DAU Flashcards
Communication and Disclosure Requirements for Actuarial Report:
o Clear and appropriate to the circumstances and intended audience
o Satisfies applicable standards of practice
o Clearly identifies the actuary as being responsible for it
o Indicates the extent to which the actuary or other sources are available for supplemental info/explanations
o Describes the capacity in which the actuary serves
o Identifies the principals for whom the actuarial communication is issued
o Appropriate and timely disclosure of sources of direct/indirect compensation
Steps to Remedy Violations of Professional Standards:
- Attempt to discuss situation with other member and resolve the noncompliance
- If no resolution, report the noncompliance to the Committee on Professional Conduct
- Redo valuation results to correct violations
- Document all work and reviews and appropriately disclose adjustments made
- Reissue the valuation report with all appropriate disclosures
How to Address Unreasonable Prescribed Assumption:
- Under ASOP 4: prescribed assumption by another party
- Under ASOP 27:
o Evaluation of prescribed assumptions
o Assess materiality of prescribed assumption - Discuss with third party assumption is unreasonable with evidence to support claim
- Offer alternative assumption
- Professional Code of Conduct: exercise courtesy and cooperation
- If third party can’t be convinced:
o Disclose source of prescribed assumption
o Disclose assumption conflicts with what would be considered reasonable for this purpose
ASOP 4 (Measuring Pension Obligations):
- Need to reflect the different measurement date by either adjusting the data or adjusting the obligations to the measurement date.
- Actuary must determine if the adjustment produces a reasonable result for the purpose of the measurement
- Items to consider adjusting:
o Changes in demographics and participant counts
o Length of time since prior measurement
o Differences in cash flows (BPs, contributions, expenses)
o Changes in economic and demographic expectations
o Plan provision changes - Plan changes between the prior valuation date and measurement date should be reflected. Changes after the measurement date can be reflected.
- Actuary should consider whether assumptions should be revised
- Assumptions that vary asymmetrically based on experience:
o Utilize stochastic modeling, option-pricing techniques, or other procedure based on actuary’s professional judgement for the specific purpose
ASOP 6 (Measuring Retiree Group Benefit Obligations):
- Initial Per-Capita Costs – use past experience to predict future experience; adjust for age, plan design, utilization, etc
- Health Care Trend - select and ultimate, analyze by components
- Covered Benefits – reimbursements for covered services, fixed-dollar payments, and other monetary benefits
- Eligibility Conditions – age, svc, employment classification, etc.
- Benefit Limitations, Exclusions, Cost-Sharing Provisions – deductibles, copayments, coinsurance
- Participant Contributions – contributions formula, pre-retirement contributions
- Participation - initial enrollment, lapse, re-enrollment
- Payment from Other Sources – e.g. retiree medical savings accounts
- Benefit Options
- Anticipated Future Changes – any communicated changes?
ASOP 21 (Roles of Actuaries in Financial Audits):
- Responding Actuary:
o Actuary who works on the DB plan for the company
o Responsible for responding to auditor on behalf of company
o Prepares the financial measurements necessary for financial statements
o Needs to follow ASOP 41 for all communications
o Should be prepared to discuss:
Data used
Methods and assumptions
Source of any methods and assumptions not set by actuary
Models used
Significant risks to the entity - Reviewing Actuary:
o Typically employee of audit firm
o Assists with the financial audit with respect to items based on actuarial considerations
o Documents findings on actuarial procedures
o Should comply with ASOP 41 for communications - Other ASOP 21 Points:
o Be appropriately responsive
Defining Materiality Thresholds for Pension Audit:
- Involves accumulation of differences and may be measured over many years
- Due to accumulation, seemingly small numbers can be considered material
- Item actuary considers material may not be with respect to the financial statement
- Responding actuary should quantify impact of a change in assumptions
- “Clearly Trivial” has a lower threshold than materiality, but no clear cut definition
- Consequences of crossing the clearly trivial barrier are less severe
ASOP 25 (Credibility Procedures):
- Evaluate credibility – actuary represents data as credible
- Blending subject experience and other experience
- Must be practical from a cost/benefits perspective
- Use judgement as appropriate
- Apply procedures to separate data segments if not representative of experience as a whole
- Disclosures required – credibility procedures used, any material changes
Considerations for Determining Mortality Credibility Factor:
- Accuracy of relevant experience
- Variability of the subject experience; small amount of variance in subject experience means we should assign a lot of credibility
- Availability of large amounts of experience data
- Consider if information on each subgroup is available
- Consider the shape of the subject experience as compared to standard tables
- Consider:
o Whether procedure is expected to produce reasonable results
o Appropriate for its intended use and audience
o Practical to implement
o Professional judgement
o Using different assumptions for different subgroups
o The homogeneity of the data
ASOP 27 (Selection of Economic Assumptions):
- Characteristics of a Reasonable Assumption:
o Combined effect of assumptions should be unbiased
o Assess reasonability at each measurement date
o Consistent with all other assumptions
o Appropriate for purpose of the measurement
o Reflects actuary’s professional judgement
o Considers relevant historical and current economic data
o Reflects the actuary’s estimate of future experience - Disclose Assumptions Used
- Disclose Rationale for Assumptions
- Disclose Change in Assumptions
- Disclose Change in Circumstances
- Disclose Prescribed Assumptions/Methods
ASOP 27 Specific to Discount Rate Selection:
o Can be determined with market yields at the end of the reporting period on high quality fixed income instruments
o Requires actuary to use guidance set forth in ASOP to determine reasonableness of assumption
o Discount rate may be a single rate or series of rates (i.e., YC)
o May be approximated by market yields for a hypothetical bond portfolio whose cash flows reasonably match the pattern of expected benefits
ASOP 27 Specific to Expected Return Selection:
o Anticipated returns on plan’s current and future assets
o Judgement of professional opinions
o Current yields to maturity of FI securities
o Forecasts of inflation
o Total returns for each asset class
o Any stochastic simulations or models used to develop expected returns
o Plan’s investment policy – current allocation; eligible securities; target allocation
ASOP 27 Considerations for Variable Annuity Plan:
o Changes in market rates have no effect on the sponsor’s obligation, as obligation is tied to performance of the asset portfolio
o Requires all economic assumptions to be consistent
o Actuary should consider alternative valuation procedures, such as stochastic modeling, option pricing techniques, or deterministic procedures using assumptions that are adjusted to reflect the impact of changes in experience year over year
ASOP 34 (Retirement Plan Benefits in Domestic Relations Actions):
- Ways actuaries can assist:
o Draft a DRO
o Review work of another expert who drafted a DRO
o Participate in negotiations with another expert concerning DRO
o Provide expert testimony regarding DRO
o Provide guidance on division of benefits
o Calculate covered party’s accrued benefit at given date
o Perform actuarial valuation of retirement benefits covered by DRO
o Implement a DRO for plan sponsor (prepare final benefit calculation)
Benefit Provisions That Should be Addressed in DRO:
- Early retirement subsidies – what if any subsidies are provided to alternate payee
- BCD for alternate payee – participant’s commencement date? Early commencement date?
