What are those actuaries up to now!?!

Transcription

1 SACRS Fall 2016 Conference What are those actuaries up to now!?! Indian Wells, California November 10, 2016 Paul Angelo, FSA Segal Consulting San Francisco v1 Copyright 2014 by The Segal Group, Inc. All rights reserved.

2 Today s topics Actuarial Organizations and Governance Market Pricing Controversy Refining the Level Cost Model Enhanced Risk Assessment and Disclosure Recent Actuarial Standards Board Activity On all these topics! 2

3 Pension Actuarial Organizations Research and Education Policy and Professionalism Continuing Education Joint Board for the Enrollment of Actuaries Actuarial Services Under ERISA 3

4 Governance of Actuaries Code of Professional Conduct All actuarial organizations have adopted the same Code of Conduct Actuarial Standards Board (ASB) Actuarial Standards of Practice (ASOPs) Actuarial Board for Counseling and Discipline (ABCD) Adjudicates complaints against actuaries 4

5 The Market Pricing Issue (and some terminology) Ongoing controversy on how to value pension obligations The Level Cost Model Discount rate: expected return on assets Cost method: level cost based on projected benefits Based on established funding practices The Market Pricing Model (so called MVL or economic value ) Discount rate: market yields on low risk bonds Cost method: increasing cost based on accrued benefits Based on financial economics, called MV ABO Two recent references SOA article Understanding the Valuation of Public Pension Liabilities SI&PF Newsletter In the Public Interest, January 2016 Specifically on Market Pricing controversy Academy Issue Brief Measuring Pension Obligations, Nov General discussion of different measures 5

6 Terminology is part of the controversy Market Pricing proponents assert that the cost is that determined under the market pricing model Starts with theoretical market price of accrued benefit as liability (hence MVL ) Then periodic cost is the change in this MVL Under Actuarial Standards of Practice (ASOPs) 4 and 27, the basis for measuring both cost and liability depends on the purpose of the measurement ASOP 4 examples: contributions, accounting, settlement, market value assessments ASOP 27 examples: contributions, defeasement/settlement, market-consistent measurements 6

7 The Players and their acronyms AAA American Academy of Actuaries AAA PPC Pension Practice Council AAA PPSC Public Plans Subcommittee CCA Conference of Consulting Actuaries CCA PPC Public Plans Community SOA Society of Actuaries BRP Blue Ribbon Panel of the Society of Actuaries SI&PF Social Insurance & Public Finance Section PFTF Pension Finance Task Force (joint AAA and SOA) ASB Actuarial Standards Board PTF Pension Task Force of the Actuarial Standards Board GASB Governmental Accounting Standards Board 7

8 Brief History of Market Pricing Model for Corporate Pension Plans Originally, ERISA minimum funding was only level-cost model IRC Sec. 412, from 1976 to 1987 Market pricing for corporate plans arrives in1987 Current Liability under OBRA 1987 for funding Also ABO under FAS 87 for expensing For funding, dual regime lasts for 20 years With RPA 1994, market pricing model starts to take over In 2003, the Great Controversy (SOA Vancouver) advocated strict market pricing for corporate pension funding Finally, PPA 2006 eliminates level cost funding for corporates Target Liability is a strict MV ABO (discount rate relaxed in 2012) PFTF publishes (Corporate) Pension Actuary s Guide to FE 8

9 Preview of Market Pricing and Public Plans Most discussion has been on whether public pension plans should disclose a Market Pricing type measure Actually three possible levels of application: Disclosure of MV ABO Accrued benefits at (default) risk-free discount rate Funding based on risk-free discount rate Even if invested in equities Avoid intergenerational risk transfer Investment only in bonds, not stocks See Bader/Gold The Case against Stocks in Public Pension Funds Avoid increasing taxpayers equity risk exposure Recent SOA PFTF paper advocates for all three 9

10 Market Pricing controversy comes to Public Plans Should public pension plans disclose a Market Pricing type measure using a (default) risk free discount rate? PFTF starts developing their case in late 2006 AAA committees, May 2007 Sept 2008 Round Table public conference, New York, January 2008 AAA Public Interest Committee (PIC) hearing, DC, Sept Public Interest Committee recommendations to AAA Board It is in the public interest to disclose consistent measures of the economic value of plan liabilities. AAA Board should request the ASB to adopt appropriate ASOPs PIC does not recommend statement by Board supporting MVL disclosures by public pension plans. June 2009: CCA establishes Public Plans Committee 10

11 Action shifts to the GASB GASB and staff fully aware of market pricing controversy GASB s Postemployment Benefits Project April 2008: Added to Current Agenda March 2009: GASB issues Invitation to Comment Clearly weighing Level Cost vs Market Pricing models June 2010: July 2011: GASB issues Preliminary Views (PV) GASB issues two Exposure Drafts August 2012: GASB releases final statements 67 and 68 Unequivocal endorsement of Level Cost Model for accounting and financial reporting Discount rate based on expected return (if plan has assets) Entry Age cost method 11

