How to Read an Actuarial Valuation Report
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Transcript How to Read an Actuarial Valuation Report
Georgia Government Finance
Officers Association
October 1, 2013
How to Read an Actuarial
Valuation Report:
“It’s Not Just a Sleep Aid”
Speaker
Alisa Bennett, Principal and Consulting Actuary,
Cavanaugh Macdonald Consulting, LLC.
Kennesaw, GA
Over 20 years of Public Sector Actuarial Experience
Consult with many GA Plans
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Table of Contents
Actuarial Jargon
Main Purposes of the Valuation Report
Funding Requirements
Assets
Gain/Loss
GASB Accounting
Assumptions
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Actuarial Jargon
Actuarial Communication – Actuarial Standards of Practice
(ASOPs)
MVA
PVFB
EAN
PUC
AAL
NC
UAAL
AVA
ARC
NPO
GASB
OPEB
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Main Purposes of Valuation Report
Provide a summary of the funded status of
the Pension or OPEB Plan.
Recommend rates of contribution.
Provide accounting information under
GASB 25 and 27 (soon to be 67 and 68)
and/or 43 and 45 for OPEB for Plan’s
Comprehensive Annual Financial Reports
(CAFR).
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Main Purposes of Valuation Report
Provide summary of participant data as of
snapshot valuation date.
List all Assumptions and Methods that
went into developing liabilities.
Provide summary of Plan Provisions.
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Funding Valuation Process
Present Value of Future Benefits
(PVFB)
Actuarial Accrued Liability
(AAL)
Assets
(AVA, MVA)
Unfunded Accrued
Liability (UAL)
Future Normal Costs
(NC)
Member Portion
Employer
Portion
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Present Value
The present value of an amount of money payable
in the future is the amount of money that, if we
had it today, would accumulate to the amount that
will be payable considering:
Investment Return
Probability that money will be paid
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Present Value
Example 1: You owe $1,000 to a financial institution
payable one year from now. You estimate you can invest
money for a 7% return. What is the present value of the
debt?
$1,000 / 1.07 = $934.58
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Present Value
Example 2: You owe $1,000 to a person payable one year
from now. The person is 70 years old and has no heirs.
You estimate you can invest money for a 7% return. You
estimate that the chance the person is still alive one year
from now is 98%. What is the present value of the debt?
$1,000 / 1.07 x 98% = $915.89
Observation: If the person dies, you will have money left
over. If the person lives, you won’t have enough money
to pay the debt.
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Normal Cost
Contribution For
Description
Future Normal Costs
Value of all future expected
benefit accruals
Normal Cost Rate
Value of this next year’s expected
benefit accruals as a percent of payroll
Total Normal Cost Rate
12.00%
Employee Rate
(8.00)%
Employer Normal Cost Rate
4.00%
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Actuarial Accrued Liability
The portion of the present value of pension plan
benefits not provided for by future normal costs.
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Asset Valuation Methods
Market Value of Assets (MVA)
Smoothed Market – Actuarial Value of Assets
(AVA)
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Smoothing Methods
Recognize some portion of market return each year
Can be straight line or weighted
Most commonly used is straight line, 5-year
smoothing
Can be with or without corridor, i.e., actuarial value
cannot be less than x% or more than x% of market
value
Most common corridor is 80%-120% of market
value
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Actuarial Value vs. Market Value
Actuarial Value of Assets is expected to be:
• Higher than Market Value when market is doing poorly
• Lower than Market Value when market is doing well
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Unfunded Accrued Liability
Contribution Rate
Contribution For
Unfunded Accrued Liability (UAL)
Description
Actuarial Accrued Liability –
Actuarial Value of Assets
“Unfunded Accrued Liabilities” are a natural part of retirement system
funding comparable to a mortgage on a home. A plan which is 100% funded
is required to contribute only the normal cost.
Funding Ratio (or Funded Status) of the Plan is the ratio of Actuarial Value
of Assets divided by the Actuarial Accrued Liability. If the Plan has a 100%
Funding Ratio, there is no Unfunded Accrued Liability.
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Unfunded Accrued Liability
Amortization
Level $
Level % of payroll
Closed period
Open or rolling period
Maximum 30 years (GASB requirement)
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Level $ Amortization
Same as paying a home mortgage on a fixed
interest rate.
Payments remain constant in dollar amount over
the amortization period, but decline as a percent
of a, presumably, growing payroll.
UAL declines in nominal (total dollar) value
every year.
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Level $ Amortization
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Level % Amortization
Developed to help better achieve the goal of level
contributions as a percent of payroll.
Requires an assumption regarding annual total payroll
growth.
GASB permits this method as long as growth in the
active membership is not reflected in the payroll growth
assumption. However expected declines in
membership (e.g., closed plans) should be reflected.
This results in the use of the wage inflation assumption
for ongoing plans.
