Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations

Second Exposure Draft

TRANSMITTAL MEMORANDUM

June 2019

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations

FROM: Actuarial Standards Board (ASB)

SUBJ: Proposed Revision of Actuarial Standard of Practice (ASOP) No. 35

This document contains a second exposure draft of a proposed revision of ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations. Please review this exposure draft and give the ASB the benefit of your comments and suggestions. Each written comment letter or email received by the comment deadline will receive consideration by the drafting committee and 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 embed your comments in the exposure draft and 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:

ASOP No. 35 Revision
Actuarial Standards Board
1850 M Street, NW, Suite 300
Washington, DC 20036

The ASB posts all signed comments received to its website to encourage transparency and dialogue. Comments received after the deadline may not be considered. Anonymous comments will not be considered by the ASB nor posted to the website. Comments will be posted in the order that they are received. The ASB disclaims any responsibility for the content of the comments, which are solely the responsibility of those who submit them.

For more information on the exposure process, please see the ASB Procedures Manual.

Deadline for receipt of comments in the ASB office: September 15, 2019

History of the Standard

The ASB provides guidance for measuring pension and retiree group benefit obligations through the series of ASOPs listed below.

  1. ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions;
  2. ASOP No. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions;
  3. ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations;
  4. ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations;
  5. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations; and
  6. ASOP No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.

The last revision of ASOP No. 35 was issued in September 2014.

In response to specific requests for changes in the ASOPs and other activity related to public pension plans, in July 2014 the ASB issued a Request for Comments on the topic of ASOPs and Public Pension Plan Funding and Accounting. Over 50 comment letters were received covering a wide variety of potential ASB actions. In December 2014, the ASB formed the Pension Task Force and charged it with reviewing these comments and other relevant reports and input to develop recommendations for ASB next steps. In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. The Pension Task Force provided its report to the ASB in February 2016. The report included suggestions for changes to the ASOPs that would apply to all areas of pension practice. In June 2016, the ASB directed its Pension Committee to draft appropriate modifications to the actuarial standards of practice, in accordance with ASB procedures, to implement the suggestions of the Pension Task Force. Draft revisions of ASOP Nos. 4, 27, and 35 were exposed for comment in March 2018 with a comment deadline of July 31, 2018.

First Exposure Draft

The first exposure draft was issued in March 2018 with a comment deadline of July 31, 2018. Sixteen comment letters were received and considered in making changes that are reflected in the second exposure draft.

Notable Changes from the First Exposure Draft

Notable changes made to the first exposure draft are summarized below. Additional changes were made to improve readability, clarity, or consistency.

  1. Section 1.2, Scope, was expanded to clarify the application of the standard when a demographic assumption is not selected by the actuary and whenever the actuary has an obligation to assess the reasonableness of a demographic assumption that the actuary has not selected.
  2. Section 1.4, Effective Date, was modified.
  3. Section 3.2.5, Select a Reasonable Assumption, was clarified to acknowledge that relevant historical data may not exist. The section also was further clarified concerning the expectation that a reasonable assumption will have no significant bias.
  4. Section 3.4, Phase-In of Changes in Assumptions, was moved to section 3.9 and clarified to state that the reasonableness of an assumption must be evaluated at each measurement date at which it is applied, without regard for future planned changes in the assumption.
  5. Section 3.5.3, Mortality, (now section 3.4.3) was clarified.
  6. Section 3.5.4, Mortality Improvement, (now section 3.4.4) was clarified.
  7. Section 3.7, Consistency among Demographic Assumptions Selected by the Actuary for a Particular Measurement, (now section 3.6, Consistency among Assumptions Selected by the Actuary for a Particular Measurement) was amended to provide that the actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary.
  8. Section 3.9, Assumptions Not Selected by the Actuary, (now section 3.8, Assessing Assumptions Not Selected by the Actuary) was modified to clarify the requirement that the actuary assess the reasonableness of each demographic assumption that the actuary has not selected.
  9. Section 3.10.4, Combined Effect of Assumptions, was clarified to indicate that the combined effect of assumptions selected by the actuary should be expected to have no significant bias.
  10. Section 3.10.6, Views of Experts, (now titled, Other Sources of Demographic Data and Analyses) was renamed and clarified to provide for use of other sources of demographic data and analyses.
  11. Section 3.11, Documentation, was added to conform to current ASOP format.
  12. Section 4.1.2, Rationale for Assumptions, was modified concerning the disclosure of the rationale for assumptions not selected by the actuary, was clarified concerning the application to planned assumption changes after the measurement date, and was clarified regarding disclosures for mortality assumptions.

