Fly on the Wall

By Karen Smith • January 17, 2018 • 0 Comments

On Dec. 7, 2017, I attended an Actuarial Standards Board (ASB) meeting. I had never attended an ASB meeting and was curious. Revisions to pension ASOPs 27 and 35 were on the agenda. So, I notified the Academy office that I planned to attend, booked my airfare and I was off to DC!

As an observer, one may watch the meeting and listen, but observers are not permitted to comment unless recognized by the ASB Chair. Since I was not sure that I would be recognized by the ASB Chair, I settled in to listen and take notes. Those of you who know me well probably understand how hard it is for me to spend the day not sharing my “brilliant” thoughts while listening to pension issues being discussed…

Below are some highlights from my very unofficial meeting notes.

The pension actuaries in attendance were the current ASB pension members Frank Todisco and Kathy Riley. Additionally, incoming pension ASB member Mita D. Drazilov was present. Mr. Drazilov is replacing Mr. Todisco, whose ASB term expired Dec. 31, 2017. Chris Noble, the chair of the ASB Pension Committee, also attended the meeting to present the proposed revisions to ASOPs 27 and 35.

They spent pretty much from 8:30 a.m. to 2:00 p.m. reviewing the proposed revisions to ASOPs 27 and 35. The ASB works straight through. They took no breaks other than lunch, and lunch was short. They started with ASOP 35 and then after lunch reviewed ASOP 27. The day concluded with some planning about ASOPs 4, 27 and 35.

Review of ASOPs 27 and 35

ASOP 27 covers investment assumptions and ASOP 35 covers noneconomic assumptions, including demographic assumptions. Most of the proposed changes were either made to conform to the Pension Task Force (PTF) suggestions that had been adopted by the ASB or were wordsmithing to clarify the meaning of the existing ASOP. Since implementing the PTF suggestions as quickly as possible is the current priority, a complete review of ASOPs 27 and 35 was not undertaken.

Here are my key takeaways — none of which are surprises if you are familiar with the PTF report:

  • As part of annually reviewing the assumptions, there would be an affirmative obligation to review recent gain and loss experience with each valuation and consider performing or updating an experience study. Gain/loss analysis will be defined in a revised ASOP 4 and a gain/loss analysis will be required. The minimum required gain/loss will be to determine a liability gain/loss and asset gain/loss.

I continue to be confused by what this will mean for a PPA funding valuation. For example, in a micro/small PPA funding valuation, there is often no asset return assumption. So I am not sure how to measure the asset loss. And to what extent will the actuary be required to break out prescribed assumptions changes such as PPA segment rates and mortality updates in the liability gain/loss? However, this very minimal gain/loss analysis makes perfect sense for many other valuations, including FAS valuations and larger valuations.

  • When an actuary uses an “old” published mortality table, the actuary will need to include an explanation of why the table is appropriate. There is some concern that actuaries were using old tables inappropriately. Under the revision, it would still be permissible to use an old mortality table, but the actuary would need to include an explanation of why the table is appropriate. This will potentially improve some governmental pension valuations.
  • The rationale for assumptions disclosure will be changed to require that the actuary state why the chosen assumption is reasonable instead of the rationale for choosing the assumption. So, the actuary does not need to explain why he chose the precise assumption he chose. Instead, he must only describe why the chosen assumption is reasonable. This also makes it clearer what is required to actuaries who thought the disclosed rationale could be “The assumptions represent the actuary’s best estimate of future experience.” It will now be clearer that the disclosure should be why the assumption represents the actuary’s best estimate of future experience.

Additionally, when the actuary is required to assess the reasonableness of an assumption, the actuary will need to provide an example of why he believes the assumption is reasonable. So, as an example, Assume that an FAS client chooses a discount rate of 4.0% for year-end disclosure and the actuary agrees with this assumption choice. The actuary will need to provide an explanation of why the actuary found the assumption reasonable. As in the current ASOPs, there will be no need to comment on the reasonableness of PPA assumptions specified by the IRC.

  • Part of the master plan appears to be to combine ASOP 27 and ASOP 35 at some point in the future. This makes sense. There are a fair number of repeated concepts and text between the two ASOPs. They will not be combined when exposed next year, as the combination is a large project that will take additional time.

What’s Next?

The ASB Pension Committee is still working on proposed revisions to ASOP 4 to conform to the PTF Report suggestions. When the proposed revisions to ASOP 4 are approved, ASOPs 4, 27 and 35 are planned to be exposed simultaneously. At a future meeting, they are planning to review ASOP 4 along with some minor updates to the current working drafts of ASOPs 27 and 35. So, maybe we will probably see some exposure drafts next year!

Mr. Noble indicated that the Pension Committee is still working on the proposed revisions to ASOP 4 and noted that there was not yet Pension Committee agreement on the PTF suggestions requiring a “solvency value.” The Pension Committee is working on both the language that the ASB requested and on alternate language. What is a “solvency value” anyway? Well, it is not completely defined yet, but here is what the PTF report said:

“This solvency value should represent an estimate of the cost, as of the valuation date, to defease all liabilities accrued under the plan in the marketplace, based upon the presumption that capacity is available. An acceptable proxy for this measurement would be to calculate the present value of future benefits accrued to date using: 

• the unit credit method, 

• U.S. Treasury rates, and 

• other assumptions determined according to ASOP Nos. 27 and 35.”

For a small cash balance plan where you expect everyone to elect lump sums, could it be the sum of the account balances? Or, for a small traditional plan, could it be the lump sums calculated under the terms of the plan? Or does the solvency value really contemplate conversions to annuities and consideration of the annuity pricing? I don’t know and I am curious to see what the ASB Pension Committee comes up with, because this is a tough issue.

Closing Thoughts

The ASB meeting was interesting. The discussion of the proposed changes was thoughtful and deliberate. It is important to remember this when we don’t agree with the ASOPs. And, of course, we must all participate in the process so that our perspective is heard.

I look forward to the ASB completing the implementation of the PTF recommendations, which I perceive to be looking in the rearview mirror. I would love to see progress on standards that are more forward looking and anticipating tomorrow’s issues.