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Level % Amortization
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Closed vs. Open Periods
Closed period means a one year drop in the
amortization period each year until you reach
zero.
Open period means the amortization period
fluctuates up or down, or stays the same from
year to year.
Open period with level % amortization can
result in never paying off the UAL, although it
does decline as a percent of payroll.
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Open Period
UAL Dollar Amount
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Open Period
UAL as % of Payroll
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Funding Ratio Comparison
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Annual Required Contributions
(ARC)
Contribution For
Employer Rate
Total Normal Cost Rate
12.00%
Employee Rate
(8.00%)
Employer Normal Cost Rate
4.00%
Unfunded Accrued Liability Rate
(amortized over 30 year period)
6.00%
Annual Required Contribution Rate
10.00%
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Causes of Unfunded
Accrued Liabilities
Granting initial benefits or granting benefit
increases for service already rendered.
Actual experience which is less favorable than
assumed. Examples follow:
a.
b.
c.
d.
e.
Higher salary increases
Earlier retirement date(s)
Lower death rates
Lower rates of investment earnings
Lower rates of non-death terminations
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Changes in Major Assumptions
Effect on Liabilities and Contributions
Assumption
Action
Usual Effect on
UAL
Long Term Investment Rate
Increase
Decrease
Retire Younger
Increase
Turnover Rates
More Terminations
Decrease
Salary Increases
Higher than Normal
Increase
Retirement Rates
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GASB Accounting Information
Disclosure for GASB 25 and 27 (soon to be 67
and 68) and/or 43 and 45 for OPEB Valuations
Distribution of Number of Employees by Type of
Membership
Schedule of Funding Progress
Schedule of Employer Contributions
Calculation of Net Pension Obligation (soon to be
Net Pension Liability (NPL) and/or Net OPEB
Obligation
Solvency Test
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Schedule of Funding Progress
Six Year History of the following:
Actuarial Value of Assets
Actuarial Accrued Liability
Unfunded Accrued Liability (UAL)
Funded Ratio
Covered Payroll
UAL as a Percent of Covered Payroll
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Schedule of
Employer Contributions
Six Year History of the following:
Annual Required Contributions (ARC)
Percent of ARC Contributed
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Net Pension Obligations (NPO)
Net OPEB Obligations (NOO)
If the ARC is not contributed each year by the
Employer, the Plan must disclose a liability on
the financial statements to recognize this
obligation.
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Solvency Test
Displays the Portion of the Accrued Liabilities
that are covered by the Assets in Percentage
Form
Liabilities broken down into 3 components:
1)
2)
3)
Active Member Contributions
Retirees, Survivors and Inactive Liabilities
Active Members (Employer Provided Benefits)
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Selecting Assumptions
Demographic
Economic
Specific to OPEB
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Demographic
Withdrawal
Death in active service
Disability
Retirement
Death after retirement
Special Terminations (e.g. Shutdowns)
Spouse Assumptions
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Demographic Adjustments
Experience Investigations
Compares actual plan experience with actuarial
assumptions used in the valuation
Performed every 3-5 years
Follow experience
Watch trends (e.g. Improving Mortality)
Factor in special events (e.g. re-employment
legislation)
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Economic Assumptions
Inflation should be consistently applied
Asset return
Salary increases
COLAs
Real returns should reflect asset mix
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Understanding
Economic Assumptions
Interest Rate
- Inflation Rate
= Real Rate of Return
Interest rate determines how much money we think
we'll have.
Inflation rate tells us what we think it will buy.
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Other Economic Assumptions
Salary increases
Current & anticipated practice
Collective bargaining agreements
Single rate
Age and/or service related
Cost of Living Adjustments (COLAs)
Inflation related
Percent determined by plan
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Assumptions Specific to OPEB
Healthcare Trend
Applied annually to the plan’s assumed per member
claims cost.
Considers such things as
price inflation,
leverage (the effect of fixed co-payments and
deductibles),
future utilization and cost shifting,
legislative and technological changes.
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Assumptions Specific to OPEB
Healthcare Trend (continued)
Recent experience indicates very high medical inflation rates
outstripping both salary and general inflation rates, but these
are generally expected to level off.
Affordable Care Act (ACA)
Excise tax on high-value health insurance plans beginning in
2018 (if applicable),
Mandated benefits and
Participation changes due to the individual
mandate/exchanges
Overall future plan costs and the resulting liabilities are
driven by amounts employers and retirees can afford (i.e.,
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trend).
Assumptions Specific to OPEB
Participation
Most post-employment health plans require retirees to pay
part of the premium. What percent will pay the premium and
participate – what percent will waive coverage?
Depends on the premium the retiree is required to pay. May
depend on age and/or service at retirement.
Affordable Care Act (ACA)
Exchanges
Participation changes due to the individual mandate
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Questions ???
Alisa Bennett
Cavanaugh Macdonald Consulting
678-388-1703
[email protected]