Workshop 18 Have You Reviewed the ASOPs Lately? Karen Smith, MSPA Lynn M. Young, MSPA

Workshop 18 Have You Reviewed the ASOPs Lately? Karen Smith, MSPA Lynn M. Young, MSPA

WHY FOCUS ON THE ASOPs? CODE OF CONDUCT Precept 3 says: An Actuary shall ensure that Actuarial Services performed satisfy applicable standards of practice. 1

Agenda High level review of the ASOPs as they relate to what ACOPA actuaries generally do, which is new plan proposals; valuation work for small to midsize plans; prepare ASC 715 disclosures; analyze plans for sufficiency on termination; and occasional special studies. 2

Agenda (continued) ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions; ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations; ASOP No. 35, Selection of Demographic and Other noneconomic Assumptions for Measuring Pension Obligations; How this all coordinates with ASOPs 1 and 41 3

POLL #1 I have at some point intentionally deviated from the Actuarial Standards of Practice. YES NO 4

POLL #2 When reading the ASOP s, Must and Should have the same meaning. TRUE FALSE 5

ASOP 1- Introductory Actuarial Standard of Practice Key Changes Effective January 1, 2013 Simple codification or new? Definitions combined Must/Should into a single discussion that highlights the differences. 6

ASOP 1- Introductory Actuarial Standard of Practice Must the ASB does not anticipate the actuary will have any reasonable alternative but to follow a particular course of action Should indicates what is normally the appropriate practice to follow May course of action describe is one that would be considered reasonable and appropriate in many circumstances. 7

ASOP 4 - Measuring Pension Obligations and Determining Pension Plan Costs or Contribution ASOP 4 - Revised ASOP 4 issued in December of 2013 Effective for any actuarial work product with a measurement date on or after December 31, 2014. 8

ASOP 4 WHAT IS IT S PURPOSE? Provides guidance to us when performing actuarial services measuring plan obligations and when determining periodic costs 3.2 of the ASOP is a checklist to follow See 4.1 for a detailed list of relevant items that should be disclosed. 9

ASOP 4 Highlights Disclosure related to a plan s funded status (section 4.1(p) and 4.1(q)) Disclosure requirements for a change in the cost or allocation procedure (Section 4.1(t)) Disclosures related to implications of the contribution allocation procedure or funding policy on future expected contributions and funded status (Section 4.1(m)) 10

ASOP 4 Highlights Defines prescribed assumptions or method to break out assumptions or methods set by another party or set by law (Section 2.19 and 2.20) Provides guidance to the actuary who needs to measure plan provisions that are difficult to measure using traditional valuation procedures (Section 3.5.3) 11

ASOP 4 Scope? Measuring plan obligations Financial accounting Actuarially determined contributions And more 12

Poll #3 Does ASOP 4 apply to a valuation report that just shows the minimum required and maximum deductible contribution? Yes No 13

ASOP 4 Scope? 2.6 ACTUARIALLY DETERMINED CONTRIBUTION A potential payment to the plan as determined by the actuary using a contribution allocation procedure. It may or may not be the amount actually paid by the plan sponsor or other contributing entity. 14

ASOP 4 Scope? 2.8 CONTRIBUTION ALLOCATION PROCEDURE A procedure that uses an actuarial cost method, and may include an asset valuation method, an amortization method, and an output smoothing method, to determine the actuarially determined contribution for a plan. The procedure may produce a single value, such as normal cost plus an amortization payment of the unfunded actuarial accrued liability, or a range of values, such as the range from the ERISA minimum required contribution to the maximum tax-deductible amount. 15

ASOP 4 WHAT IT DOES NOT APPLY TO. Individual Benefit Calculations Individual Benefit Statement Estimates Non-discrimination Testing Does not require the actuary to evaluate the ability of the sponsor to make contributions when due. 16

Poll #4 For a FAS report, the actuary recommends a discount rate of 4%, but the plan sponsor chooses a discount rate of 10%. Is the actuary required to comment on the appropriateness of this assumption? YES NO 17

ASOP 4 prescribed assumptions by another party If actuary does not disclaim responsibility, the actuary is responsible for the assumption. 18

ASOP 4 prescribed assumptions by another party Does the assumption or method Conflict with the Actuary s professional judgement on what would be reasonable for the purpose of the measurement? If there is a significant conflict, the actuary should disclose. 19

ASOP 4 prescribed assumptions by another party If the actuary is unable to evaluate a prescribed assumption or method set by another party without performing a substantial amount of additional work beyond the scope of the assignment, the actuary should disclose this. 20

Poll #5 Which of the following is required to be disclosed by ASOP 4? a. Statement that future measurements could differ b. A list of participant s dates of birth and service c. A plan termination estimate d. The responsible actuary 21

ASOP 4 COMMUNICATION REQUIREMENTS Must include a statement, appropriate for the intended users, indicating that future measurements (for example, of pension obligations, periodic costs, actuarially determined contributions, or funded status as applicable) may differ significantly from the current measurement. 22

ASOP 4 COMMUNICATION REQUIREMENTS For example, a statement such as the following could be applicable: Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan s funded status); and changes in plan provisions or applicable law. 23

