September 18, 2016 Actuarial Assumptions and Disclosures Where Are We Headed? Shelley Johnson, ASA, MAAA Consulting Actuary Louisiana Association of Public Employees’ Retirement Systems

Actuarial Assumptions and Disclosures Where Are We Headed? I.Recent Changes in Actuarial Standards of Practice II.Recent Changes in Actuarial Practices III.Proposed Changes to Actuarial Standards of Practice IV.Recent Task Forces, Committees, Publications, etc. Foster & Foster 2

I. Recent Changes in Actuarial Standards of Practice  New disclosure requirements for actuarial reports –Descriptions of funding policy and disclosure of funded status Qualitative assessment of the implications of the policy on the plans expected future contributions and funded status Is this measurement appropriate for assessing the plans’ ability to settle benefit obligations and for assessing the amount of future contributions? –Disclosure of rationale for changes in cost or contribution allocation procedures (cost method, asset valuation “smoothing” method, etc.) Foster & Foster 3

I. Recent Changes in Actuarial Standards of Practice  New disclosure requirements for actuarial reports –Disclosure that future pension measurements may differ significantly from current measurements, possibly resulting from a number of factors. –Prescribed assumptions or methods: previously no requirement to disclose opinion regarding reasonableness of prescribed assumptions and methods. Must now disclose opinion if believe not reasonable if prescribing entity is also the plan sponsor (such as state legislature) Foster & Foster 4

I. Recent Changes in Actuarial Standards of Practice  Plan provisions that are difficult to measure –Examples : Gain sharing provisions, floor offset provisions, other provisions that tie benefits to an external event –Actuary should consider using alternative valuation procedures, including adjusting assumptions to reflect the impact of these provisions –Disclose approach taken  Administrative expenses not directly funded –Expenses should be considered by valuation, either directly funded or as an adjustment to the investment return assumption Foster & Foster 5

I. Recent Changes in Actuarial Standards of Practice  Disclosure regarding mortality improvement –Must disclose whether or not assumptions consider expected mortality improvement  Disclosure of rationale used in selecting or changing economic and demographic assumptions –Economic assumptions include salary increases, inflation, investment returns, discount rate, etc. –Demographic assumptions generally includes all other assumptions, such as mortality tables and mortality improvement adjustments, rates of disability and disability recovery, termination of employment, administrative expenses, retirement rates, household composition (such as marriage, divorce, remarriage, number of children, etc.) Foster & Foster 6

II. Recent Changes in Actuarial Practices  Mortality Tables/Assumptions and Mortality Improvement –RP-2014 Mortality Table Issued by the Society of Actuaries’ (SOA) Retirement Plans Experience Committee (RPEC) in October 2014 Intended to supersede RP-2000 mortality table Also issued companion mortality improvement scale, MP-2014 Based on experience of uninsured private sector retirement plans Foster & Foster 7

II. Recent Changes in Actuarial Practices  Mortality Tables/Assumptions and Mortality Improvement –Public Plan Study A number of actuaries requested a specific public plan study SOA currently preparing a table based on public plan experience Intend to study variations by demographic and employment characteristics (e.g. geographic location, job classification). Anticipate preliminary results by September 2017 and final report by May 2018 Foster & Foster 8

II. Recent Changes in Actuarial Practices  Mortality Tables/Assumptions and Mortality Improvement –Mortality Improvement - Most actuaries agree that mortality will continue to improve, but there is significant debate over how much. Using the same underlying data, the RPEC and Social Security Administration (SSA) came to different conclusions about the level of future mortality improvement. Chief Actuary for the SSA states that “Projections of mortality improvement are subject to uncertainty that is possibly greater than any other variable used in Trustees assumptions.” * Foster & Foster 9 * Source: The Long Range Demographic Assumptions for the 2014 Trustee Report, published by the office of the Chief Actuary, Social Security Administration. Range_Demographic_Assumptions.pdf, Paragraph 2.2https:// Range_Demographic_Assumptions.pdf

II. Recent Changes in Actuarial Practices  Mortality Tables/Assumptions and Mortality Improvement Some experts believe mortality will continue to improve in perpetuity Some believe the rate of improvement will begin to decrease substantially at some point Due to the long-term nature of defined benefit plans, small differences in assumptions can create large variances in pension liabilities Foster & Foster 10

