Actuarial Audits of Defined Benefit Plans
The Actuarial Valuation
Defined benefit plans promise a series of benefit payments to plan members, typically payable for life, if members meet certain age and service requirements. To make sure this benefit promise can be kept, a periodic (often annual), actuarial valuation is prepared. The purpose of the actuarial valuation is to make sure the benefit promise is secure, funded in a systematic fashion, and to meet reporting requirements.
Plan trustees hire an independent actuarial firm to perform the actuarial valuation. Because public plans rely on tax-payer dollars to fund the plan, it is extremely important that these calculations be accurate and based on reasonable assumptions and methods.
How Does a Trustee Know That The Actuary is Doing a Good Job?
Plan trustees are fiduciaries. Due diligence requires they exercise prudence in selecting service providers for the plan and monitor the quality of their work.
An actuarial audit is a tool that can be used by plan trustees to monitor the actuarial services provided by the plan’s consulting actuary. An actuarial audit consists of hiring an independent and qualified firm to review the work of the plan’s consulting actuary. While any actuarial work product can be audited, typically the actuarial valuation and the experience study are the subject of actuarial audits.
Types of Actuarial Audits
Actuarial audits can be classified depending upon the level of audit desired:
- Full replication – The reviewing actuary will fully replicate the actuarial valuation using the participant data, plan provisions, assumptions and methods used by the consulting actuary. This type of audit is the most comprehensive and can evaluate most of the detailed calculations done by the consulting actuary.
- Sampling method – The reviewing actuary selects sample people from the participant data and performs calculations for the sample people only to test the results of the valuation.
- Review of report only – The reviewing actuary examines the assumptions and methods for reasonability and consistency by reviewing the report. No actuarial calculations are performed.
Experience studies are often more limited in scope, typically reviewing the study and its conclusions for reasonability and consistency.
Audits culminate in a written report that generally includes an opinion regarding:
- The reasonability and accuracy of the valuation results, the actuarial assumptions and methods.
- The consistency of the valuation with generally accepted actuarial standards of practice and Government Accounting Standards Board (GASB) requirements.
- The consistency of the calculations with the plan’s funding objectives and requirements.
If the reviewing actuary disagrees with anything in the valuation, they will typically recommend reasonable alternatives. The report will also recommend possible improvements to the quality and understandability of the valuation report.
Why have an Actuarial Audit?
An actuarial audit is a second opinion for the work performed by the consulting actuary. It is common practice in state-wide retirement systems and is recommended by the Government Finance Officers Association (GFOA). As fiduciaries, trustees need to take steps to make sure the actuarial valuation is done correctly, using appropriate assumptions and methods to ensure the benefits are secure and tax-payer dollars are used as efficiently as possible. An actuarial audit can assist the trustees in having confidence in the actuarial reports they rely on.
If you have any questions about how actuarial auditing adds value or which type of audit is best for your plan, please contact CBIZ Retirement Plan Services.
CBIZ Retirement Plan Services is a trade name under which certain subsidiaries of CBIZ, Inc. (NYSE Listed: CBZ) market investment advisory, investment management, third party administration, actuarial and other retirement plan services. Investments, investment advisory and investment management services offered through CBIZ Financial Solutions, Inc., Member FINRA, SIPC and SEC Registered Investment Adviser, dba CBIZ Retirement Plan Advisory Services. Investment advisory and investment management services may also be offered through CBIZ Investment Advisory Services, LLC, SEC Registered Investment Adviser. Third party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.