Request for Comments

The ASB appreciates comments and suggestions on all areas of this proposed standard. Rationale and recommended wording for any suggested changes would be helpful.

The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure draft.

The ASB voted in June 2019 to approve this exposure draft.

Pension Committee of the ASB
Christopher F. Noble, Chairperson
Margaret S. Berger David T. Kausch
Sarah E. Dam Stephen T. McElhaney
Stacey A. Day Keith L. Nichols
Tammy F. Dixon Matthew M. Smith
Howard A. Freidin
Actuarial Standards Board
Kathleen A. Riley, Chairperson
Christopher S. Carlson Darrell D. Knapp
Maryellen J. Coggins Cande J. Olsen
Robert M. Damler Barbara L. Snyder
Mita D. Drazilov Patrick B. Woods

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.

PROPOSED REVISION OF ACTUARIAL STANDARD OF PRACTICE NO. 35

SELECTION OF DEMOGRAPHIC AND OTHER NONECONOMIC ASSUMPTIONS FOR MEASURING PENSION OBLIGATIONS

STANDARD OF PRACTICE

Section 1. Purpose, Scope, Cross References, and Effective Date

1.1 Purpose

This actuarial standard of practice (ASOP or standard) does the following:

a. provides guidance to actuaries when performing actuarial services that include selecting (including giving advice on selecting) demographic and other noneconomic assumptions for measuring obligations under defined benefit pension plans;

b. supplements the guidance in ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions, that relates to the selection and use of demographic and other noneconomic assumptions;

c. supplements the guidance in ASOP No. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions, that relates to the selection and use of demographic and other noneconomic assumptions; and

d. supplements the guidance in ASOP No. 34, Actuarial Practice Concerning Retirement Plan Benefits in Domestic Relations Actions, that relates to the selection and use of demographic and other noneconomic assumptions.

1.2 Scope

This standard applies to actuaries when performing actuarial services that include selecting demographic and all other assumptions not covered by ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations, to measure obligations under any defined benefit pension plan that is not a social insurance program as described in section 1.2, Scope, of ASOP No. 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). Measurements of defined benefit pension plan obligations include calculations such as funding valuations or other assignment of plan costs to time periods, liability measurements or other actuarial present value calculations, and cash flow projections or other estimates of the magnitude of future plan obligations. Measurements of pension obligations do not generally include individual benefit calculations, individual benefit statement estimates, or nondiscrimination testing.

Throughout this standard, any reference to selecting demographic and other noneconomic assumptions also includes giving advice on selecting demographic and other noneconomic assumptions. For example, the actuary may provide advice on selecting demographic and noneconomic assumptions under US GAAP or Governmental Accounting Standards even though another party is ultimately responsible for selecting these assumptions. This standard applies to the actuarial advice given in such situations, within the constraints imposed by the relevant accounting standards.

As discussed in ASOP No. 41, Actuarial Communications, an assumption may be selected by the actuary or selected by another party. Nothing in this standard is intended to require the actuary to select a demographic or other noneconomic assumption that has otherwise been selected by another party. When a demographic or other noneconomic assumption is not selected by the actuary, the guidance in section 3.8 and section 4 concerning assessment and disclosure applies.

If the actuary determines that the guidance in this standard conflicts with ASOP Nos. 4 or 6, ASOP Nos. 4 or 6 will govern.

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. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law.

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 is effective for any actuarial report that meets the following criteria: (a) the actuarial report is issued on or after a date that is 12 months after the date of adoption of this standard by the Actuarial Standards Board; and (b) the measurement date in the actuarial report is on or after a date that is 12 months after the date of adoption of this standard by the Actuarial Standards Board.

Section 2. Definitions

The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP.

2.1 Assumption Format

The form in which a particular demographic assumption will be used or expressed. In some cases, the assumption will take the form of a table where the probability of the occurrence of a given event depends on parameters such as gender, age, service, or calendar year. In other cases, the assumption may be a point estimate, implying 100% probability of occurrence of a given event at the stated point. An example of a point estimate assumption is an assumption that 100% of the population will retire at age 62. The assumption format may include different tables or point estimates for different segments of the covered population.

