Questions You Should Consider Asking Your Actuary

Transcription

1 Questions You Should Consider Asking Your Actuary Texas Pension Review Board Annual Seminar October 1, 2012 Austin, Texas Mark R. Fenlaw, F.S.A.

2 Not All Actuaries are Good at Educating Their Audience How Can You Help Your Plan s Actuary Give You Useful Information? 1

3 Your Actuary May Have Characteristics of My Sons First son Conversational Informative Transparent Second son Outgoing Entertaining In his own world Your plan s actuary May tell you all he thinks you need to know May tell you too much or too fast May be entertaining May lack presentation or writing skills You and your board Still have some questions you could ask him Have some questions you need to ask him Definitely have some questions you need to ask him Have your work cut out for you 2

4 So How Can You Help Learn More About Actuarial Issues? Patience Repetition Questions each time Preparation before board meeting Adequate time for actuarial presentation Climate conducive to questions Stopping actuary, if necessary, to get clarification In Summary, Encourage a Learning Environment 3

5 Questions for Newer Board Members to Ask What is an actuarial valuation? What is its primary purpose? What is the UAAL? Why does our plan have one? Is it bad? What is an actuarial gain or loss? What is the amortization period? What is the funded ratio? Why is the 0% funded ratio benchmark a myth? AAA Issue Brief: The 0% Pension Funding Standard Myth In Summary, Answers to Questions May be the Key to Understanding Actuarial Issues 4

6 Questions to Ask about Actuarial Assumptions and Methods How did you review or determine our current assumptions? Investment return assumption Salary increase assumption Demographic assumptions Does our mortality assumption include projected mortality improvement beyond the valuation date? When did you last review and change each of our key actuarial assumptions? How does the actuarial value of assets smoothing method work? In Summary, the Board is Jointly Responsible with the Actuary for the Actuarial Assumptions and Methods 5

7 Questions to Ask about Actuarial Condition Does our retirement system have an adequate contribution arrangement? Based on the most recent actuarial valuation Based on the current contribution rates of the participants and of the employer If not, how much more in employer contributions would be required to have an adequate contribution arrangement? What will the next four years look like under several different investment return scenarios? In Summary, These Questions about Actuarial Condition are the Key Questions for Your Actuary 6

8 Next Four Years for a Fixed Contribution Rate Plan (Actuarially Determined Amortization Period) Projected Amortization Periods Assumed Investment Return for Calendar Year and later Amortization Period as of December 31: 2011 (actual) 2012 (projected) 2013 (projected) 2014 (projected) 2015 (projected) Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 % 31 years 41 years 43 years 45 years 4 years 4% years 43 years 4 years 57 years 0 years 6% years 42 years 46 years 51 years 60 years % 31 years 41 years 41 years 41 years 40 years 12% years 40 years 39 years 37 years 34 years 7

9 Next Four Years for an Actuarially Determined Contribution Rate Plan (Pre-Determined Amortization Period) Projected Employer Contribution Rate Assumed Investment Return for Calendar Year and later Employer Contribution Rate for Calendar Year 2009 (actual) 20 (projected) 2011 (projected) 2012 (projected) 2013 (projected) Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 % 12.0% % 12.0% % % % % % %

10 Benefit Reduction Questions What are the most effective changes to make to restore an adequate contribution arrangement? What other changes should be considered in order to improve the potential perception of the benefit design? What are the expected replacement ratios for future retirees without the reductions vs. with the reductions? Replacement ratio is projected retirement benefit as a percent of the projected salary in the year before retirement Case study example In Summary, Benefit Reduction is Not a Standard Actuarial Procedure but a Joint Process that Requires a Number of Policy Decisions by the Board 9

11 Total Projected Replacement Ratios for Three Different Plan Design Options for New Hires Combined with the 457 Plan and Social Security Male Age 62 with 30 Years Mid Salary Male Age 67 with 35 Years Mid Salary 120% DB DC CB DB DC CB 3.7% 0% % of Final Salary 0% 60% 76.% 37.2% 56.1% 57.9% 49.1% 7.5% 7.6% 23.9% 24.0% 40% 16.5% 1.3% 21.0% 21.0% 21.0% 15.7% 15.7% 15.7% 20% 23.9% 23.9% 23.9% 33.6% 33.6% 33.6% 0% Social Security 457 Defined Benefit Defined Contribution Cash Balance Column1

12 Final Thoughts for Encouraging a Learning Environment Do you allow adequate time for actuarial presentations? Do you create a climate conducive to questions? Do you view your actuarial team as a resource? Provide necessary actuarial services Enhance your understanding of key concepts Help you carry out your fiduciary responsibilities When you go through an RFP for actuarial services, do you Review a sample actuarial valuation report to see if it answers the key questions about the actuarial condition of the system? Contact references and ask them about an actuary s ability to help board members understand key actuarial issues? In Summary, Your Actuary Can Add Value If You Ask the Right Questions 11