessment of Risk, to address a funding valuation or pricing valuation that includes multiple measurements.
- The language in section 3.6, Additional Assessment of Risk, was modified, replacing “beneficial” with “significantly beneficial.”
- The guidance in section 3.9, Reliance on a Separate Report, was clarified.
- The disclosure requirements regarding the risks identified and the results of the risk assessment were clarified.
- Section 4.1(f) was added, requiring the actuary to disclose “any limitations or constraints on the comprehensiveness of the risk assessment.”
The Pension Committee thanks former committee chairperson Mita D. Drazilov and former committee members Fiona E. Liston, Mitchell I. Serota, Judy K. Stromback, and Virginia C. Wentz for their assistance with drafting this ASOP.
The ASB voted in September 2017 to adopt this standard.
|Pension Committee of the ASB
|Christopher F. Noble, Chairperson
|Margaret S. Berger
|David T. Kausch
|Stephen T. McElhaney
|Tammy F. Dixon
|Alan W. Milligan
|Howard A. Freidin
|Actuarial Standards Board
|Maryellen J. Coggins, Chairperson
|Christopher S. Carlson
|Kathleen A. Riley
|Beth E. Fitzgerald
|Barbara L. Snyder
|Darrell D. Knapp
|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
This actuarial standard of practice (ASOP) provides guidance to actuaries when performing certain actuarial services with respect to measuring obligations under a defined benefit pension plan (hereafter referred to as “plan” or “pension plan”) and calculating actuarially determined contributions for such plans, with regard to the assessment and disclosure of the risk that actual future measurements may differ significantly from expected future measurements. Examples of future measurements include pension obligations, actuarially determined contributions, and funded status.
This standard supplements the guidance in actuarial standards of practice 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, addressing 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.
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 also applies to actuaries when performing a risk assessment that is not part of a funding valuation or pricing valuation.
This standard does not apply to actuaries performing services in connection with applications for plan partitions or 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).
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 November 1, 2018.
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice. Certain terms embedded within these definitions, and not used elsewhere in this ASOP, are defined in ASOP No. 4.
2.1 Actuarial Accrued Liability
The portion of the actuarial present value of projected benefits (and expenses, if applicable), as determined under a particular actuarial cost method that is not provided for by future normal costs. Under certain actuarial cost methods, the actuarial accrued liability is dependent upon the actuarial value of assets.
2.2 Actuarial Present Value
The value of an amount or series of amounts payable or receivable at various times, determined as of a given date by the application of a particular set of actuarial assumptions with regard to future events, observations of market or other valuation data, or a combination of assumptions and observations.
2.3 Actuarially Determined Contribution
A potential payment to the plan as determined by the actuary using a contribution allocation procedure. It may or may not be the amount actually paid by the plan sponsor or other contributing entity.
2.4 Contribution Allocation Procedure
A procedure that uses an actuarial cost method, and may include an asset valuation method, an amortization method, and an output smoothing method, to determine the actuarially determined contribution for a plan. The procedure may produce a single value, such as normal cost plus an amortization payment of the unfunded actuarial accrued liability, or a range of values, such as the range from the ERISA minimum required contribution to the maximum tax-deductible amount.
2.5 Contribution Risk
The potential of actual future contributions deviating from expected future contributions, for example, that actual contributions are not made in accordance with the plan’s funding policy, that withdrawal liability assessments or other anticipated payments to the plan are not made, or that material changes occur in the anticipated number of covered employees, covered payroll, or other relevant contribution base.
2.6 Funded Status
Any comparison of a particular measure of plan assets to a particular measure of plan obligations.
2.7 Funding Valuation
A measurement of pension obligations or projection of cash flows performed by the actuary intended to be used by the principal to determine plan contributions or to evaluate the adequacy of specified contribution levels to support benefit provisions.
2.8 Intended User
Any person the actuary identifies as able to rely on the actuarial findings.
2.9 Measurement Date
The date as of which the values of the pension obligations and, if applicable, assets are determined.
2.10 Normal Cost
The portion of the actuarial present value of projected benefits (and expenses, if applicable) that is allocated to a period, typically twelve months, under the actuarial cost method. Under certain actuarial cost methods, the normal cost is dependent upon the actuarial value of assets.
An individual who satisfies the requirements for participation in the plan.
2.12 Prescribed Assumption or Method Set by Another Party
A specific assumption or method that is selected by another party, to the extent that law, regulation, or accounting standards gives the other party responsibility for selecting such an assumption or method. For this purpose, an assumption or method set by a governmental entity for a plan that such governmental entity or a political subdivision of that entity directly or indirectly sponsors is deemed to be a prescribed assumption or method set by another party.
2.13 Pricing Valuation
A measurement of pension obligations or projection of cash flows performed by the actuary to estimate the impact of proposed changes to plan benefit provisions on the plan contributions or to determine whether the proposed benefit provisions are supportable by specified contribution levels.
A client or employer of the actuary.
The potential of actual future measurements deviating from expected future measurements resulting from actual future experience deviating from actuarially assumed experience. For purposes of this ASOP, risk includes contribution risk.
2.16 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 condition.
2.17 Sensitivity Test
A process for assessing the impact of a change in an actuarial assumption on an actuarial measurement.
2.18 Stochastic Modeling
A process for generating numerous potential outcomes by allowing for random variations in one or more inputs over time for the purpose of assessing the distribution of those outcomes.
2.19 Stress Test
A process for assessing 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
Measuring pension obligations and calculating actuarially determined contributions requires 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 Nos. 4, 27, 35, and 44. In the event of a conflict between the guidance provided in this ASOP and the ASOPs listed above, this ASOP would govern.
