Retirement Account Third Quarter 2012

 

August 15, 2012
 

ASOP Drafts Reviewed

In separate May 31 letters to the Actuarial Standards Board (ASB), the Academy’s Pension Committee, Pension Finance Task Force, and Joint Committee on Retiree Health commented on an exposure draft of Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.

The Pension Committee’s comments addressed market-consistent measures, terminology, disclosure requirements for fully funded plans, future assessments and projections, the requirement to disclose the type of actuarial present value, and the amortization method for the contribution-allocation procedure.

The Pension Finance Task Force wrote that while “market consistent present value” was well-defined, the definition of “cost” was vague and confusing. It also noted that a number of terms or concepts were defined differently within the standard.

Comments by the Joint Committee on Retiree Health on ASOP No. 4 focused on the inclusion of “retiree group benefit obligations” in the background section and whether the ASB intends the standard for retiree health under ASOP No. 6, Measuring Retiree Group Benefit Obligations, to be subordinate to the pension obligations under ASOP No. 4.

Also on May 31, the Pension Committee and the Joint Committee on Retiree Health commented on an exposure draft of ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations. In its letter, the Pension Committee raised concerns about a number of sections, including selecting a reasonable assumption, measurement-specific considerations, and selecting a discount rate. The Joint Committee on Retiree Health in its comments expressed concern that the exclusive use of the word “pension” in numerous instances makes the application of the standard to retiree group benefit practice tenuous.

Certain aspects of the exposure draft of ASOP No. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Costs or Contributions, do not appropriately describe standards of practice that should be applied to the practice of retiree group benefits, the Joint Committee on Retiree Health wrote in a July 14 letter to the ASB.

New Publications

The commonly held belief that pension funds with an 80 percent funding ratio are financially sound is a myth, the Pension Practice Council (PPC) wrote in a new issue brief, The 80% Pension Funding Standard Myth. A funding ratio by itself fails to provide a sufficient measure of a plan’s financial health, the committee explained. The PPC referenced the brief and criticized use of the 80 percent standard in a July 31 letter to Republican Sen. Orrin Hatch of Utah in response to his January report, State and Local Government Defined Benefit Pension Plans: The Pension Debt Crisis that Threatens America.

The Social Security Committee released an updated issue brief, Understanding the Assumptions Used to Evaluate Social Security’s Financial Condition, which describes the major assumptions used by the Social Security Board of Trustees, the Congressional Budget Office, and outside experts to project the program’s financial condition and explains how variations affect the results. The issue brief encourages complete disclosure of the assumptions used and emphasizes the importance of applying assumptions consistently when comparing alternative proposals to reform the Social Security program.

In a new issue brief, The Significance of Social Security Trust Funds, the Social Security Committee addresses various perspectives on the trust funds, which are often the centerpiece of partisan debates over the nature of the Social Security program. In these debates, many of the important purposes and fiscal implications of the trust funds frequently are overlooked. The issue brief answers many of the questions that have been raised over the last several decades on this topic.

Comments on Scale BB

In June 30 comments to the Society of Actuaries on the Retirement Plans Experience Committee’s exposure draft of Mortality Improvement Scale BB, the Pension Committee discussed differences of opinion within the actuarial community on the proposed scale and its potential use.

Meetings with Policymakers

Members of the Multiemployer Plans Subcommittee met with the U.S. Government Accountability Office (GAO) on Aug. 1 to discuss options to address the financial challenges facing multiemployer pension systems for a study commissioned by Rep. John Kline of Minnesota, chairman of the Committee on Education and the Workforce.

Senior Pension Fellow Don Fuerst and members of the Pension Committee provided actuarial insight on regulatory issues related to the new pension funding provisions recently passed by Congress in the MAP-21 legislation during a July 23 meeting with Treasury officials.

 

Upcoming Issues

The Governmental Accounting Standards Board (GASB) on Aug. 2 released two new standards:

  • Statement No. 67, Financial Reporting for Pension Plans, which replaces the requirements of Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and Statement 50, Pension Disclosures, as they relate to pension plans that are administered through trusts or similar arrangements meeting certain criteria.
  • Statement No. 68, Accounting and Financial Reporting for Pensions, which replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers and Statement No. 50 as they relate to governments that provide pensions through pension plans administered as trusts or similar arrangements that meet certain criteria.

The new reporting will require two sets of measures and will result in a decoupling of pension funding and pension reporting. This will be a significant change for the vast majority of public employee pension plans. Under the new standards, it is likely that the pension expense will be much larger for the vast majority of plans. The pension reporting measurements will include a closed-group projection to determine if the existing assets, investment income, and employer and employee contributions are sufficient to pay all the benefits being promised to current active members and retirees. If assets are deemed insufficient, the projected benefits due after the crossover date when assets are expected to be depleted will be discounted using a high-quality municipal bond index rate. This calculation of liabilities will be compared to the market value of assets to determine a net pension liability.

The provisions in Statement No. 67 are effective for financial statements for periods beginning after June 15, 2013. The provisions in Statement No. 68 are effective for fiscal years beginning after June 15, 2014. The new standards and a plain-language description of the new standards also are available on the GASB website.

The Public Plans Subcommittee is developing recommended practices for areas in which the new standards allow for judgment and latitude.

California Actuarial Advisory Panel
The California Actuarial Advisory Panel (CAAP) has requested input on proposed model actuarial funding policies and practices. While the Model Actuarial Funding Policies and Practices for Public Pension and OPEB Plans is intended to be used for public post-retirement pension and healthcare plans in California, it may be of interest to public plan industry sponsors and participants in other states. The Public Plan Subcommittee plans to submit comments to CAAP on the proposed model’s purpose, scope, and general policy objectives.

Academy Media Activity

Senior Pension Fellow Don Fuerst added the Academy’s perspective to a number of major news stories, including an analysis of proposed pension provisions for a July 9 Associated Press article, “New Law Gives US Companies a Break on Pensions.”

“I think it should make people wary,” Fuerst said. “[But] what they should really look to is, is the company that sponsors their pension plan a financially strong company” that can weather market ups and downs.

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Welcome to David Goldfarb, who joined the Academy as pension policy analyst in July.