Actuarial Practices

Actuarial calculations and processes are the cornerstones of sound pension   funding policies. According to the US Bureau of Labor Statistics, "Actuaries analyze the financial costs of risk and uncertainty. They use mathematics, statistics, and financial theory to assess the risk that an event will occur and to help businesses and clients develop policies that minimize the cost of that risk."

In the realm of public pensions, actuaries typically assess and project the financial condition of a pension plan, and determine how much should be contributed each year to provide for the secure funding of benefits in a systematic fashion. Actuaries also may estimate the cost and other effects of proposed changes to a pension plan and review or audit the work of other actuaries.

Public pension professional actuaries most often are employed by actuarial consulting firms appointed by public retirement systems and other public sector entities; a growing number of public retirement systems employ one or more actuaries as staff.

Actuarial Assumptions

Actuarial assumptions are projections of future events that affect the cost and funding condition of a pension plan. Such assumptions fall into one of two broad categories: demographic and economic.

• Demographic assumptions are those associated with the behavior and experience of pension plan participants, such as their rate of retirement and mortality, frequency of turnover, rates of marriage and divorce, age at which they join the plan, etc.

• Economic assumptions include rates of inflation, wage growth, and the investment return on the plan's assets.

ASOP 4 Toolkit: Measuring Pension Obligations and LDROM

As part of the recent updates to ASOP 4, the Actuarial Standards Board will require a new disclosure, the Low-Default-Risk Obligation Measure (LDROM), that will affect this year's actuarial valuations. NASRA, NCPERS, NCTR, and NIRS formed a workgroup to develop a toolkit to help pension funds communicate the new requirements of ASOP 4, avoid misunderstanding and misuse of the new disclosure, and communicate the benefits of a well-diversified investment portfolio. Over 30 public pension directors, senior staff, actuaries, and communications experts participated in the effort and their work shaped the ultimate outcome. The toolkit, which has been endorsed by GFOA, includes three products:
 

• A Fact Sheet that presents a clear and simple overview of LDROM—what it is and what it isn’t—and provides appropriate context to frame the correct use of the disclosure for stakeholders of the pension plan, including policymakers, system participants and the general public.
• Suggested language for public pension actuarial valuations. Following these guidelines will ensure that valuations conform to ASOP 4 and provide context for the measure. Accurate and reliable valuations will maximize stakeholder understanding and the impact on taxpayers' contributions of various liability measures.
• A set of frequently asked questions on investment diversification and other important topics.

System Policies and Practices

Public retirement system policies and practices governing contracts for actuarial services vary widely from one state to another. Some systems choose to enter into contractual agreements for actuarial services. The terms of such agreements vary significantly among systems concerning the length of term, audit requirements, etc. Some systems choose to employ actuaries on staff to provide assumptions and funding guidance.

Valuations and Experience Studies

According to a 2016 survey of NASRA members, most systems must conduct an actuarial valuation on an annual basis. Periods required to produce an actuarial experience study vary, with five-years the most frequently cited period among those systems who responded.