2.2 Assumption Universe

For each demographic assumption, a universe consisting of the possible options that the actuary might reasonably use for the specific assumption. For example, an assumption universe for a mortality assumption might reasonably include relevant published or proprietary mortality tables and possible adjustments, such as projections of mortality improvement. For some pension plans, an assumption universe for a specific assumption might reasonably include a table or factors developed specifically for that plan.

2.3 Demographic Assumptions

Demographic and all other noneconomic assumptions (i.e., those assumptions not covered in ASOP No. 27), unless explicitly stated otherwise.

2.4 Measurement Date

The date as of which the values of the pension obligations and, if applicable, assets are determined.

2.5 Measurement Period

The period subsequent to the measurement date during which a particular demographic assumption will apply in a given measurement.

2.6 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 give the other party responsibility for selecting such an assumption or method. For this purpose, an assumption or method selected by a governmental entity for a plan that such governmental entity or a political subdivision of that entity directly or indirectly sponsors is a prescribed assumption or method set by another party.

2.7 Prescribed Assumption or Method Set by Law

A specific assumption or method that is mandated or that is selected from a specified range or set of assumptions or methods that is deemed to be acceptable by applicable law (statutes, regulations, and other legally binding authority). For this purpose, an assumption or method selected by a governmental entity for a plan that such governmental entity or a political subdivision of that entity directly or indirectly sponsors is not a prescribed assumption or method set by law.

Section 3. Analysis of Issues and Recommended Practices

3.1 Overview

The actuary should use professional judgment to estimate possible future outcomes based on past experience and future expectations and select assumptions based upon application of that professional judgment. The actuary should select reasonable demographic assumptions in light of the particular characteristics of the defined benefit plan that is the subject of the measurement. For any given measurement, the actuary will typically be able to identify a range of reasonable assumptions for the same contingency.

3.2 Demographic Assumption Selection Process

The actuary should follow the process below, as applicable, for selecting demographic assumptions. The actuary need not follow this complete process at each measurement date for each assumption if, in the actuary’s professional judgment, previously selected assumptions continue to be reasonable (see section 3.7).

3.2.1 Identify the Types of Assumptions

The actuary should identify the types of demographic assumptions to use for a specific measurement. In doing so, the actuary should take into account the following:

a. the purpose of the measurement;

b. the plan provisions or benefits and factors that will affect the timing and value of any potential benefit payments;

c. the characteristics of the obligation to be measured (such as measurement period, pattern of plan payments over time, open or closed group, materiality, and volatility);

d. the contingencies that give rise to benefits or result in loss of benefits;

e. the materiality of the assumption to the measurement (see section 3.10.2); and

f. the characteristics of the covered group.

The types of demographic assumptions used to measure pension obligations may include retirement, termination of employment, mortality and mortality improvement, disability and disability recovery, election of optional forms of benefits, and other assumptions such as administrative expenses; household composition; marriage, divorce, and remarriage; open group assumptions; hours of service; transfers; and assumptions regarding missing or incomplete data.

Not every contingency requires a separate assumption. For example, for a plan that is expected to provide benefits of equal value to employees who voluntarily terminate employment or become disabled, retire, or die, the actuary may use an assumption that reflects some or all of the above contingencies in combination rather than selecting a separate assumption for each.

3.2.2 Consider the Relevant Assumption Universe

The actuary should be familiar with the assumption universe relevant to each type of assumption identified in section 3.2.1. This may include tables or factors particular to the given plan as well as general tables, factors, and modifications to the tables that are available to actuaries. Sources of information relevant to demographic assumptions may include the following:

a. experience studies or published tables based on experience under uninsured plans and annuity contracts, or based on any other populations considered representative of the group at hand;

b. relevant plan or plan sponsor experience, which may include analyses of gains or losses by source;

c. studies or reports of the effects of plan design, specific events (for example, shutdown), economic conditions, or sponsor characteristics on the demographic assumption under consideration;

d. studies or reports of general trends relevant to the type of demographic assumption in question (for example, mortality improvement in the United States); and

e. relevant information from the plan sponsor or other sources about future expectations.