- Actuarial equivalence factors – used to adjust benefit over alternate payee’s lifetime
- Death of either party prior to commencement
ASOP 35 (Selection of Demographic Assumptions):
- Communication Requirements:
o State source of any prescribed assumptions
o Describe any prescribed assumption or method set by another party that conflicts with the actuary’s professional judgement
o Describe any prescribed assumption or method set by another party that the actuary is unable to evaluate for reasonability
ASOP 35 (Mortality Considerations):
- Mortality Considerations:
o Characteristics of employees and retirees; select different assumptions pre and post retirement
o Size of the population; small plan can consider no pre-ret mortality
o Characteristics of disabled lives, if applicable
o Characteristics of different subgroups
o Use of actual participant data, if credible
o Disclose rationale if using older tables
o Consider impact of mortality improvements before and after measurement date
ASOP 41 (Actuarial Communication Requirements):
- Identify stakeholders
- Consider nature of work (purpose and scope)
- Information date and data, assumptions, and methods
- Prescribed assumptions
- Disclosure requirements when relying on others
o Identify assumption/methods relied upon
o Identify if actuary feels method/assumption is reasonable or unable to judge
Reporting Requirements in Actuarial Communications:
- Uncertainty or risk
- Conflict of interest
- Reliance on other sources of data or other information
- Responsibility of assumptions and methods
- Information and measurement date
- Subsequent events
- A statement indicating future results may differ significantly from current measurements
- Outline of plan provisions
- Description of known changes in plan provisions since the subsequent measurement
- Summary of participant information
- Actuarial cost method
- Description of accounting policies or methods that may be appropriate
ASOP 44 (Selection and Use of Asset Valuation Methods):
- Considerations:
o Purpose and nature of measurement – might select different methods for different purposes (e.g. smoothed method for contribution forecast, market method for termination analysis)
o Objectives of principal – e.g. potential desire for more stable contributions
o Multiple asset valuation methods – different methods for different classes of assets (e.g. smoothed for equities, market for fixed income)
o Adjustment of asset value for timing differences – adjusting values if they are not available at the measurement date
ASOP 51 (Assessment and Disclosure of Pension Related Risk):
- Risks to Disclose in Valuation Report:
o Investment Risk – returns different than expected
o Asset/Liability Mismatch Risk – changes in asset values not matched by liabilities
o Interest Rate Risk – interest rates different than expected
o Longevity and other demographic risk – mortality and other assumptions different than expected - Methods for Assessing Risk:
o Scenario tests
o Sensitivity tests
o Stochastic modeling
o Comparison of PV using discount rate derived from minimal risk investments to corresponding PV from the funding valuation or pricing valuation
ASOP 56 (Modeling):
- Considerations for Model Setting:
o Confirm the capability of model is consistent with its purpose
o Consider the level of detail built into the model
o Consider the model’s ability to identify variability of output
o Confirm the model is reasonable for its purpose
o Consider whether the model is appropriate for its purpose
o Ensure the data used is appropriate - Setting Assumptions:
o Consider a range of assumptions
o Ensure assumptions are reasonable for current model run
o Ensure assumptions are consistent with each other
o Assumptions should be reasonable in aggregate
o Disclose any assumptions required by law
o Data used to develop assumptions should be based on actual experience - Mitigating Model Risk:
o Understand the model’s intended purpose
o Understand the complexity of the model
o Perform sufficient testing of the model
o Validate the model outputs are reasonable
o Compare the output to output from other models
o Have the model peer reviewed by other actuaries
o Prepare appropriate documentation of the model
o Understand when and where revisions have been made and document them
DB vs DC Plan (DB Plan Disadvantages):
- DB Plan Disadvantages:
o Lacks portability – favored by younger population
o Investment return – participants don’t share returns or control investments
o Accruals relatively low for younger employees
o No encouragement of EE savings
DC Plan Advantages:
o Account balance provided as lump sum
o Control over investment return
o Accruals based on pay in given year – incremental value same at all ages
o Encourage EE savings to receive full match
o Ease of administration
o No more PBGC premiums or ASC 715 valuations
o Reflects plan designs offered by most competitors