12 Meanwhile back at the ASB Reviewing the two key ASOPs for pension funding ASOP 4: Measuring Pension Obligations ASOP 27: Selecting Economic Assumptions Last revised September 2007 ASOP 4 ASOP 27 January 2011 Discussion Draft 1 st Exposure Draft January st Exposure Draft 2 nd Exposure Draft December nd Exposure Draft Working Draft Dec. / Sept Revised ASOP Revised ASOP 12

13 New ASOP 4 and ASOP 27 The ASOP 4 Discussion Draft defined a Market-Consistent present value (MCPV) As requested by the AAA PIC and AAA Board Comments argued that MCPV is a type of measure, not a single measure Final ASOPs 4 and 27 instead stress purpose of the measurement ASOP 4: when measuring pension obligations and determining periodic costs or contributions ASOP 27: as a primary factor in selecting a discount rate Note Market-Consistent Measurements and market value assessments are included as a possible purpose So Market Pricing model is both a type and a purpose! 13

14 Enter the SOA Blue Ribbon Panel Announced April 2013 Heavy representation of Market Pricing advocates on Panel Online survey, individual interviews Report released February 2014 Detailed disclosure recommendations, including: Plan liability and normal cost calculated at the risk-free rate Undiscounted cash flows on an accrued (earned-to-date) basis However, MV ABO not recommended for disclosure The Panel urges the ASB to require the financial and risk measures outlined above be disclosed in actuarial reports. 14

15 What about the Level Cost Model? Renewed focus on funding policy Actuarial cost method Asset smoothing method UAAL amortization policy (Unfunded Actuarial Accrued Liability) New GASB standards separate accounting cost (expense) and funding cost (contributions) No longer look to GASB for funding policy guidelines No more Annual Required Contribution (ARC) New GASB standards include an Actuarially Determined Contribution (ADC) but it is neither required nor defined Resulting policy guidance void inviting discussion 15

16 Recent Guidance on Funding Policies and Practices Academy of Actuaries Public Plans Subcommittee Issue Brief on Objectives and Principles issued Feb Society of Actuaries Blue Ribbon Panel Report, Feb Conference of Consulting Actuaries Public Plans Community (CCA PPC) Actuarial Funding Policies and Practices White Paper issued Oct Similar to earlier California Actuarial Advisory Panel (CAAP) Government Finance Officers Association (GFOA) Best Practices (BP) March 2013 BP: Core Elements of Pension Funding Policy Much less detailed but consistent with CCA PPC White Paper 16

17 Comparison of Recent Actuarial/GFOA Guidance Remarkable consistency on Funding Policy Objectives Fund the expected cost of all promised benefits (i.e., fund normal cost plus 100% of any unfunded actuarial liabilities). Match funding cost of benefits to years of service (i.e., target demographic matching or generational equity). Have costs emerge stably and predictably (i.e., manage contribution volatility). Balance competing funding-policy objectives. CCA PPC White Paper focuses on balancing demographic matching against contribution volatility Actually fund the Actuarially Determined Contribution as determined by the plan s funding policy. 17

18 Comparison of Recent Actuarial/GFOA Guidance General consistency on funding policy specifics Entry Age cost method Five year asset smoothing preferred 15 to 20 year UAAL amortization preferred Perhaps longer for assumption changes Much shorter for plan amendments 25 is the new 30 for maximum UAAL amortization period CCA PPC White paper provides by far the most detailed discussion and analysis Evaluates and categorizes policy alternatives Model, Acceptable, Acceptable with Conditions, Non-recommended and Unacceptable Detailed, empirical rationales for all recommendations 18

19 Recent ASB Activity on Public Pension Plans July 2014 Request for Comments on ASOPs and Public Pension Plan Funding and Accounting Referenced revised ASOPs and recent funding policy guidance High level questions on application of ASOPs to public plans Is additional guidance needed and, if so, in what areas? Should there be a separate ASOP for public plans? Should public plan ASOPs remain principles based or become more rules based (prescriptive)? Should ASOP require actuary to produce information useful to individuals other than the principal/intended user?» [Such as those asking for Market Pricing disclosures] ASB appoints a Pension Task Force (PTF) to address the volume of proposals received (55 letters, over 200 pages of commentary) 19

20 Recent ASB Activity on Public Pension Plans July 2015 Hearing on Public Pension Plan Issues Requested input specific to possible new guidance in four areas: 1. Contribution/Cost Allocation Procedures» CCA PPC: no ultimate entry age cost method» CCA PPC: all plans should show an Actuarially Determined Contribution (ADC) even if actual rate is fixed (in statute) 2. UAAL Amortization Methods» CCA PPC: no combination of rolling and negative amortization 3. Assumptions» CCA PPC: phase-in cost impact, not assumption change 4. Alternative Liability Measures (four types of Market Pricing)» CCA PPC: none appropriate for purposes of funding or financial reporting 20

