Pension risk is uncertainty due to factors that are inherent in pension plans. It results in required contribution and funding percentage volatility. Examples of risks faced by public sector pension plans include:
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.*
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 Consulting’s annual actuarial valuation and most other types of 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.
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.
The standard does not require the actuary to evaluate the likelihood of contributing entities to make contributions when due, nor does it require the actuary to assess the likelihood or consequences of future changes in applicable law.
The assessment can be qualitative or quantitative (based on numerical demonstrations). The table below notes examples of those latter methods.
|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. Commentary could include:
The actuary should calculate and disclose any plan maturity measures that are significant in understanding retirement plan risks. Examples may include the ratio of the number of inactive participants to total participants or the amount of liability for inactive participants to the total liability and the ratio of benefit payments to contributions over time. Plan maturity is important because mature plans may have more difficulty recovering from adverse experience.
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, cash flow, possible insolvency and current market conditions.
Your Segal consultant will continue to work with you to identify and analyze retirement plan risks. Our annual valuation presentations will include a brief discussion of investment risk and other significant risks. In addition, the plan actuary will recommend a more detailed assessment, if appropriate.
|This Public Sector Letter is not intended to provide guidance on actuarial standards. For interpretation and application of ASOPs, employers and trustees should rely on their plan actuary for advice.|
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:
Kim Nicholl, FSA, MAAA, FCA, EA
Paul Angelo, FSA, MAAA, FCA, EA
Leon F. “Rocky” Joyner, Jr., ASA, MAAA, FCA, EA
Brad Ramirez, FSA, MAAA, FCA, EA
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Public sector entities face tough decisions. We understand those challenges as well as options for meeting them. Having worked with hundreds of public sector clients for more than 50 years, we have insight into the spectrum of design characteristics and features of all types of compensation and benefit plans throughout all levels of government. We provide the following services:
* 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. (Return to the publication)
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