By: Emily Feeny, ASA
ASOP 51: Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions
Risk has always been present and discussed in actuarial
work. Now pension actuaries must
disclose that risk in actuarial publications.
Actuarial Standard of Practice #51 (“ASOP 51”) was adopted by the Actuarial
Standards Board (“ASB”) in September of 2017 for actuarial work
products with a measurement date on or after November 1, 2018. ASOP 51 has three main components as it
relates to actuarial valuations: Assessment of Risk, Disclosure of Maturity
Measures and Disclosure of Historical Information.
ASOP 51 defines risk as “the potential of actual future measurements deviating from expected future measurements resulting from actual future experience deviating from actuarially assumed experience.” Actuaries should assess and disclose relevant risk in valuations. Two examples of risks are investment risk (the potential that investment returns will differ from expected) and longevity risk (the potential that mortality experience will be different from expected).
Actuaries should also list maturity measures in valuations,
such as the ratio of retired actuarial liability to total actuarial liability.
As a plan matures, the percentage of the liability associated with inactive
participants grows and the plan becomes more dependent on investment return
than on contributions for asset growth. Other maturity measures include
the ratio of market value of assets to active participant payroll and the ratio
of benefit payments to contributions.
Finally, ASOP 51 calls for disclosure of historical actuarial measurements such as funded status, normal cost and plan participant count. This historical information can be helpful in identifying trends so that corrective action can be taken where necessary.
The McKeogh Company
and ASOP 51
The McKeogh Company’s valuations with measurement dates of November 1, 2018 or later will include a section entitled “Risk Assessment and Disclosure”. This section will first list risks that a plan faces with respect to the actuarial assumptions and illustrate how deviations from expectations could affect assets and liabilities. Next, there will be a discussion of plan maturity measures to help illustrate risks associated with a maturing plan. The McKeogh Company valuations have always included historical actuarial measurements but will now use this new section to summarize the variance of such historical values and cite the sections in which more information can be found within the report.
The ASB and The McKeogh Company recognize the difficulty that Defined Benefit Pension Plans face during uncertain times. Plan sponsors will be better prepared for the future if they are more aware of the risks, maturity measurements and historical trends associated with their plans.
Applying for a suspension under the Multiemployer Pension Reform Act (MPRA) is a lengthy and complicated process. This article describes the steps one pension fund went through to apply for benefit suspensions.
Michael Reilly, ASA, published this article in the May 2019 issue of Benefits Magazine.
Boris Vaynblat presented at the Annual Conference of Consulting Actuaries Meeting in October 2018 in Colorado Springs. He led a session on the Multiemployer Pension Act of 2014 (MPRA). Boris related his experiences obtaining approval from the US Treasury Department for benefit suspensions for a Pension Fund heading for insolvency, thereby giving the Fund a chance to survive for future generations.
Both Jim McKeogh, president of The McKeogh Company, and Michael Reilly presented at the International Foundation of Employee Benefit Plans (IFEBP) in New Orleans in October. Michael co-lead a discussion entitled “How to Make Your Client’s MPRA Applications Successful”. His presentation focused on the application process including assumptions and common pitfalls. Jim sat on a panel of industry experts in the “Ask the Professionals” session as the multiemployer plan expert.
Mandy Notaristefano traveled to Aruba to speak at the Contractors Association of Eastern PA’s 2019 Winter Conference in February 2019. Mandy’s talk focused on Rehabilitation Plans. She ran a simulation of a plan that had newly entered critical status and walked the attendees through the development and monitoring of a rehabilitation plan.
On January 9, 2019, Rep. Richard Neal (D-MA) introduced the Rehabilitation for Multiemployer Pensions Act into Congress.
This bill seeks to help ailing
multiemployer pension plans by establishing a new agency within the Treasury
Department called the Pension Rehabilitation Administration (PRA).
This agency would be authorized to issue bonds in order to raise capital.
The capital would then be used to issue loans to critical and declining status
plans and some already-insolvent plans that are currently receiving financial
assistance from the Pension Benefit Guaranty Corporation (PBGC).
The loan would be interest-only for 30 years with principal due at end of 30th year and in an amount needed to fund pensions for current retirees only. The pension fund would be required to purchase a commercial annuity contract with the loan proceeds, or set the funds aside in a separate pool and invest in a bond portfolio which has cash flows that mimic the expected pension payouts. In certain situations, a loan could be combined with financial assistance from the PBGC in order to prevent plan insolvency.
Loan applications would need to demonstrate that the loan will enable the plan to avoid insolvency during the 30-year period and that plan would be reasonably expected to pay the loan back with interest. The plan would not be allowed to reduce benefits during the loan term and could not accept a CBA with lower contribution rates.
There has been a lot of chatter as of late about possible legislation and efforts on the Hill to provide relief to failing multiemployer pension plans. On Thursday, November 16th, House Democrats introduced a bill that would allow multiemployer pension plans to receive loans from Treasury.
While the language of the bill is not yet available, according to congress.gov, the bill is intended to create a Pension Rehabilitation Trust Fund and to establish a Pension Rehabilitation Administration (PRA) within the Department of the Treasury to make loans to multiemployer defined benefit plans, and for other purposes. The PRA would allow pension plans to take out loans at low interest rates, in order for the plans to remain solvent and continue providing full retirement benefits for current and future retirees. The money for the loans would come from the sale of Treasury-issued bonds to financial institutions. There will likely be some reporting requirements and other restrictions for plans that take out such loans, to ensure that the plans can pay back the taxpayers.
This bill is in the first stage of the legislative process. The bill is now assigned to three House committees for review and consideration. If approved, it will then be sent to the House or Senate as a whole. A bill must be passed by both the House and Senate in identical form and then be signed by the President to become law.
The U.S. Treasury Department has denied the application to suspend benefits under the Multiemployer Pension Reform Act of 2014 that was submitted by the Automotive Industries Pension Fund in September 2016. Treasury noted in its denial letter that assumptions regarding mortality, Joint and Survivor election percentage by married participants, and the probability of benefit commencement by terminated vested participants over the age of 70 were considered not reasonable.
The Automotive Industries Pension Fund is projected to become insolvent in 2030 without the suspensions. As of January 1, 2016, the Plan had an unfunded benefit liability of over $700 million, was 60.7% funded, and covered over 25,000 participants.
As of the date of this posting, Treasury has received applications for benefit suspensions from a total of 15 multiemployer pension plans since MPRA took effect. Five have been denied, one has been approved, three have been withdrawn, and six are pending.