I completed a study to determine how actuaries are complying with ASOP 51. I selected to review public plan funding reports for several reasons. First, it is my understanding that the development of ASOP 51 was motivated by public plans, and I was curious to see if public plan funding reports were materially different due to ASOP 51.
Second, I thought reviewing these reports would provide insight into how I could comply with ASOP 51. And third, actuarial reports for public plans are readily available, and it is harder to find private employer plans.
The study revealed that the ASOP 51 public plan disclosures are generally not very customized and are often generic.
Background
ASOP 51 is effective for funding valuations with a measurement date of Nov. 1, 2018 or later. One of the requirements of ASOP 51 is that the actuary perform a risk assessment for funding valuations. There are three risk assessment requirements:
- Identify risks that may affect the plan’s future financial status (ASOP 51, Section 3.2)
- Assess the identified risks taking into account plan-specific circumstances (ASOP 51, Section 3.3)
- Disclose the results of the risk assessment including plan-specific commentary (ASOP 51, Section 4.1a)
“Assess” is not defined in ASOP 51. One definition of assess is “evaluate or estimate the nature, ability, or quality of.” Another definition is “to determine the importance, size, or value of.” Consistent with common definitions of “assess,” ASOP 51 does state that the assessment is not required to involve numerical calculations. In some circumstances, it may be possible to determine the importance or size of risks without numerical calculations. The actuary may take into account practical considerations in choosing how to perform the risk assessment (ASOP 51, Section 3.4).
Importantly though, ASOP 51 does contemplate a plan-specific assessment (ASOP 51, Section 3.3). ASOP 51 could have been drafted to require that actuaries just disclose common risks that pension plans face. Arguably, that requirement alone would have been a meaningful improvement.
ASOP 51 also could have required actuaries to offer clients a risk assessment and for actuaries to only perform a risk assessment when it was mutually agreed to be part of the engagement. But instead, ASOP 51 requires risk assessments for all funding valuations and pricing valuations (ASOP 51, Section 1.2).
Initial Assessment
In a review of public plan funding valuations, initial compliance with ASOP 51’s risk assessment requirement was largely generic. However, there were a few excellent plan-specific ASOP 51 disclosures in the sample. Significant observations included:
- Many reports included a list of possible risks without any identification of which risks were assessed for the plan. The list usually would include a description of the risk, but it was not specific to the plan’s circumstances.
- Some firms had nearly identical ASOP 51 disclosures for all or almost the reports that they prepared in the sample.
- In lieu of the actuary assessing risk, some reports advised the reader on how to assess risk.
- There were only six recommendations that a more detailed risk assessment be performed.
- Two reports referenced a separate forthcoming risk assessment report.
- One report did not contain any ASOP 51 disclosure, but the actuary advised me they are issuing a revised report to include the information.
- One report appeared to make no effort to comply with ASOP 51.
- No actuary disclosed that they were deviating from ASOP 51.
Following are some possible reasons why the reports did not include plan-specific risk assessments.
First, in many reports there was language that a detailed risk assessment was beyond the scope of the report. This statement may appropriately describe why detailed, numerical calculations were not performed, but it does not satisfactorily explain why there was no plan-specific risk assessment and commentary. Actuaries are required to comply with the ASOPs and are not allowed to take on assignments where the scope of the assignment is inappropriately narrow. ASOP 51 could have provided a transition period to allow time for the scope of assignments to be expanded, but it did not.
Second, it appeared that some actuaries intended to comply with the risk assessment requirement by disclosing historical plan information and plan maturity measures. However, these items are explicitly required by ASOP 51 in addition to a plan-specific risk assessment – not in lieu of it (ASOP 51. Sections 3.7-3.8 and 4.1d-4.1e). Thus, meaningful commentary about maturity measures does not replace a plan-specific risk assessment.
Third, the fact that ASOP 51 does not define “assessment” probably has confused actuaries. In fact, it is quite possible that if “assessment” were defined in ASOP 51, it would turn out that this article’s conclusions are incorrect. However, while the definition of “assessment” is not included in it, ASOP 51 is clear that an assessment should be plan-specific. At a minimum, more comments such as “investment risk is significant risk for this plan” or “the most important risk for this plan is turnover” would be expected in ASOP 51 disclosures.
Conclusion
Of course, ASOP 51 is very new; over time, actuaries’ understanding of and compliance with ASOP 51 will mature. But an important concern is whether two standards of actuarial practice are evolving with respect to pension funding risk assessments: the plain language of ASOP 51, and what actuaries are really doing.
The evolution of an ASOP and a lower, “real” standard would be extremely dangerous for the entire profession. Actuaries should be able to rely on and be required to comply with the plain language of ASOPs. While actuaries should be free to exercise actuarial judgment in applying the plain language of ASOPs, they should not be put in a position of trying to divine the intent of actuarial standards of practice.
Scope of Review
The review included 50 publicly available funding valuation reports for public pension plans with a Dec. 31, 2018 or Jan. 1, 2019 measurement date. Plans ranged from $27 million to $40 billion in assets. Eleven different actuarial firms were represented.
All opinions stated are the opinions of the author and should not be attributed to any other individual or organization.
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