3.2.3 Consider Assumption Formats

The actuary should select an appropriate format for each demographic assumption. Factors that affect format specification may include the following:

a. the degree to which the assumption format may affect the results;

b. the availability of tables, data, or information relevant to the assumption being selected;

c. the degree to which the assumption format has the potential to model anticipated plan experience;

d. the size of the covered population; and

e. the degree to which a parameter (such as gender, age, service, or calendar year) is anticipated to affect experience.

In many situations it is appropriate for the format to include assumptions for different segments of the covered population. For example, it may be appropriate to have different mortality tables for males and females or different turnover tables for salaried and hourly employees.

3.2.4 Select the Specific Assumptions

The actuary should select each demographic assumption from the appropriate assumption universe. In all cases, the actuary should take into account the significance of each assumption selected, which may include the consequences of experience deviating significantly from the selected assumption. The actuary should take into account factors specific to the measurement when selecting assumptions. Examples of such factors are as follows:

a. the purpose and nature of the measurement. For example, a cash flow projection may require more refined assumptions than a liability measure;

b. any features of the plan design or change in the plan design that may influence the assumption. For example, the introduction of an early retirement subsidy could influence the plan’s incidence of retirement; under these circumstances, in order to measure the incremental cost associated with this change, the retirement assumption for the proposed plan provision may differ from the retirement assumption for the current provision;

c. appropriate experience from the specific plan and other relevant sources; and

d. relevant factors known to the actuary that may affect future experience, such as the economic conditions of the area or industry, availability of alternative employment, or the human resources practices of the employer.

Specific experience of the covered group or other groups with similar characteristics may be useful in forming a judgment about future expectations. However, the actuary should not give undue weight to experience that is not sufficiently credible. The actuary should refer to ASOP No. 25, Credibility Procedures, for additional guidance.

In addition, the actuary should not give undue weight to experience that may not be relevant to future expectations. For example, if recent rates of termination and retirement were largely attributable to a one-time workforce reduction, it may be unreasonable to assume that such rates will continue over the measurement period.

3.2.5 Select a Reasonable Assumption

The actuary should select reasonable demographic assumptions. For this purpose, an assumption is reasonable if it has the following characteristics:

a. it is appropriate for the purpose of the measurement;

b. it reflects the actuary’s professional judgment;

c. it takes into account current and historical data that is relevant to selecting the assumption for the measurement date, to the extent such relevant data is reasonably available;

d. it reflects the actuary’s estimate of future experience, the actuary’s observation of the estimates inherent in market data (if any), or a combination thereof; and

e. it is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic), except when provisions for adverse deviation or plan provisions that are difficult to measure are included (as discussed in section 3.10.1) and disclosed under section 4.1.1 or when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.

3.3 Range of Reasonable Assumptions

Due to the uncertain nature of the items for which assumptions are selected, the actuary may consider several different assumptions reasonable for a given measurement. Different actuaries will apply different professional judgment and may choose different reasonable assumptions. As a result, a range of reasonable assumptions may develop, both for an individual actuary and across actuarial practice.

3.4 Specific Considerations

When performing the assumption selection process described in section 3.2, the actuary should be aware of specific considerations that may apply to the selection of individual assumptions, as discussed below.

3.4.1 Retirement

The actuary should take into account factors that may affect rates of retirement, such as the following:

a. employer-specific or job-related factors such as occupation, employment practices, work environment, unionization, hazardous conditions, and location of employment;

b. the plan design, where specific incentives may influence when participants retire;

c. the design of, and date of anticipated payment from, social insurance programs (for example, Social Security or Medicare); and

d. the availability of other employer-sponsored postretirement benefit programs (for example, postretirement health coverage or savings plan).

3.4.2 Termination of Employment

The actuary should take into account factors that may affect rates of termination of employment, such as the following:

a. employer-specific or job-related factors such as occupation, employment practices, work environment, unionization, hazardous conditions, and location of employment; and

b. plan provisions, such as early retirement benefits, vesting schedule, or payout options.

3.4.3 Mortality

The actuary should take into account factors that may affect rates of mortality, such as the following:

a. the characteristics of employees and retirees (for example, it may be reasonable to select different assumptions for pre and post retirement);

b. the size of the covered population (for example, for some small plans, a reasonable model for mortality may be to assume no mortality before retirement);

c. the characteristics of disabled lives, which may depend on the plan’s definition of disability and how it is administered; and

d. the characteristics of different participant subgroups and beneficiaries.

