Actuarial Audits Internal Auditor Breakout Session

Transcription

1 Actuarial Audits Internal Auditor Breakout Session Presentation: Nick Collier, Milliman Color Commentary: Richard Bendall, LACERA 11/14/2018 Actuarial Audits (Internal Auditor Breakout) 1

2 Overview Purpose Types of actuarial audits Selection process Actuarial audit process Typical findings of actuarial audit Bonus material 11/14/2018 Actuarial Audits (Internal Audit Breakout) 2

3 Terminology Normal Cost rate Value as a % of pay of benefit earned in year Actuarial Accrued Liability (AAL) Actuarial Value of Assets (AVA) Unfunded Actuarial Accrued Liability (UAAL) 11/14/2018 Actuarial Audits (Internal Audit Breakout) 3

4 Purpose of Actuarial Audit Assure calculations are accurate and assumptions are reasonable One of the best tools to help boards satisfy its fiduciary responsibility with regard to the actuarial function GFOA characterizes actuarial audits as best practice. Per GFOA: Due diligence requires that pension plan fiduciaries and plan sponsors exercise prudence in selecting service providers such as actuaries, and monitor the quality of their work. An actuarial audit is a valuable tool for monitoring the quality of actuarial services performed on behalf of the pension plan. 11/14/2018 Actuarial Audits (Internal Audit Breakout) 4

5 Selection Process RFP Separate audit or combined with retained services How often? GFOA recommends at least once every five years RFP or retained auditor 11/14/2018 Actuarial Audits (Internal Audit Breakout) 5

6 Selection Process (continued) Same firm as last actuarial audit or rotate? Same firm: familiarity with system, known track record, efficiency, more in-depth Different firm: fresh set of eyes, different perspective 11/14/2018 Actuarial Audits (Internal Audit Breakout) 6

7 Types of Actuarial Audits Level of review Peer review with sampling of individual calculations Peer review with no calculations Full replication of calculations Timing of review Parallel Post-release 11/14/2018 Actuarial Audits (Internal Audit Breakout) 7

8 Typical Audit Schedule Kick-off meeting Request information from system staff and retained actuary Assumptions Core calculations: data, individual and aggregate liability calculations, assumptions, member rates, employer contributions Summary report and presentation 11/14/2018 Actuarial Audits (Internal Audit Breakout) 8

9 Actuarial Audit Process Basically the same calculations as the retained actuary Individual test life calculations Primary calculations in peer review audits Key in replication audit for identifying differences in liability calculations 11/14/2018 Actuarial Audits (Internal Audit Breakout) 9

10 Test Life Calculations What auditing actuary receives from retained actuary Present value of benefits by type Normal Cost by type Present value of future salary 11/14/2018 Actuarial Audits (Internal Audit Breakout) 10

11 Test Life Calculations (continued) Prob Prob of Limited 3-Year Age Credited Monthly Present PV of Age Active Svc Ret Pay Avg Pay Factor Service Benefit discount Value $1 Svc Ret % 0.0% 70,315 65,353 na 18.0 na 35.0% % 0.0% 72,951 67,804 na 19.0 na 32.7% % 3.0% 75,687 70, % , % , % 5.0% 78,525 72, % , % , % 5.0% 81,470 75, % , % , % 10.0% 84,525 78, % , % , % 10.0% 87,695 81, % , % , % 10.0% 90,983 84, % , % , % 10.0% 94,395 87, % , % , % 10.0% 97,935 91, % , % , % 10.0% 101,608 94, % , % , % 10.0% 105,418 97, % , % , % 20.0% 109, , % , % , % 30.0% 113, , % , % , % 30.0% 117, , % , % , % 100.0% 122, , % , % ,431 Total Present Value of Benefit (Milliman) = 62,211 11/14/2018 Actuarial Audits (Internal Audit Breakout) 11

12 ASOPs vs GAAP Like accounting profession has GAAP, actuarial profession has Actuarial Standards of Practice Reflecting there tends to be more ambiguity in actuarial work, ASOPs have more flexibility than GAAP Therefore, expectation is there will be differences in calculations and assumptions from one actuary to the next 11/14/2018 Actuarial Audits (Internal Audit Breakout) 12

13 Additional Guidance CAAP & CCA CCA guidance on public retirement system funding CCA is Conference of Consulting Actuaries Actuarial Funding Policies and Practices for Public Pension Plans Basis of work was done by California Actuarial Advisory Panel Strictly guidance, nothing binding 11/14/2018 Actuarial Audits (Internal Audit Breakout) 13

14 Typical Audit Findings -- Calculations Significant differences in overall results are very rare these days Examples of areas where we may see differences Consistency of timing of salary increases used in liability calculation and payroll increases used in UAAL amortization Normal cost calculations Changes since prior audit PEPRA benefits, assumption changes, administrative expense load, etc. 11/14/2018 Actuarial Audits (Internal Audit Breakout) 14

15 Audit Findings Typical Assumption Differences Investment return Investment consultants used in analysis Geometric vs arithmetic 20%, -20% example Average arithmetic rate has less than 50% probability of being achieved 11/14/2018 Actuarial Audits (Internal Audit Breakout) 15

