Key Actuarial Changes for Public Pension Plans in 2023

In December 2021, the Actuarial Standards Board approved revisions to Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions. These changes are effective for any actuarial report issued on or after February 15, 2023, and with a measurement date on or after February 15, 2023.

The revisions include a number of technical items regarding funding calculations and related disclosures. They should not have any impact on the cost of benefits or how pension plans are funded; they simply require additional information in funding valuation reports.

Most notably, plans must now disclose and explain a “Low-Default-Risk Obligation Measure” (LDROM), which is the value of liabilities using an interest rate derived from low-default-risk fixed income securities.The ASOP provides the following discount rate alternatives:

-US Treasury yields

-Rates implicit in settlement of pension obligations

-Yields on corporate or tax-exempt general obligation municipal bonds with one of two highest ratings given by recognized ratings agency

-Non-stabilized ERISA funding rates for single employer plans

-Multiemployer current liability rates

Section 3.11, Low-Default-Risk Obligation Measure, was added in light of the fact that public plan valuation reports are public documents with a wide audience that likely needs additional context to understand that a low-default-risk portfolio could still experience market volatility and lose value.

The interpretation and usefulness of the new liability measurement will vary from plan to plan. It is worth noting that the LDROM will only be required as a disclosure item, so public sector pension plans will continue to use the AAL for funding in accordance with existing policies.

Other Key Changes:

1. Section 1.2, Scope – Expanded to clarify the application of the standard when the actuary selects an output smoothing method and when an assumption or method is not selected by the actuary.
2. Section 3.2, General Procedures – Revised to include specific references to sections 3.11, Low-Default-Risk Obligation Measure; 3.14, Amortization Methods; 3.16 Output Smoothing Method; 3.19, Implications of Contribution Allocation Procedure or Funding Policy; 3.20, Contribution Lag; 3.21, Reasonable Actuarially Determined Contribution; 3.22, Gain and Loss Analysis; 3.24, Assessment of Assumptions and Methods Not Selected by the Actuary; 3.25, Approximations and Estimates; and 3.26, Documentation
3. Section 3.8, Assumptions – Title changed from “Actuarial Assumptions” and expanded to provide additional guidance regarding selection of assumptions. In addition, exceptions to significant bias now include when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 51.
4. Section 3.14, Amortization Methods – Added to provide guidance on the selection of amortization methods.
5. Section 3.16, Output Smoothing Methods – Added to provide guidance on the selection of output smoothing methods.
6. Section 3.17 (previously 3.14), Allocation Procedure – Expanded to provide additional guidance regarding the selection of a cost allocation procedure or contribution allocation procedure.
7. Section 3.19 (previously 3.14.2), Implications of Contribution Allocation Procedure or Funding Policy – Modified to eliminate exceptions to the requirement that the actuary should assess such implications whenever the actuary is performing a funding valuation.
8. Section 3.20, Contribution Lag – Added to provide guidance on calculating an actuarially determined contribution, and the passage of time between the measurement date and the expected timing of actual contributions.
9. Section 3.21, Reasonable Actuarially Determined Contribution – Added to provide further guidance on performing a funding valuation that does not include a prescribed assumption or method set by law.
10. Section 3.22, Gain and Loss Analysis – Added to provide guidance regarding the performance of a gain and loss analysis when performing a funding valuation.
11. Section 3.23 (previously 3.16), Volatility - Modified to direct an actuary analyzing potential economic and demographic volatility to refer to ASOP No. 51 for additional guidance.
12. Section 3.26, Documentation – Added to provide guidance on documenting work within the scope of this ASOP.
13. Section 4.1, Required Disclosures in an Actuarial Report – Title changed from “Communication Requirements” and revised to provide additional guidance regarding disclosures.

At the end of the day, defined benefit plan sponsors should work with their consultants to determine which changes are most relevant to their plan and respond appropriately. Connect with a consultant here to learn more about how CBIZ can help.

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