In addition, the actuary should consider using recently published and generally available mortality tables.

3.4.4 Mortality Improvement

The actuary should reflect the effect of mortality improvement (which may be positive, negative, or zero) both before and after the measurement date. With regard to mortality improvement, the actuary should do the following:

a. adjust mortality rates to reflect an assumption as to mortality improvement before the measurement date. For example, if the actuary starts with a published mortality table, the mortality rates may need to be adjusted to reflect mortality improvement from the effective date of the table to the measurement date. Such an adjustment is not necessary if, in the actuary’s professional judgment, the published mortality table reflects expected mortality rates as of the measurement date. This assumption should be disclosed in accordance with section 4.1.1, even if the actuary concludes that such an adjustment is not necessary; and

b. include an assumption as to expected mortality improvement after the measurement date. This assumption should be disclosed in accordance with section 4.1.1, even if the actuary concludes that an assumption of zero future improvement is reasonable as described in section 3.2.5. Note that the existence of uncertainty about the occurrence or magnitude of future mortality improvement does not by itself mean that an assumption of zero future improvement is a reasonable assumption.

3.4.5 Disability and Disability Recovery

The actuary should take into account factors that may affect rates of disability and disability recovery, such as the following:

a. the plan’s definition of disability (for example, whether the disabled person is eligible for Social Security benefits); and

b. the potential for recovery. For example, if the plan requires continued disability monitoring and if the plan’s definition of disability is not highly restrictive, an assumption for rates of recovery may be appropriate. Alternatively, the probability of recovery may be reflected by assuming a lower incidence of disability than the actuary might otherwise assume.

3.4.6 Election of Optional Form of Benefit

The actuary should take into account factors that may affect rates of electing an optional form of benefit, such as the following:

a. the optional forms of benefit and benefit commencement dates available under the plan being valued;

b. the historical or expected experience of elections under the plan being valued and similar plans; and

c. the degree to which particular optional forms of benefit may be subsidized.

3.4.7 Expenses Paid from Plan Assets

The actuary should take into account expenses paid from plan assets such as investment advisory, investment management, or insurance advisory services; premiums paid to the Pension Benefit Guaranty Corporation (PBGC); accounting and auditing services; actuarial services; plan administration services; legal services; and trustee services. Formats for these assumptions may include a dollar amount, a specific percentage of assets, a reduction in the investment return assumption, a percentage of benefit obligation or normal cost, or a combination thereof.

3.5 Other Demographic Assumptions

The actuary should follow the general selection process outlined in section 3.2 when selecting other assumptions relevant to the measurement. Such assumptions may include the following:

3.5.1 Household Composition

Household composition may affect the payment of benefits, the amount of benefits, or other demographic assumptions. For example, some plans provide annuity death benefits to surviving children under a stated age. In that case, an assumption as to the number and ages of the potential beneficiaries may be needed.

3.5.2 Marriage, Divorce, and Remarriage

Marriage, divorce, or remarriage may affect the payment of benefits, the amount or type of benefits, or the continuation of benefit payments. An assumption regarding beneficiary ages may also be necessary.

3.5.3 Open Group

Certain assumptions, such as the number and characteristics of new entrants, are applicable in open-group measurements.

3.5.4 Hours of Service

Assumptions for hours of service are generally plan- or industry-specific. Separate assumptions may also be needed for such purposes as benefit accrual and total employer plan contributions.

3.5.5 Transfers and Return to Employment

The assumptions for transfers or return to employment are generally plan- or industry-specific. Transfers and return to employment may be one-time events or may be continual if employees are required or permitted to move among groups that are covered by the same or different plans.

3.5.6 Missing or Incomplete Data

The data provided may be incomplete due to missing elements such as birth dates or hire dates. Accordingly, assumptions for missing or incomplete data may be necessary if the actuary has determined, in accordance with ASOP No. 23, Data Quality, that the overall data are of sufficient quality to complete the assignment. Data actually supplied may be relevant in making such assumptions. For example, it may be appropriate to assume a missing birth date is equal to the average birth date for other participants who have complete data and who have the same service credits as the participant whose date of birth is missing.

