112 th Annual Conference May 6-9, 2018 St. Louis, Missouri

Transcription

1 2:40 3:30 Sunday, May 6, 2018 Room th Annual Conference May 6-9, 2018 St. Louis, Missouri Moderator/Speakers: Paul Angelo, FSA Senior Vice President & Actuary Segal Consulting Tony Boras, CPA Senior Manager Crowe Horwath LLP Michelle Kirby (Moderator) Controller City of Portland, Oregon Whose Shoes? Pension and OPEB Reporting From the Auditors and Actuaries Perspectives #GFOA2018 1

2 Actuaries, Accountants Auditors and Actuarial Valuations Session description: With the implementation of GASB's pension and other postemployment benefit (OPEB) standards, some of the largest numbers and most detailed disclosures in a government's financial statements are calculated by actuaries. Accountants and auditors must understand and work with these numbers - and the professionals who calculate them. In this session you will hear from actuaries and accountants about their respective roles and how to most effectively manage interdependency to facilitate timely and reliable pension and OPEB reporting. Discussion will focus on pension plans With comments on how OPEB plans may differ 2

3 Key Takeaways and Learning Objectives Learn how to anticipate areas of coordination between actuary and auditor Identify where key pension and OPEB information comes from Become familiar with the information the actuary is providing and the questions the auditor might be asking 3

4 What goes into an Actuarial Valuation? Member Data Financial Data Plan Provisions Actuarial Valuation Actuarial Assumptions Funding Policies 4

5 Actuarial valuation: what goes in and where it comes from Plan provisions, member data: from the retirement plan Plan assets: from plan or from auditor Actuarial assumptions, actuarial funding policy: Generally recommended by the actuary but set by plan board For OPEB plans, may be set by the employer/sponsor 5

6 Actuarial valuation: what comes out, who uses it and for what For pension plans, start with the funding valuation report Sets actuarially determined contribution -- if determined! Then two reports for accounting and financial reporting GASB Statement 67 report: for plan financial statements GASB Statement 68 report: for employer financial statements For OPEB plans there may or may not be a funding valuation Many OPEB plans are pay-as-you-go, so no funding valuation Then two new reports for accounting and financial reporting GASB Statement 74 report: for plan financial statements GASB Statement 75 report: for employer financial statements 6

7 Actuarial Assumptions: where do they come from and who says they are OK For retirement plans, plan / plan actuary generally sets assumptions for funding valuation Same funding assumptions are generally used for financial reporting for plan and sponsor The accounting standards (GASB statements) make reference to actuarial standards (ASOPs) For example, GASB 67, 38 says selection of assumptions... should be made in conformity with the Actuarial Standards of Practice issued by the Actuarial Standards Board. Also note GASB 82, 7 says that disclosed deviations allowed by the ASOPs are NOT allowed by GASB Now that net pension/opeb liability and expense are in basic financial statements, greater involvement of auditor in validating plan actuary s assumptions Sometimes including the auditor s actuary 7

8 The actuarial / auditor annual work-flow dance Actuary / Auditor coordination on annual work product The actuary and auditor need information from each other, Actuary needs plan asset information to determine unfunded liabilities aka NPL and employer contributions and expense Auditor needs results of actuarial valuation for plan and employer disclosures Auditor must also buy off on participant data and actuarial assumptions Who goes first? 8

9 Questions and Discussion 9

10 Who should the auditor be talking to Actuary Auditor Employer Plan 10

11 Plan Communications Determining the strategy for the pension/opeb plan audit activities various parties perform understanding the key provisions 11 investing and holding plan assets maintaining records determining pension/ OPEB liabilities receiving contributions disbursing benefits. eligibility contributions vesting benefit payments

12 Employer Communications The employer is solely responsible for its financial statements and, therefore, employer management is responsible for establishing financial reporting processes and controls over the measurement of its specific pension/opeb amounts. 12

13 Employer Communications Employer management must support the assumptions with appropriate, reliable, and verifiable information It ordinarily is not sufficient to rely solely on assumptions provided by the actuary The assumptions may be reliably based on external sources» published interest rates» group experience studies internal sources» historical information based on mortality experience studies by the employer Some of the assumptions may be more subjective than others. The extent of subjectivity, such as whether an assumption or input is observable, influences the degree of estimation uncertainty, and thereby, the risk of misstatement 13

14 Actuarial Communications Obtain actuarial valuation report (accounting purposes) Addressed to client Dates updates? Key assumptions Plan provisions Actuarial methods Obtain confirmation from actuary Census data any changes or missing information? Rationale for assumptions Objectivity relationships? Cash flow projections 14

15 Evaluating a management s specialist AU-C Section If information to be used as audit evidence has been prepared using the work of a management's specialist, the auditor should, to the extent necessary, taking into account the significance of that specialist's work for the auditor's purposes evaluate the competence, capabilities, and objectivity of that specialist; obtain an understanding of the work of that specialist; and evaluate the appropriateness of that specialist's work as audit evidence for the relevant assertion 15