II. Recent Changes in Actuarial Practices  Mortality Tables/Assumptions and Mortality Improvement Two Types: Static and Generational Projections –Static Projection of Mortality Improvement Projects improvement to specific date Revised table is applied to all durations May overstate liability for some participants and understate for others Intent is to produce reasonable results for a large diverse group Foster & Foster 11

II. Recent Changes in Actuarial Practices  Mortality Tables/Assumptions and Mortality Improvement Two Types: Static and Generational Projections –Generational Projection of Mortality Improvement Generates a unique table for each year of birth More refined, so possibly theoretically more valid Significantly more complicated May add administrative cost without providing corresponding improvement in results Foster & Foster 12

II. Recent Changes in Actuarial Practices Foster & Foster 13 Smoothed Historical U.S. Mortality Improvement Rates, 1951–2007 Two-dimensional arrays of graduated mortality improvement rates, colorized to create historical U.S. mortality improvement heat maps from ages 35 through 95 (youngest to oldest upward along the y-axis) and from calendar years 1951 through 2007 (left to right along the x-axis), are displayed below. Source: Society of Actuaries Mortality Improvement Scale MP-2014 Report, Pg Males Females

III. Proposed Changes in Actuarial Standards of Practice (ASOPs)  Proposed ASOP: Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions –Expands upon recent changes but more focus on risk assessment and disclosures. –Intent is to increase understanding of the risks inherent in the measurements of pension obligations and actuarial contributions. –Request for Comments Issued in July 2014 Should ASOPs related to public plan actuarial valuations be prescriptive, rather than principles based? Should the ASOPs require actuaries for public pension plans to perform additional, significant work that is not requested by the principal (plan) if that work provides useful information to individuals who are not intended users ? Foster & Foster 14

III. Proposed Changes in Actuarial Standards of Practice (ASOPs)  First Exposure Draft (December 2014) –Included requirements for completing risk assessments, whether qualitative or quantitative. –In some cases, require commentary regarding the significance of each assessed risk in relation to the plan –Would require actuary for large plans to complete a quantitative assessment of risk at least every 10 years, or every 5 years if there is a significant change in risk –Would have created significantly more work (i.e. billable hours) on the part of the actuary, regardless of whether the Board of Trustees requested such work Foster & Foster 15

 Second Exposure Draft (June 2016) –Originally applied only to funding valuations –Current draft applies to pricing valuations of a proposed plan change that would significantly change the types or levels of plan risks –Risk: The potential of actual future measurements deviating from expected future measurements resulting from actual future experience deviating from actuarially assumed experience. –In other words, risk is the potential that plan experience develops differently than expected, i.e. different than actuarial assumptions –Would require actuaries to identify and assess risks that in the actuary’s professional judgement may reasonably be anticipated to significantly affect the plan’s future financial condition. –See next slide for examples. Foster & Foster 16 III. Proposed Changes in Actuarial Standards of Practice

 Second Exposure Draft (continued) –Examples of risks that could significantly affect the plan’s future financial condition: Investment risk – the potential that investment returns will be different that expected Longevity risk – the potential that mortality experience will be different than expected Asset/liability mismatch risk – the potential that changes in asset values are not matched by changes in the value of liabilities Foster & Foster 17 III. Proposed Changes in Actuarial Standards of Practice

 Second Exposure Draft (continued) –Examples of risks that could significantly affect the plan’s future financial condition: Contribution risk – the potential that contributions will not be sufficient relative to the actuarially determined contribution. Could result from contributions are not made in accordance with the plan’s funding policy, or that material changes occur in the anticipated number of covered employees, covered payroll, or other relevant contribution base. Foster & Foster 18 III. Proposed Changes in Actuarial Standards of Practice

 Second Exposure Draft (continued) –Identify and disclose plan maturity measures that are significant to understanding the risks associated with the plan, such as: Ratio of market value of assets to payroll Ratio of retired life actuarial accrued liability to total actuarial accrued liability The ratio of net cash flow to market value of assets The ratio of benefit payments to contributions, and The duration of the actuarial accrued liability Foster & Foster 19 III. Proposed Changes in Actuarial Standards of Practice

 Second Exposure Draft (continued) –If reasonably available, identify and disclose historical plan maturity measures, such as: Funded status Actuarially determined contribution Actuarial gains/losses Normal cost Plan settlement liability Foster & Foster 20 III. Proposed Changes in Actuarial Standards of Practice