3.6 Consistency among Assumptions Selected by the Actuary for a Particular Measurement

With respect to a particular measurement, the actuary should select demographic assumptions that are consistent with the other assumptions selected by the actuary, including economic assumptions, unless an assumption considered individually is not material (see section 3.10.2). For example, if an employer’s business is in decline and the effect of that decline is reflected in the turnover assumption, it may be appropriate to reflect a change in the retirement assumption, and it may also be appropriate to reflect a change in the compensation increase assumption.

In addition, the actuary should review the assumptions for consistency with demographic assumptions used for measurements of different benefit plans covering the same covered group, if that information is available to the actuary. To the extent the actuary determines that inconsistencies exist, the actuary should determine whether those inconsistencies are reasonable and make adjustments if appropriate.

The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary.

3.7 Reviewing Assumptions Previously Selected by the Actuary

At each measurement date, the actuary should determine whether the assumptions selected by the actuary for a previous measurement date continue to be reasonable. In making this determination, the actuary should take into account changes in relevant factors known to the actuary that may affect future experience. The actuary should also review recent gain and loss analyses, if any. In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. For each previously selected assumption that the actuary determines is no longer reasonable, the actuary should select a reasonable new assumption.

3.8 Assessing Assumptions Not Selected by the Actuary

At each measurement date, the actuary should assess the reasonableness of each demographic assumption that the actuary has not selected (other than prescribed assumptions or methods set by law or assumptions disclosed in accordance with section 4.2[b]), using the guidance set forth in this standard to the extent practicable.

3.9 Phase-In of Changes in Assumptions

If a demographic assumption is being phased in over a period that includes multiple measurement dates, the actuary should determine the reasonableness of the demographic assumption and its consistency with other assumptions as of the measurement date at which it is applied, without regard to changes to the assumption planned for future measurement dates. If the actuary determines that a demographic assumption is not reasonable as of the measurement date at which it is applied, the actuary should select a reasonable new assumption.

3.10 Other Considerations

The actuary should take into account the following considerations when applicable:

3.10.1 Adverse Deviation or Plan Provisions That Are Difficult to Measure

Depending on the purpose of the measurement, the actuary may determine that it is appropriate to adjust the demographic assumptions to provide for considerations such as adverse deviation or plan provisions that are difficult to measure, as discussed in ASOP No. 4. Any such adjustment made should be disclosed in accordance with section 4.1.1.

3.10.2 Materiality

The actuary should take into account the balance between refined demographic assumptions and materiality. The actuary is not required to use a particular type of demographic assumption or to select a more refined demographic assumption when in the actuary’s professional judgment such use or selection is not expected to produce materially different results.

3.10.3 Cost of Using Refined Assumptions

The actuary should take into account the balance between refined demographic assumptions and the cost of using refined demographic assumptions. For example, actuaries working with small plans may prefer to emphasize the results of general research to comply with this standard. However, they are not precluded from using relevant plan-specific facts.

3.10.4 Combined Effect of Assumptions

The actuary should select assumptions (both demographic assumptions selected in accordance with this standard and economic assumptions selected in accordance with ASOP No. 27) such that the combined effect of the assumptions selected by the actuary is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic) except when provisions for adverse deviation are included. For example, the actuary may have decided not to make any assumption with regard to four different types of future events, each of which alone is immaterial. However, the effect of omitting assumptions for all four types of future events may be a material understatement or overstatement of the measurement results. In these circumstances, the assumptions should be revised.

3.10.5 Changes in Circumstances

The actuary should select demographic assumptions that reflect the actuary’s knowledge as of the measurement date. However, the actuary may learn of an event occurring after the measurement date (for example, plan termination or death of the principal owner), that would have changed the actuary’s selection of a demographic assumption. If appropriate, the actuary may reflect this change as of the measurement date.

3.10.6 Other Sources of Demographic Data and Analyses

Demographic data and analyses are available from a variety of other sources, including representatives of the plan sponsor and administrator, demographers, economists, and other professionals. When the actuary is responsible for selecting or giving advice on selecting demographic assumptions within the scope of this standard, the actuary may incorporate these other sources, but the selection or advice should reflect the actuary’s professional judgment.

3.11 Documentation

The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. When preparing documentation, the actuary should prepare documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work or could assume the assignment if necessary. The degree of such documentation should be based on the professional judgment of the actuary, and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41, section 3.8, for guidance related to the retention of file material other than that which is to be disclosed under section 4.

