1. Greene Finney Annual Conference May 30, 2019
The Actuarial Process
Greene Finney Annual Conference
May 30, 2019

2. Property and Casualty Insurance
Areas of Practice
Life Insurance
Health Insurance
Property and Casualty Insurance
Retirement 2

3. Retirement Plan Actuarial Services
Defined Benefit Pension Plans (DB Plans)
Postretirement Welfare Plans (OPEB)
Non-Qualified DB Plans
Other 3

4. DB Plans (Private) – Annual Actuarial Services
Annual actuarial valuation for IRS funding purposes
FASB ASC 715 valuation and year end disclosure for accounting purposes
Benefit calculations and plan administration
Non-discrimination testing
Cost analysis
Plan design analysis
Preparation of required government forms (IRS and PBGC)
Plan audit support 4

5. DB Plans (Public) – Annual Actuarial Services
Funding valuation
Accounting valuation
Benefit calculations and plan administration
Benefit statements
Experience studies
Cost analysis
Plan design analysis 5

6. Actuarial Valuation Process
Census Data Processing
Selection of Assumptions
Perform Actuarial Valuations
Preparation of Required Calculations and Exhibits
Preparation of Actuarial Report 6

7. Actuarial Valuations – Key Concepts
Present value of Future Benefits (PVFB)
Project salary and service
Actuarial Accrued Liability (AAL), includes:
Projected Benefit Obligation (PBO) – FASB 715
Funding Target (FT) – IRS Funding
Total Pension Liability (TPL) – GASB 68
Total OPEB Liability (TOL) – GASB 75
Normal Cost (NC), includes:
Service Cost (SC)
Present value of future normal costs (PVFNC)
PVFNC = PVFB – AAL 7

8. Actuarial Cost Methods
Unit Credit
Projected Unit Credit
Entry Age
Other funding methods not commonly used
Aggregate
Frozen Initial Liability
Individual Level Premium 8

9. Census Data Preparation
Annual census data reconciliation
Data items collected is dependent on plan design
Typical data items include:
Basic demographic information (name, gender, DOB, DOH, DOP)
Compensation (current and historical)
Hours, if applicable (current and historical)
Other information (form of payment, spousal information, subdivision, group codes) 9

10. Example – Census Data Reconciliation Exhibit10

11. Actuarial Assumptions
Economic
Discount rate
Expected rate of return
Future salary increases
Inflation
COLA, if applicable
Demographic
Mortality
Retirement
Termination
Disability
Percent Married
Form of Payment 11

12. Actuarial Standards Board
Actuarial Standards of Practice (ASOPs)
Describe the procedures an actuary should follow
Identify what actuary should disclose when communicating results 12

13. Retirement Related ASOPs
ASOP 4 – Measuring Pension Obligations and Determining Pension Plan Costs or Contributions
ASOP 6 – Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined
ASOP 23 – Data Quality
ASOP 27 – Selection of Economic Assumptions for Measuring Pension Obligations
ASOP 34 – Actuarial Practice Concerning Retirement Plan Benefits in Domestic Relations Actions
ASOP 35 – Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations
ASOP 41 – Actuarial Communications
ASOP 44 – Selection and Use of Asset Valuation Methods for Pension Valuations
ASOP 51 – Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions 13

14. Overview of Selected ASOPs
ASOP 4 – Measure Liabilities, Determine Costs
Coordinates other major ASOPs (27,35,44) to integrate all the elements of an actuarial valuation.
Outlines issues and recommended practices for an actuarial valuation.
ASOP 23 – Data Quality
Actuaries not required to audit data.
Actuaries are required to assess whether the data is appropriate and sufficient for the assignment. 14

15. Overview of Selected ASOPs
ASOP 27 – Selection of Economic Assumptions
Examples: investment return, inflation, compensation increases, etc.
Provides guidance to actuaries, not prescriptive.
Selecting reasonable assumptions defined by Section 3.6.
Reflect actuary’s estimate of future experience.
No significant bias (not significantly optimistic or pessimistic).
A range can no longer be provided by the actuary. An actuary must recommend a specific value. (September 2013 revision)
Prescribed assumptions 15