ASOP 27 ASOP 27 covers: a. inflation; b. investment return (sometimes referred to as the valuation interest rate); c. discount rate; d. compensation scale; and e. other economic factors (e.g., Social Security, costof-living adjustments, growth of individual account balances, and variable conversion factors). 24

ASOP 27 Economic assumptions can be based on either the actuary s estimate of future experience, or on the actuary s observation of estimates inherent in market data. 25

ASOP 27 General Selection Process (Sec. 3.2) Identify components of the assumption Evaluate relevant data Consider factors specific to the measurement Consider other general factors Select a reasonable assumption. Review all assumptions for consistency. 26

Poll #6 On what percentage of your valuations do you use a salary increase assumption? a. Less than 25% b. 25% - 50% c. 50% - 75% d. More than 75% 27

ASOP 27 Cost of Using Refined Assumptions 3.5.3 Consider the balance between using refined assumptions and the cost of using refined assumptions. For example actuaries working with small plans may prefer to emphasize the result of general research. 28

ASOP 27 - Materiality 3.5.2. Consider the balance between refined economic assumptions and materiality. You aren t required to use a type of assumption or to select a more refined assumption if in your professional judgment such use or selection isn't expected to produce materially different results. 29

ASOP 27 -Range of Reasonable Assumptions The standard recognizes that you may consider several different assumptions reasonable for a measurement. It also recognizes that different actuaries will have different professional judgment and will choose different assumptions. 30

We will discuss ASOP 27 and 35 communication requirements together in a few minutes. 31

ASOP 35 Adopted September 30, 2014 Effective for any work product with a measurement date on or after June 30, 2015. Consistent with ASOP 4 and ASOP 27. 32

ASOP 35 Types of Demographic Assumptions Retirement Termination Mortality and mortality improvement. Election of optional forms of benefit Other admin expenses; household composition; marriage; divorce and remarriage; open group assumptions; hours of service; transfers; and assumptions re. missing or incomplete date. 33

ASOP 35 Process of Selection 3.3.1 Identify the types of demographic assumption to use, considering: The purpose of the measurement Plan provisions that will affect the timing and value of benefit payments Characteristic of the obligation The contingencies that give rise to benefits Significance of each assumption Characteristics of the covered group 34

ASOP 35 Other considerations You may determine its appropriate to adjust assumptions to provide for adverse deviation or plan provisions that are difficult to measure.and disclose these adjustments Take into account the balance between materiality and refined assumptions same as ASOP 27. Take into account the balance between refined assumptions and the cost of using refined assumptions.same as ASOP 27 The combined effect of all non-prescribed assumptions should be reasonable 35

ASOP 35 Optional Form of Benefit 3.5.5 You should take into account factors such as: Benefit forms and commencement dates available. Historical or expected incidence of elections under the plan or similar plans. Degree to which various forms may be subsidized. 36

Communications under ASOPs 27 and 35 37

Poll #7 In what percentage of your reports do you make significant modifications to the report produced by your software? a. Less than 25% b. 25% - 50% c. 50% - 75% d. More than 75% 38

The standards now require disclosing the rationale used in selecting each non-prescribed assumptions or any changes made to non-prescribed assumptions! When was that effective? 39

Rationale for Assumptions You should disclose the information and analysis used in selecting each assumption that has a significant effect. Your disclosure may be brief but should be pertinent. For example you may disclosure specific approaches used, sources of external advice, and how past experience and future expectations were considered. You can reference any other experience report or study performed. No applicability to prescribed assumptions! 40

Changes in Assumptions You should disclose any changes in assumptions, and the general effect of the changes should be disclosed in words or numerical data as appropriate. You should include an explanation of the information and analysis that led to the changes. 41

ASOP 35 - Communication 4.1.1 Describe each significant demographic assumption and whether it reflect an estimate of future experience, your observations of the estimates inherent in market data, or a combination thereof. Provide enough detail to permit another actuary to assess the level and pattern of each assumption. Disclose enough detail for another actuary to understand the provision made for mortality improvement. If no improvement is assumed, this should be disclosed. Include a description of any adjustment made for adverse deviation or for valuing plan provisions that are difficult to measure per ASOP 4. 42

The Question you are all asking: I use ASC/Datair/Relius/Larry s system/my own system and my val report has a page that has a certification page and describes the assumptions used. Is that sufficient? 43

The Question you are all asking: probably not without some modifications or additional disclosures. Is it even possible to automate all of these disclosures? 44

Might Be Missing Statement of qualifications (ASOP 41 4.1.3c) Future measurements may be different (ASOP 4) Language limiting distribution (ASOP 41, 3.7) Identification of intended users (ASOP 41, 4.1.3b) 45

Probably Missing Rational for Assumptions and assumption changes Explanation of material differences on revised reports (ASOP 41, 3.5) Cautions about risk (ASOP 41, 4.1.3d) 46

Remember our first poll? Have you unintentionally deviated from the Actuarial Standards of Practice? 47

Next Steps Review your current disclosures to ensure compliance with the ASOPs Set up a best practice to review annually your procedures/disclosures for compliance with the ASOPs. 48

QUESTIONS? 49