Assessing Retirement Plan Risk

New Professional Standard Reinforces Need for Pension Risk Assessments

Over the past year, we have been focusing on the issue of risk in retirement plans.1 Risk is inherent uncertainty associated with every retirement plan over time that cannot be avoided. Although we commonly perceive risk as something negative, it is worth keeping in mind that there is also an upside to risk. Investors who understand that duality refer to risk and reward as two sides of the same coin. However, most retirement plan decision makers are concerned about what exposes the plan to unexpected negative outcomes.

Examples of risks faced by multiemployer pension plans include:

  • Investment (the potential that investment returns will be different than expected);
  • Longevity (the possibility that retirees may live longer than projected by the actuary);
  • Employment and contribution levels; and
  • Those associated with non-payment of withdrawal liability.

We have previously discussed some approaches to evaluating retirement plan risks. Deterministic projections display the consequences of a particular future event and are based on the assumption that this particular event will occur — such as that plan assets will return 7.5 percent next year, and perhaps every year thereafter. Stochastic projections, on the other hand, display the likelihood of all possible future outcomes and are based on the aggregation of thousands of deterministic projections. For example, using stochastic projections, one can determine, for a specific investment portfolio and set of capital market assumptions, what the probability is of the plan remaining in the green zone for the next 10 years.

A new Actuarial Standard of Practice, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions (ASOP No. 51) effective later this year, supports our view that it is important to address retirement plan risks.2

Requirements of ASOP No. 51

ASOP No. 51 requires actuaries to identify and assess risks that may reasonably be anticipated to significantly affect a pension plan’s future financial condition. The goal is to help users of actuarial reports better understand those risks. The new standard applies to annual funding valuations and pricing valuations. These include Segal’s annual actuarial valuation or most other actuarial calculations.

It permits actuaries to use various methods to assess risks. It also requires actuaries to recommend that a more detailed risk assessment be performed if the actuary judges that it would be significantly beneficial for the plan sponsor to understand those risks.

Identifying Risks to Be Assessed

ASOP No. 51 requires actuaries to identify risks that “may reasonably be anticipated to significantly affect the plan’s future financial condition.” Investment risk, asset/liability mismatch risk, interest rate risk, longevity and other demographic risks and contribution risk are cited as examples.

Assessing Risk

The assessment can be qualitative or quantitative (based on numerical demonstrations). The table below notes examples of those latter methods.

Risk-Assessment Methods Based on Numerical Calculations

Method Description
Scenario Test Assesses impact of one possible event or several simultaneous events (economic recession may impact investment returns and employment levels)
Sensitivity Test Assesses the impact of a change in a specific assumption about future events
Stress Test Assesses the impact of adverse changes in one or relatively few factors, such as what it will take for the plan to fall out of the green zone
Stochastic Modeling Assesses the range and likelihood of all potential outcomes by allowing random variations, usually with respect to investment returns

The actuary may also use non-numerical methods for assessing risks that might take the form of commentary about potential adverse experience and the likely effect on future results. It could include:

  • Statements relating to declines in the number of active participants and the possible impact on future financial measurements;
  • Asset performance and expected future returns; or
  • Other issues, such as an increase in the number of employer withdrawals.

Taking Plan Maturity into Account

The actuary should calculate and disclose any plan maturity measures that are significant in understanding retirement plan risks. Examples may include the ratio of inactive participants or liability to total participants or liability, cash-flow measures and the ratio of benefit payments to contributions. Plan maturity is important because it can make it difficult to recover from adverse experience.

Recommending a More Detailed Risk Assessment

The actuary may recommend that a more detailed risk assessment be performed. When making that decision, the actuary will take into account such factors as the plan’s design, maturity, size, funded status, asset allocation, zone status, cash flow, possible insolvency and current market conditions.



Segal and Risk Consulting

Your Segal consultant will continue to work with you to identify and analyze retirement plan risks. Our annual valuation presentations will include a brief risk assessment for investment risk and other significant risks. In addition, the plan actuary will recommend a more detailed assessment, if appropriate.


This Ideas is not intended to provide guidance on actuarial standards. For interpretation and application of ASOPs, trustees should rely on their plan actuary for advice.


Questions? Contact Us.

For more information about pension plan risks, ASOP No. 51 and/or to discuss how Segal Consulting can help you to manage those risks, please contact your Segal consultant, the nearest Segal office or one of the following experts:


1 Our publications and other resources on that topic are available on the Managing Retirement Plan Risk webpage of Segal Consulting’s website.

2 ASOPs are established by the Actuarial Standards Board (ASB), which sets standards for appropriate actuarial practice in the United States. ASOP No. 51 and other ASOPs are available on ASB's website.


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Since our founding in 1939, Segal Consulting has been a trusted advisor to multiemployer benefit funds. Working with hundreds of multiemployer plans enables us to understand and provide innovative, cost-effective solutions to the challenges facing funds. Our unbiased, objective advice allows funds to make decisions in the broader context of other multiemployer plans. In addition, our ability to aggregate multiemployer data from our extensive client base enables us to determine trends and offer timely advice on emerging developments. In addition to pension consulting, we provide the following services:

  • Defined contribution plan consulting,
  • Health and welfare plan consulting for active and retiree coverage, including pharmacy benefit management,
  • Compliance consulting,
  • Participant communications, including personalized statements,
  • Administration and technology consulting, and
  • Insurance brokerage services for fiduciary liability insurance, fidelity bonds and cyber liability insurance through Segal Select Insurance Services, Inc.

We are a firm with a national commitment to the multiemployer environment. We are actively involved with multiemployer legislation and research and work closely with industry advocacy groups. In working with us, you will have access to professionals who have deep multiemployer subject matter experience and can bring the full resources of Segal to help address your issues.


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