16. Overview of Selected ASOPs
ASOP 35 – Selection of Demographic Assumptions
Examples: mortality rates, termination rates, percent married, etc.
Provides guidance to actuaries, not prescriptive.
Reflect actuary’s estimate of future experience.
Credibility of population when selecting demographic assumptions.
Prescribed assumptions 16

17. Overview of Selected ASOPs
ASOP 41 – Actuarial Communications
Provides guidance on all necessary disclosure elements
Communication is an ongoing and interactive process
ASOP 44 – Asset Valuation Methods
Provides guidance for selecting appropriate asset valuation method
Developing Actuarial Value of Assets 17

18. Overview of Selected ASOPs
ASOP 51 – Assessment and Disclosure of Risks
Effective for any work product with a measurement date on or after November 1, 2018.
Identify risks to be assessed
Investment risk, longevity, contribution risk, etc.
Assessment of risk
Can be qualitative or quantitative
Determine if a detailed risk assessment is significantly beneficial
Provide plan maturity measures
Ratio of market value of assets to payroll, ratio of retired actuarial accrued liability to total actuarial accrued liability, cash flow measures, etc.
Provide relevant historical values 18

19. Applicable Standards – DB Plans
Private Plans
Funding rules – IRC and ERISA
PBGC Regulations
Employer accounting – FASB ASC 715
Plan Accounting – FASB ASC 960
Public Plans
Funding rules – State and local law
Employer Accounting – GASB 68
Plan Accounting – GASB 67 19

20. Applicable Standards – OPEB
Private Plans
Employer accounting – ASC
Public Plans
Employer Accounting – GASB 75
Plan Accounting GASB 74 20

21. Key Actuarial Assumptions
Varies depending on standard
FT, PBO, TPL, ASC 960 AAL all have different requirements
Discount Rate
Hot topic in recent years
2014 SOA mortality study
Must include mortality improvement
Static vs. generational mortality tables
Mortality 21

22. Discount rate definition – ASC 715
Section 44 – The assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates currently published by the Pension Benefit Guaranty Corporation). In making those estimates, employers may also look to rates of return on high‐quality fixed‐income investments currently available and expected to be available during the period to maturity of the pension benefits. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost. Section 44A - Pursuant to paragraph 44, an employer may look to rates of return on high‐quality fixed‐income investments in determining assumed discount rates. The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high‐quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. Notionally, that single amount, the projected benefit obligation, would equal the current market value of a portfolio of high‐quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of the expected future benefit payments. Because cash inflows would equal cash outflows in timing and amount, there would be no reinvestment risk in the yields to maturity of the portfolio. However, in other than a zero coupon portfolio, such as a portfolio of long‐term debt instruments that pay semiannual interest payments or whose maturities do not extend far enough into the future to meet expected benefit payments, the assumed discount rates (the yield to maturity) need to incorporate expected reinvestment rates available in the future. Those rates shall be extrapolated from the existing yield curve at the measurement date. 22

23. Mortality – ASOP 35 3.5.3 MORTALITY AND MORTALITY IMPROVEMENT
The actuary should consider factors such as the following in the selection of mortality and mortality improvement assumptions:
a. the possible use of different assumptions before and after retirement (for example, in some small plan cases a reasonable model for mortality may be to assume no mortality before retirement);
b. the use of a different assumption for disabled lives, which in turn may depend on the plan’s definition of disability and how it is administered; and
c. the use of different assumptions for different participant subgroups and beneficiaries.
The actuary should reflect the effect of mortality improvement both before and after the measurement date. With regard to mortality improvement, the actuary should do the following:
i. adjust mortality rates to reflect mortality improvement before the measurement date. For example, if the actuary starts with a published mortality table, the mortality rates may need to be adjusted to reflect mortality improvement from the effective date of the table to the measurement date. Such an adjustment is not necessary if, in the actuary’s professional judgment, the published mortality table reflects expected mortality rates as of the measurement date.
ii. include an assumption as to expected mortality improvement after the measurement date. This assumption should be disclosed in accordance with section 4.1.1, even if the actuary concludes that an assumption of zero future improvement is reasonable as described in section Note that the existence of uncertainty about the occurrence or magnitude of future mortality improvement does not by itself mean that an assumption of zero future improvement is a reasonable assumption. 23

24. Actuarial Report Review
FASB ASC (Private pension)
GASB 75 (Public OPEB) 24