Ready or Not – Revised ASOP No. 4 Is Here
By: Piotr Krekora, ASA, EA, FCA, MAAA, PhD, Gabriel, Roeder, Smith & Company
New disclosure requirements are in effect for actuarial valuation reports with measurement dates after February 15, 2023. While intended to add context to results presented in the reports, the new information may create communication challenges for some systems.
This is an excerpt from NCPERS Spring 2023 issue of PERSist, originally published March 21, 2023.
The Actuarial Standards Board (ASB) provides guidance regarding appropriate actuarial practice for a broad range of actuarial services through a series of Actuarial Standards of Practice (ASOPs), including actuarial services related to pension and retiree group benefit obligations. In December 2021, the ASB adopted revisions to ASOP No. 4 entitled Measuring Pension Obligations and Determining Pension Plan Costs or Contributions. The revised standard is effective for any actuarial report with a measurement on or after February 15, 2023 that is issued on or after that date.
Actuarial practice is constantly evolving with changing needs of users of actuarial services and changing environments in which those services are performed, which is particularly evident in the area of retirement practice. This evolution has been reflected through multiple revisions to ASOP No. 4, first adopted in 1990 under the title “Recommendations for Measuring Pension Obligations”.
For public plans, the most recent ASOP revisions can be placed in two categories: (1) Low-Default-Risk Obligation Measure” (LDROM) calculation and disclosure, and (2) other revisions.
LDROM had already garnered considerable attention both within and outside the pension actuarial community. It can be thought of as the value of the plan's liabilities using an interest rate, or rates, derived from low-default-risk fixed income securities. In terms of the current practice, this would be a liability determined for a plan investing all its assets in such securities. This disclosure needs to be accompanied by commentary to help the intended user understand the significance of LDROM with respect to the funded status of the plan, plan contributions, and the security of participant benefits.
The rationale for the LDROM disclosure was included in the ASB's transmittal memorandum to the revised ASOP No. 4:
The ASB believes that the calculation and disclosure of this measure provides appropriate, useful information for the intended user regarding the funded status of a pension plan. The calculation and disclosure of this additional measure is not intended to suggest that this is the “right” liability measure for a pension plan. However, the ASB does believe that this additional disclosure provides a more complete assessment of a plan's funded status and provides additional information regarding the security of benefits that members have earned as of the measurement date.
Other ASOP revisions of significance and interest to public plans are the calculation and disclosure of a reasonable actuarially determined contribution, additional considerations regarding amortization policy, and additional assessments of the implications of the plan's funding policy. These new requirements are generally intended to promote good actuarial practices and as such should not affect many public plans significantly as their reports may already comply with many of the other ASOP No.4 revisions.
While it is difficult to determine if the new requirements were shaped or influenced by comments from parties outside the actuarial profession, many revisions were inspired by a desire within the actuarial community to better address various types of risks affecting retirement systems (although ASOP No. 4 does not directly require risk assessment disclosures). As actuaries begin implementing the new requirements during the upcoming valuation season, many trustees and stakeholders will scrutinize the new information in their reports. Careful communication and commentary will be critical to meeting the goal of helping the intended users better assess long-range health of their retirement systems.
Note: The views expressed in this article are those of the author.
Bio: Piotr Krekora, ASA, EA, FCA, MAAA, PhD is a Senior Consultant in Gabriel, Roeder, Smith & Company's Fort Lauderdale, Florida office with more than 15 years of actuarial and consulting experience.
Piotr is a member of the GRS Office of the Chief Actuary. In this capacity, he provides strategic thought leadership to public sector clients as well as ensuring that service is being provided at the highest level by all GRS employees.
Piotr's actuarial expertise covers all aspects of public sector pension and retiree health plan design and operation, including pension and OPEB valuations, asset simulation and cash flow studies, pension and retiree health care studies, cost analyses of proposed plan changes, liability and contribution projections, and designing and implementing cash balance plans as well as other alternative designs.