16 Audit Findings Typical Assumption Differences Mortality Benefit weighted vs head-count weighted Generational vs static PEPRA retirement rates Consideration of lower rates for PEPRA tiers than classic tiers 11/14/2018 Actuarial Audits (Internal Audit Breakout) 16

17 Audit Methods Mortality Assumption Syst #5 Syst #9 Syst #7 Syst #2 Syst #8 Syst #4 System Syst #1 Life Expectancy for Service Retirements at Age 65 in 2017 Average of Male and Female General Members 20% 15% 10% 5% Annual Probability of Death General Female Retirees Number of Deaths Actual Expected Milliman Joe Actuary Syst #6 Syst # Expected Age at Death 0% Milliman Joe Actuary Expected Rate 11/14/2018 Actuarial Audits (Internal Audit Breakout) 17

18 Materiality -- Liabilities What is a material difference in an actuarial audit? Materiality not defined in actuarial standards of practice My personal rules of thumb (completely non-binding) Depends on size of liability and complexity of benefit Liabilities for members in payment: expect <1% difference Liabilities for active members: expect <2% difference - May see more difference in ancillary benefits: expect <5% 11/14/2018 Actuarial Audits (Internal Audit Breakout) 18

19 Materiality Contribution Rates Basic member rates COLA member rates PEPRA member rates Employer contribution rates Sum of Normal Cost rate less member contribution plus unfunded contribution Higher tolerance for very small subgroups 11/14/2018 Actuarial Audits (Internal Audit Breakout) 19

20 Comment, Consider or Recommend? Important to put results in perspective Results will always differ to a certain extent Alternate approaches are reasonable Appropriate to discuss alternate methods, but we are careful to make recommendations unless there is a compelling reason We usually break down recommendations as follows: Changes that should be made in the next valuation / experience study that are material Changes that should be made in the next valuation / experience study that are not material Changes to be considered for future valuations / experience studies 11/14/2018 Actuarial Audits (Internal Audit Breakout) 20

21 Bonus Material Actuarial 101 Actuarial methods Amortization of UAAL Contribution rate smoothing 37 Act system statistics 11/14/2018 Actuarial Audits (Internal Audit Breakout) 21

22 Simple Liability Calculation Example Age 65-year retiree with $2,500 monthly benefit and 2% COLA 11/14/2018 Actuarial Audits (Internal Audit Breakout) 22

23 Simple Example Non-Actuary s View $50,000 Annual Payments Based on Life Expectancy $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $ COLA Benefit Base Benefit 11/14/2018 Actuarial Audits (Internal Audit Breakout) 23

24 Simple Example Actuary s View $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Annual Payments Based on Annual Mortality Projected payments estimated to be $890k $ COLA Benefit Base Benefit 11/14/2018 Actuarial Audits (Internal Audit Breakout) 24

25 Simple Example Discounted Value of Payments $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 PV of Annual Payments Based on Mortality by Age Present value of projected payments is $390k $ COLA Benefit Base Benefit 11/14/2018 Actuarial Audits (Internal Audit Breakout) 25

26 Active Liability Calculations Many more variables than for current retirees Type of benefit, age leaving active service, future salaries, etc. Then similar calculations to retirees Applying assumptions to all current members and summing projected payments 11/14/2018 Actuarial Audits (Internal Audit Breakout) 26

27 Total Projection of Payments Millions of Dollars Future Members 200 Actives - Unaccrued Benefits 180 Actives - Accrued Benefits Terminated & Inactive 120 Retirees /14/2018 Actuarial Audits (Internal Audit Breakout) 27

28 How Projected Payments are Funded Millions of Dollars Normal Cost 120 Contributions /14/2018 Actuarial Audits (Internal Audit Breakout) 28

29 How Projected Payments are Funded Remaining piece is UAAL and is funded by UAAL contributions Millions of Dollars Normal Cost 140 Normal Cost Contributions 120 Contributions Current Assets /14/2018 Actuarial Audits (Internal Audit Breakout) 29

30 Amortization of UAAL Closed: creates contribution rate volatility as period gets shorter Open: never projected to fully pay off UAAL Layered Used by most of 37 Act systems Combines best characteristics of open and closed Can cause contribution rate volatility when layers are fully amortized Amortization Period: Average is around 20 years for 37 Act systems 11/14/2018 Actuarial Audits (Internal Audit Breakout) 30

31 Contribution Rate Smoothing Most systems reduce contribution rate volatility by employing asset smoothing CalPERS uses market value of assets but smooths contribution rate changes over five years Results are generally similar to five-year asset smoothing Main difference is that CalPERS approach also smooths other UAAL changes, including changes due to new assumptions 11/14/2018 Actuarial Audits (Internal Audit Breakout) 31

32 37 Act Statistics As of October 2018, so virtually all are based on 6/30/17 and 12/31/17 valuation dates Average Funded Ratio = 77.6% Average investment return assumption = 7.15% About 2/3 rds of systems use generational mortality 11/14/2018 Actuarial Audits (Internal Audit Breakout) 32

33 Funded Ratios Funded Ratios for '37 Act Systems 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 11/14/2018 Actuarial Audits (Internal Audit Breakout) 33

34 Conclusion The opinion s expressed in this presentation are those of the presenter and not necessarily those of Milliman Thank you for your time 11/14/2018 Actuarial Audits (Internal Audit Breakout) 34