16 What time frame of actuarial information should the auditor be looking at - Plan The total pension/opeb liability should be determined by (a) an actuarial valuation as of the pension/opeb plan s most recent fiscal year-end or (b) the use of update procedures to roll forward to the pension/opeb plan s most recent fiscal year-end amounts from an actuarial valuation as of no more than 24 months earlier than the pension/opeb plan s most recent fiscal year-end. 16

17 What time frame of actuarial information should the auditor be looking at - Employer Measurement of the total pension/opeb liability in employer s financial statements must be as of a date no earlier than the end of the employer s prior fiscal year. Measurement must be based on an actuarial valuation performed within 30 months plus 1 day of the employer s year-end. If actuarial valuation not performed as of measurement date, update procedures must be performed to roll forward amounts to measurement date. What gets rolled forward? Asset values and investment return? Census Data? 17

18 Where do the assumptions come from? Typically Board Economic Investment Return Inflation Salary Increases Typically Actuary with Board Approval Demographic Retirement Rates Turnover Mortality 18

19 Understanding all the assumptions and their impact Pension OPEB Investment return Retirement Age Mortality Health Care Trend Rate Inflation Plan Choice Retirement Age Participation Rates 19

20 Assumptions The auditor must obtain an understanding of the actuarial methods and assumptions and assess their reasonableness and consistency of application Base testing on the assumptions that are the valuation s main drivers Long-term expected rate of return used in the calculation of the discount rate Required to be forward-looking Be based on the appropriate expected long-term rate of return considering target asset allocations The auditor is cautioned to avoid supporting the reasonableness of this assumption solely based on retrospective analysis of historical investment returns. 20

21 Do we really have to test census data Employer Employer management must be able to support the underlying census data used by the actuary The employer should have processes and controls in place to determine that complete and accurate information is reported to the plan and the plan actuary regarding active members Plan The auditor may determine that it is not possible or practicable to obtain sufficient appropriate audit evidence only from substantive audit procedures The plan's controls are relevant to the audit, thus, the auditor should obtain an understanding of the controls and consider testing the operating effectiveness 21

22 Do we really have to test census data Cost sharing plan employers Focusing on the risk of material misstatement to the employer, the employer auditor should design and perform audit procedures over the census data that are responsive to the risk of material misstatement at the assertion level. This will be dependent on both the nature of the plan and the risks at the employer level, including the employer s relative proportion of the collective pension/opeb amounts for the plan. 22

23 Are pension and OPEB testing actually different Pension Salary based Plan well documented Administered by separate plan Typically well funded Claims based Plan documentation informal Administered by employer Often not funded OPEB 23

24 What information does the auditor need to perform their testing How do the plan provisions impact the attributes tested Understand the Pension/OPEB plan provisions/benefits Focus on main assumptions Determine the key census data Accounting and reporting is similar between GASB 67/68 and GASB 74/75, don t assume the auditing focus will be 24

25 Should the auditor utilize their own actuary as an auditor specialist An auditor may require special skill or knowledge when using an actuarial valuation as audit evidence This may require the employer auditor to use the work of an auditor s specialist (internal or external) to obtain sufficient appropriate audit evidence The nature, timing, and extent of the auditor s procedures will vary depending on the circumstances 25

26 Should the auditor utilize their own actuary as an auditor specialist The auditor's decision on whether to use an auditor's specialist may be influenced by such factors as the following: The nature, scope, and objectives of the work of the management's specialist Whether the management's specialist is employed by the entity or is a party engaged by it to provide relevant services The extent to which management can exercise control or influence over the work of the management's specialist The competence and capabilities of the management's specialist Whether the management's specialist is subject to technical performance standards or other professional or industry requirements Any controls within the entity over the work of the management's specialist The auditor's ability to evaluate the work and findings of the management's specialist without the assistance of an auditor's specialist. 26

27 What does the auditor do if there are issues noted Type of plan single employer, multiple employer? Type of error Main driver? Census data Assumption How does it affect pension/opeb amounts? Talk to the actuary, plan, & employer! Focus testing on what matters Involve auditors in discussion of actuarial assumptions prior to completing actuarial valuations 27

28 Questions and Discussion 28

29 Speaker Contact Information: Paul Angelo, FSA Tony Boras, CPA th Annual Conference May 6-9, 2018 St. Louis, Missouri Questions: Speakers will take questions and comments. This session is being recorded, please utilize the microphone in the aisle to ask all questions. Provide Feedback: Please take a few minutes to provide your feedback at Discuss/Comment: Join the discussion at #GFOA2018 Contact GFOA: To contact GFOA about session topics please research@gfoa.org #GFOA