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 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.
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:
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.
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.
Pension Funding: An Elected Official's Guide, Report from the Pension Funding Task Force (2013)
Latest investment return assumptions, July 2023
NASRA Resolution 2022-01: Public Employee Retirement System Accounting Standards & Actuarial Methodologies
Resolution 2011-01: Funding Discipline in Public Employee Retirement Systems
Resolution 2016-01: Guiding Principles for Retirement Security and Plan Sustainability
Best Practice: Enhancing Reliability of Actuarial Valuations for Pension Plans, Government Finance Officers Association (September 2014)
US Public Pension Plan Mortality Assumptions, Society of Actuaries (June 2018)
Best Practice: The Role of the Actuarial Valuation Report in Plan Funding, Government Finance Officers Association
Glossary of Actuarial Terms and Concepts, National Education Association
Best Practice: Actuarial Audits, Government Finance Officers Association
The Role of Actuarial Audits in Performing Due Diligence, GRS Consulting, October 2020