 Second Exposure Draft (continued) –Actuary should provide commentary to assist reader in understanding the significance of the above items. –Professional judgement of the actuary remains as the primary factor in determining if certain descloures are significant to understanding the risks of the plan –Likely to become effective for actuarial work products with measurement dates in Foster & Foster 21 III. Proposed Changes in Actuarial Standards of Practice

IV. Recent Task Forces, Committees, etc.  Blue Ribbon Panel Report– Society of Actuaries – February 2014 –Society of Actuaries commissioned the SOA Blue Ribbon Panel to develop recommendations for strengthening public plan funding. –Panel comprised of mostly non-actuaries. –Recommendations developed based on survey responses from a diverse group of economists, investment advisors, plan administrators, trustees, unions, and other interested professionals. –Recommendations are not binding, as the SOA is not the body that sets ASOPs in the United States. Foster & Foster 22

IV. Recent Task Forces, Committees, etc.  Blue Ribbon Panel Report –Funding principles: Pension obligations should be pre-funded in a rational and sustainable manner over employee’s public service career and should follow 3 principles: Adequacy - Funding entities should strive to fund 100% of the obligation for benefits using assumptions that are consistent with median expectations about future economic conditions. Assets should be adequate to fund benefits over a broad range of expected future economic outcomes. Intergenerational equity - The full cost of public services should be paid by those receiving the benefits of those services in order to align the cost of services with the taxpayers who benefit from those services. Cost stability and Predictability - The Panel acknowledges that this is an important funding and budgeting concern but it should not take precedence over the above principles. Foster & Foster 23

IV. Recent Task Forces, Committees, etc.  Blue Ribbon Panel Report –Recommendations regarding Risk Measures, Analyses and Disclosures: The Actuarial Standards Board should consider adopting new disclosure requirements regarding risk. Likely influenced the development of the proposed new ASOP. Foster & Foster 24

IV. Recent Task Forces, Committees, etc.  Blue Ribbon Panel Report –Other Recommendations: Discount rates should be developed using forward-looking techniques based on year return expectations. Should be based on geometric, rather than arithmetic returns with a 50% probability of being achieved (no expected bias). Amortization Periods should be no longer than years. Asset smoothing period should be five years of less. Careful consideration of plan changes, such as requiring changes be completed over a period of two legislative sessions or equivalent with a formal process of evaluating impact of changes. Foster & Foster 25

IV. Recent Task Forces, Committees, etc.  Actuarial Funding Policies and Practices for Public Pension Plans “White Paper” – Conference of Consulting Actuaries - October 2014 –Addresses 3 components of actuarial funding policy: Actuarial Cost Method – allocates the total present value of future benefits to each year (normal cost) and all past years (actuarial accrued liability). Asset Smoothing Method – Reduced affect of short term asset volatility while still tracking the overall movement of the market value of plan assets. Amortization Policy – determines the duration and structure of increases and decreases in funding to address the UAL or surplus of assets. Foster & Foster 26

IV. Recent Task Forces, Committees, etc.  Actuarial Funding Policies and Practices for Public Pension Plans “White Paper” – Conference of Consulting Actuaries - October 2014 –Addresses funding policy know as “direct rate smoothing”, which can be used in addition to or as an alternative to asset smoothing. Goal of each is to provide contribution stability Foster & Foster 27

IV. Recent Task Forces, Committees, etc.  Report of the Pension Task Force of the Actuarial Standards Board – February 2016, publicly released June 2016 –Pension Task Force (PTF) was formed in Dec Purpose is to review input from interested stakeholders on ASOPs regarding public pension plans, and to develop suggestions for the ASB to consider Foster & Foster 28

IV. Recent Task Forces, Committees, etc.  Report of the Pension Task Force of the Actuarial Standards Board –Highlights of PTF’s suggestions: Calculation and disclosure of a solvency value (market based present value of accrued benefits, using US Treasury rates) Concept is to estimate the cost to settle all liabilities accrued under the plan Improved disclosures regarding assumptions Clarification that phase-in of assumptions changes are allowed if the assumptions actually used (during phases-in) are reasonable That the actuary consider benefit security, intergenerational equity, and contribution stability and predictability – and the balance among these three – when selecting a contribution allocation procedure Foster & Foster 29

Significant amount of recent work by actuaries to: Improve public pension plans funding status Increase required disclosures to improve understanding of various risks and plan assumptions Minimize future plan experience losses Promote intergenerational equity I have hope that the developing requirements will help to achieve the above goals without exacerbating current funding challenges by correcting the past while over-correcting for the future. Summary Foster & Foster 30

Questions? Foster & Foster 31