How To Read An Actuarial Valuation Report

Actuarial Accrued Liability AAL Future Normal Costs NC Assets AVA, MVA Unfunded Accrued Liability UAL Member Portion Employer Portion... Present ValueThe present value of an amount of mo

 Alisa Bennett, Principal and

Consulting Actuary, Cavanaugh

Main Purposes of Valuation

Report

 Provide a summary of the funded

status of the Pension or OPEB Plan

 Recommend rates of contribution

 Provide accounting information

under GASB 25 and 27 (soon to be

67 and 68) and/or 43 and 45 for

OPEB for Plan’s Comprehensive

Annual Financial Reports (CAFR)

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Main Purposes of Valuation

Report

 Provide summary of participant

data as of snapshot valuation

Actuarial Accrued

Liability (AAL)

Future Normal Costs

(NC)

Assets

(AVA, MVA)

Unfunded Accrued Liability (UAL)

Member Portion

Employer Portion

Present Value

The present value of an amount of

money payable in the future is the

amount of money that, if we had it

today, would accumulate to the

amount that will be payable

considering:

 Investment Return

 Probability that money will be paid

Present Value

Example 1: You owe $1,000 to a financial institution payable one year from now You estimate you can invest money for a 7%

return What is the present value of the

debt?

$1,000 / 1.07 = $934.58

Present Value

Example 2: You owe $1,000 to a person payable

one year from now The person is 70 years old and has no heirs You estimate you can invest money for a 7% return You estimate that the chance the person is still alive one year from now is 98%

What is the present value of the debt?

$1,000 / 1.07 x 98% = $915.89

Observation: If the person dies, you will have

money left over If the person lives, you won’t have enough money to pay the debt.

Normal Cost

Contribution For Description

Future Normal Costs Value of all future expected

benefit accruals Normal Cost Rate Value of this next year’s

expected benefit accruals as a

Actuarial Accrued

Liability

The portion of the present value of

pension plan benefits not provided for

by future normal costs

Asset Valuation Methods

 Market Value of Assets (MVA)

 Smoothed Market – Actuarial Value

of Assets (AVA)

Smoothing Methods

 Recognize some portion of market return

each year

 Can be straight line or weighted

 Most commonly used is straight line, 5-year smoothing

 Can be with or without corridor, i.e.,

actuarial value cannot be less than x% or

more than x% of market value

 Most common corridor is 80%-120% of

market value

Actuarial Value vs

Market Value

Actuarial Value of Assets is expected to be:

• Higher than Market Value when market is doing poorly

• Lower than Market Value when market is doing well

Unfunded Accrued Liability Contribution

Rate

Contribution For Description

Unfunded Accrued Liability

(UAL) Actuarial Accrued Liability – Actuarial Value of Assets

“Unfunded Accrued Liabilities” are a natural part of

retirement system funding comparable to a mortgage on a home A plan which is 100% funded is required to

contribute only the normal cost.

Funding Ratio (or Funded Status) of the Plan is the ratio of Actuarial Value of Assets divided by the Actuarial Accrued Liability If the Plan has a 100% Funding Ratio, there is no

Unfunded Accrued Liability Amortization

 Level $

 Level % of payroll

 Closed period

 Open or rolling period

 Maximum 30 years (GASB

requirement)

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Level $ Amortization

 Same as paying a home mortgage on

a fixed interest rate

 Payments remain constant in dollar amount over the amortization

period, but decline as a percent of a, presumably, growing payroll

 UAL declines in nominal (total

dollar) value every year

Level $ Amortization

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Level % Amortization

 Developed to help better achieve the goal of

level contributions as a percent of payroll.

 Requires an assumption regarding annual total payroll growth.

 GASB permits this method as long as growth in the active membership is not reflected in the

payroll growth assumption However expected declines in membership (e.g., closed plans)

should be reflected.

 This results in the use of the wage inflation

assumption for ongoing plans.

Level % Amortization

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Closed vs Open Periods

 Closed period means a one year drop in

the amortization period each year until

you reach zero.

 Open period means the amortization

period fluctuates up or down, or stays the same from year to year.

 Open period with level % amortization can result in never paying off the UAL,

although it does decline as a percent of

payroll.

Open Period UAL Dollar Amount

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Open Period UAL as % of Payroll

Funding Ratio

Comparison

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Annual Required Contributions (ARC)

Contribution For Employer Rate

Total Normal Cost Rate 12.00%

Causes of Unfunded

Accrued Liabilities

 Granting initial benefits or granting

benefit increases for service already

rendered.

 Actual experience which is less favorable than assumed Examples follow:

a Higher salary increases

b Earlier retirement date(s)

c Lower death rates

d Lower rates of investment earnings

e Lower rates of non-death terminations

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Changes in Major Assumptions

Effect on Liabilities and

Turnover Rates More Terminations Decrease

Salary Increases Higher than Normal Increase

GASB Accounting

Information

 Disclosure for GASB 25 and 27 (soon to be

67 and 68) and/or 43 and 45 for OPEB

Valuations

Membership

Net Pension Liability (NPL) and/or Net OPEB

Obligation

Schedule of Funding

Progress

 Six Year History of the following:

 Actuarial Value of Assets

 Actuarial Accrued Liability

 Unfunded Accrued Liability (UAL)

 Funded Ratio

 Covered Payroll

 UAL as a Percent of Covered Payroll

Schedule of Employer Contributions

 Six Year History of the following:

 Annual Required Contributions (ARC)

 Percent of ARC Contributed

Net Pension Obligations

(NPO) Net OPEB Obligations

(NOO)

 If the ARC is not contributed each

year by the Employer, the Plan must disclose a liability on the financial

statements to recognize this

obligation

Solvency Test

Liabilities that are covered by the Assets

in Percentage Form

components:

Benefits)

Selecting Assumptions

 Demographic

 Economic

 Specific to OPEB

 Death after retirement

 Special Terminations (e.g Shutdowns)

 Spouse Assumptions

Demographic Adjustments

 Compares actual plan experience with

actuarial assumptions used in the valuation

 Performed every 3-5 years

 Factor in special events (e.g

re-employment legislation)

Interest Rate

-

Inflation Rate

= Real Rate of Return

Interest rate determines how much money we think we'll have.

Inflation rate tells us what we think it will buy.

Understanding Economic Assumptions

Other Economic

Assumptions

 Salary increases

 Current & anticipated practice

 Collective bargaining agreements

 Single rate

 Age and/or service related

 Cost of Living Adjustments (COLAs)

 Inflation related

 Percent determined by plan

 leverage (the effect of fixed

co-payments and deductibles),

 future utilization and cost shifting,

 legislative and technological changes.

Assumptions Specific to

OPEB

 Healthcare Trend (continued)

rates outstripping both salary and general inflation

rates, but these are generally expected to level off.

 Affordable Care Act (ACA)

beginning in 2018 (if applicable),

mandate/exchanges

are driven by amounts employers and retirees can

afford (i.e., trend). 

Assumptions Specific to

OPEB

retirees to pay part of the premium What

percent will pay the premium and participate – what percent will waive coverage?

to pay May depend on age and/or service at

Questions ???

Alisa Bennett Cavanaugh Macdonald Consulting

678-388-1703 alisab@cavmacconsulting.com