3.2 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. Examples of risks include the following:
- investment risk (i.e., the potential that investment returns will be different than expected);
- asset/liability mismatch risk (i.e., the potential that changes in asset values are not matched by changes in the value of liabilities);
- interest rate risk (i.e., the potential that interest rates will be different than expected);
- longevity and other demographic risks (i.e., the potential that mortality or other demographic experience will be different than expected); and
- contribution risk.
This standard does not require the actuary to evaluate the ability or willingness of the plan sponsor or other contributing entity to make contributions to the plan when due. This standard does not require the actuary to assess the likelihood or consequences of potential future changes in applicable law. In addition, the actuary is not expected to provide investment advice.
3.3 Assessment of Risk
The actuary should assess the risks identified by the actuary in accordance with section 3.2, including the potential effects of the identified risks on the plan’s future financial condition. The assessment should take into account circumstances specific to the plan (for example, funding policy, investment policy, funded status, or plan demographics). This standard does not require the assessment to be based on numerical calculations.
A funding valuation or pricing valuation as of a particular measurement date may include multiple measurements that may be prepared at the same time or at different times. The actuary may perform a single risk assessment for such funding valuation or pricing valuation if, in the actuary’s professional judgment, that risk assessment is appropriate for all measurements in the funding valuation or pricing valuation.
3.4 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 an actuarial present value using a discount rate derived from minimal-risk investments to a corresponding actuarial 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.
3.5 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. 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.
3.6 Additional Assessment of Risk
If, in the actuary’s professional judgment, a more detailed assessment would be significantly 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:
- findings of the risk assessment that the actuary has performed;
- the size of the plan;
- the size of the plan relative to the size of the plan sponsor;
- the maturity of the plan;
- the funded status of the plan;
- the plan’s asset allocation;
- any relevant characteristics of the contribution allocation procedure or other method for determining contributions, such as a significantly backloaded contribution allocation procedure;
- 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;
- the length of time since the last such assessment; and
- any significant changes in circumstances since the last such assessment.
3.7 Plan Maturity Measures
In addition to the requirements of section 3.3, 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:
- the ratio of market value of assets to active participant payroll;
- the ratio of retired life actuarial accrued liability to total actuarial accrued liability;
- the ratio of a cash flow measure (such as benefit payments, or contributions less benefit payments) to market value of assets;
- the ratio of benefit payments to contributions; and
- 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, if any, 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 identified in accordance with section 3.2. Examples of such actuarial measurements include the following, expressed as dollar amounts, percentages, or in some other form, as appropriate:
- plan maturity measures;
- funded status;
- actuarially determined contribution;
- actuarial gains and losses (investment and non-investment);
- normal cost; and
- 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 and historical period 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
One or more risks identified by the actuary in accordance with section 3.2 may have been assessed by another party (for example, by another actuary or by an investment advisor). In these situations, the actuary may rely on the assessment of risk prepared by another party to partly or fully satisfy the requirements of this standard if, in the actuary’s professional judgment, such assessment is consistent with applicable requirements of this standard.
Section 4. Communications and 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:
- the risks identified in accordance with section 3.2 and the results of the risk assessment performed in accordance with section 3.3, including plan-specific commentary on the potential effects of the identified risks on the plan’s future financial condition and the specific circumstances applicable to the plan that were taken into account;
- if applicable, a description of each significant method or assumption upon which the actuary’s risk assessment depends, in accordance with sections 3.4 and 3.5;
- if applicable, a recommendation to the intended user that a more detailed assessment be performed, in accordance with section 3.6;
- 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:
- if the actuary discloses the ratio of market value of assets to active participant payroll, the actuary could describe the significance of this ratio with respect to contribution volatility;
- 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;
- if the actuary discloses the ratio of a cash flow measure to market value of assets, the actuary could describe how negative cash flow may amplify investment risk;
- 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; and
- if the actuary discloses the duration of the actuarial accrued liability, the actuary could describe the sensitivity of the liability to changes in interest rates.
- 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; and
- any limitations or constraints on the comprehensiveness of the risk assessment.
An actuarial communication can comply with some or all of the specific requirements of this section by making reference to a separate report that the actuary has relied on (in accordance with section 3.9) or to information contained in another actuarial communication. As discussed in ASOP No. 41, any referenced actuarial communication or separate report should be available to the intended users.
4.2 Disclosure about Prescribed Assumptions or Methods
The actuary’s communication should state the source of any prescribed assumptions or methods used in the assessment of risk.
With respect to prescribed assumptions or methods set by another party, the actuary’s communication should identify the following, if applicable:
- any prescribed assumption or method set by another party that significantly conflicts with what, in the actuary’s professional judgment, would be reasonable for the purpose of the measurement; or
- any prescribed assumption or method set by another party that the actuary is unable to evaluate for reasonableness for the purpose of the measurement.
4.3 Additional Disclosures
The actuary should also include the following, as applicable, in an actuarial communication:
- 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 set by a party other than the actuary; and
- 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.
4.4 Confidential Information
Nothing in this standard is intended to require the actuary to disclose confidential information.
Appendix – Comments on the Second Exposure Draft and Responses
The second exposure draft of the ASOP, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions, was issued in June 2016 with a comment deadline of October 31, 2016. Seventeen 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 changes proposed by the Pension Committee.
Summarized below are the significant issues and questions contained in the comment letters and the responses to each.
The term “reviewers” in the appendix includes the Pension Committee and the ASB. Also, unless otherwise noted, the section numbers and titles used in the appendix refer to those in the second exposure draft.
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