Section 4. Communications and Disclosures

4.1 Required Disclosures in an Actuarial Report

When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. 4, 23, 25, 27, 41, and 51. In addition, the actuary should disclose the following in such actuarial reports:

4.1.1 Assumptions Used

The actuary should describe each significant demographic assumption used in the measurement and whether the assumption represents an estimate of future experience, the actuary’s observation of the estimates inherent in market data, or a combination thereof. The actuary should also include a disclosure of any explicit adjustment made in accordance with section 3.10.1 for adverse deviation or plan provisions that are difficult to measure as discussed in ASOP No. 4. Sufficient detail should be shown to permit another qualified actuary to assess the level and pattern of each assumption (for example, by supplying the name of a published decrement table or by showing turnover rates at every fifth age for an unpublished age-based table).

The disclosure of the mortality assumption should contain sufficient detail to permit another qualified actuary to understand any adjustment to reflect mortality improvement from the effective date of the table to the measurement date and the provision made for future mortality improvement. If the actuary assumes zero mortality improvement after the measurement date, the actuary should state that no provision was made for future mortality improvement.

4.1.2 Rationale for Assumptions

For each demographic assumption that has a significant effect on the measurement and that the actuary has selected, the actuary should disclose the information and analysis used to support the actuary’s determination that the assumption is reasonable.

For each demographic assumption that has a significant effect on the measurement and that the actuary has not selected (other than prescribed assumptions or methods set by law or assumptions disclosed in accordance with section 4.2[a] or [b]), the actuary should disclose the information and analysis used to support the actuary’s determination that the assumption does not significantly conflict with what, in the actuary’s professional judgment, is reasonable for the purpose of the measurement.

The disclosures should be based on the demographic assumptions as of the measurement date at which they are applied without regard to changes to the assumptions planned for future measurement dates. These disclosures may be brief but should be pertinent to the plan’s circumstances. For example, the actuary may disclose any specific approaches used, sources of external advice, and how past experience and future expectations were considered in determining the assumption to be reasonable. If applicable, the actuary should disclose the time period of relevant plan or plan sponsor experience that was last analyzed, including the date of any experience study used in the selection process.

Additionally, if the disclosure relates to a mortality assumption that is based on mortality tables that substantially predate more recently published relevant and generally available mortality tables, the actuary should disclose the justification for the use of such tables instead of a more recently published table.

4.1.3 Changes in Assumptions

The actuary should disclose any changes in the significant demographic assumptions from those previously used for the same type of measurement. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. For situations in which both the demographic assumptions and economic assumptions have changed from those previously used for the same type of measurement, the actuary may disclose the general effects of the changes separately or combined, as appropriate. For each assumption that is neither a prescribed assumption or method set by another party nor a prescribed assumption or method set by law, the actuary should include an explanation of the information and analysis that led to the change.

The disclosure may be brief but should be pertinent to the plan’s circumstances. The disclosure may reference any actuarial experience study performed, including the date of the experience study report.

4.1.4 Changes in Circumstances

The actuary should refer to ASOP No. 41 for communication and disclosure requirements regarding changes in circumstances known to the actuary that occur after the measurement date and that would affect demographic assumptions selected as of the measurement date.

4.2 Disclosure about Assumptions Not Selected by the Actuary

The actuary’s report should state the source of any assumption that the actuary has not selected.

With respect to assumptions that the actuary has not selected, other than prescribed assumptions or methods set by law, the actuary’s report should identify the following, if applicable:

a. any such assumption that significantly conflicts with what, in the actuary’s professional judgment, is reasonable for the purpose of the measurement (section 3.8); or

b. any such assumption that the actuary is unable to assess for reasonableness for the purpose of the measurement (section 3.8).

4.3 Additional Disclosures in an Actuarial Report

The actuary should also include the following, when applicable, in an actuarial report:

a. 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

b. 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 ASOP is intended to require the actuary to disclose confidential information.

Appendix—Comments on the First Exposure Draft and Responses

The first exposure draft of the proposed revision of ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations, was issued in March 2018 with a comment deadline of July 31, 2018. Sixteen 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 here are the significant issues and questions contained in the comment letters and the responses to each. Minor wording or punctuation changes that are suggested but not significant are not reflected in the appendix, although they may have been adopted.

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.

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