21 Report of the ASB Pension Task Force (PTF) -- Feb. 29, 2016 Key Issues Do not require information only for other than intended users But do require information the intended user needs, even if not requested Principles based standards is the goal, But standards can apply prescriptive limits where necessary New guidance is needed and should apply to all plans Most changes incorporated into ASOP 4, not a new ASOP 21

22 Report of the ASB Pension Task Force (PTF) -- Feb. 29, 2016 Key Issues PTF believes that a market-based alternative liability measurement should be calculated and disclosed for all valuations of pension plans for funding purposes It may be misleading to show traditional values by themselves. Market-based alternative liability provides a reasonable measure of the cost of reducing the risk that the traditional measurement will be insufficient for the underlying obligation Provides important information about risk. Encourage better decisions regarding the financing of the plan. Will help advance the actuarial profession. Not implying that such a measure is the one true answer Would show an important alternative view of pension finance 22

23 ASB Pension Task Force Suggestions The PTF suggests that an alternative liability measure based on solvency value be calculated and disclosed for all valuations of pension plans done for funding purposes. Estimate of the cost to defease all liabilities accrued under the plan in the marketplace, presuming that capacity is available Assets needed to fully secure promises to members Understanding of risks to members benefits Information about the amount of investment risk being taken An acceptable proxy for this measurement would be Present value of accrued benefits (i.e., unit credit method) U.S. Treasury rates as discount rate other assumptions according to ASOP Nos. 27 and 35. Avoid the term market value of liabilities! 23

24 ASB Pension Task Force Suggestions Require a statement of opinion on reasonableness of assumptions and methods Define what can be a reasonable Actuarially Determined Contribution (ADC) No ultimate entry age cost method No combination of rolling and negative amortization Require disclosure of contributions and funded status based on a reasonable ADC Require disclosures on basis for assumptions and methods Qualitative estimate of when assets will be exhausted Implicit amortization period for fixed rate plans Disclose any negative amortization, with duration 24

25 Commentary: Purpose of the FE Market Liability Aka MVL, aka MV ABO, aka [financial] economic value Financial economists develop models to understand, reproduce and predict the market pricing of traded securities Traded corporation sponsors a pension plan FEs need a value to represent the pension plan in their models That is the purpose of this measurement As distinct from funding or financial reporting As distinct from other market-based liability measurements 25

26 Commentary: Solvency Value as Measure of Risk First, note that meaning of solvency value is not well defined, so better to call it defeasement or settlement value ASB PTF says the disclosure of a market-based liability: Provides a measure of the cost of reducing the risk that the traditional measures will be insufficient to fulfill the obligation Provides information about the amount of investment risk being taken by the plan. Can show the investment income in excess of that provided by low-risk investments that the principal expects to receive Encourage better decisions regarding the financing of the plan. Does not measure possible consequences of investment risk Instead measures cost to eliminate the risk Also shows expected advantage of taking the risk 26

27 Commentary: Solvency Value as Measure of Risk Does disclosure of Solvency Value help manage investment risk? No evidence that disclosure of solvency measures leads to better risk management Multiemployer plans have calculated and disclosed Current Liability (which is a solvency measure) for decades New York City disclosed a solvency value for years Neither had any apparent impact on investment policy or risk management decisions Some say it could be used in a risk management framework as the risk-free asset allocation Not clear what, if any, impact this would have Would plans immunize a portion of their liability? Would plans lengthen the duration of their bond portfolio? 27

28 Commentary: How Do We Deal with Two Measures? If Actuarial Standards require disclosure of a Solvency Value in addition to the (Level Cost Method) Actuarial Liability, we/you will need to explain the two numbers NY Times: A Sour Surprise for Public Pensions: Two Sets of Books Argues at least for calling it Settlement, not Solvency Actuarial liability represents a funding target the amount of assets needed in addition to the Normal Cost of future service If all assumptions are met As noted earlier, the difference between actuarial liability and solvency value represents Expected savings due to taking risk in portfolio Price to eliminate investment risk But that is not how financial economists will represent it It is the true cost of the pension promise 28

29 Commentary: Misleading use of Solvency Value PRECEPT 8. An Actuary who performs Actuarial Services shall take reasonable steps to ensure that such services are not used to mislead other parties. ANNOTATION 8-1. An Actuarial Communication prepared by an Actuary may be used by another party in a way that may influence the actions of a third party. The Actuary should recognize the risks of misquotation, misinterpretation, or other misuse of the Actuarial Communication and should therefore take reasonable steps to present the Actuarial Communication clearly and fairly and to include, as appropriate, limitations on the distribution and utilization of the Actuarial Communication. What if no amount of clearly presented limitations on utilization will prevent the Solvency Value from being (mis)interpreted to other parties as the true cost of the benefit? 29

30 READ the CCA PPC White Paper! 30