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PERA staff comment on proposed actuarial standard changes

actuarial standards

Colorado PERA Interim Executive Director Ron Baker recently sent a letter to the Actuarial Standards Board (ASB) providing input on proposed revisions to standards for actuaries who measure pension obligations, Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.

Read more about what it means to be an actuary here.

The Actuarial Standards Board establishes and improves standards of actuarial practice. Like all professional actuaries, the actuaries retained by PERA are expected to adhere to the standards of the ASB, so any changes to those standards that impact public pensions would have a direct impact on results that PERA’s actuaries report.

Periodically, PERA staff offer comments on proposed regulatory changes as a part of monitoring the standards and related guidance that affect how public pension plans, or investments made by such plans, are governed and regulated.

By informing regulators of their perspective, PERA staff have a voice in decision making processes that can directly impact how public pension plans operate and how their investments perform. This in turn helps to protect the interests of PERA members and retirees.

The comment letter sent in July supported the bulk of the proposed revisions to actuarial standards, but PERA staff expressed concerns about confusion that would be created by requiring an additional liability measurement that is primarily used in non-governmental (corporate) pension plans. Public plans with governmental sponsors such as PERA have a uniquely long-term time horizon, making evaluations that could be suitable for private pensions inappropriate for those public plans.

Read more than 60 additional comment letters submitted to the ASB here and a response from the American Academy of Actuaries here.

The proposed changes to the standards include a recommendation to calculate an “investment risk defeasement measure” (IRDM). This technical-sounding concept is, essentially, one way to measure investment risk for pension plans.

PERA’s letter focuses primarily on concerns about how the IRDM would be calculated if the proposed revisions were implemented. The letter states that the proposed investment-risk measure is “basically flawed in concept, calculation, and application” and notes concern about the “risk of misinterpretation and misuse, inaccurate and inappropriate calculations and reputational risk for the actuarial profession” if the standards were adopted.

A few concerns PERA staff stated in the letter include:

  • The required actuarial cost method is inappropriate. The proposed changes would make standard a “unit credit cost method” for funding valuations, a method that is not appropriate for public pension plans and, in fact, is not allowed by the Governmental Accounting Standards Board, (GASB) for valuations that are made for “accounting and financial disclosure purposes.”
  • Demographic assumptions are inappropriate. Plan members who no longer earn pay increases or future service credits behave differently than members who still might, making assumptions intended for an “ongoing” plan inappropriate.
  • The discount rate is unrealistic. Unlike private sector plans, public pension plans like PERA serving large populations of public employees “are typically considered ongoing entities as are the governments they benefit.” Just as the State of Colorado isn’t going anywhere, neither are the public employees who make up the membership of its pension plan. PERA staff believe that the discount rates allowed under the proposed standards “are not representative of a discount rate that would accurately value funding liabilities of an ongoing plan.”
  • The results of calculations would not be useful. The proposed calculations to determine an investment-risk measure would not add value for the users of PERA’s funding valuation and would not contribute pertinent information for making long-term funding decisions. This metric, therefore, “would simply be an expensive requirement with no real value to the users.”
  • A new pension liability would be confusing. Issuing an additional new pension liability would create confusion, and likely would be misinterpreted as a recommendation of PERA’s actuary, even if there were a disclosure stating otherwise. PERA staff believe the proposed approach would “unnecessarily cause confusion and misunderstanding among the memberships, employers, legislators, and taxpayers who embody the stakeholders of all public pension plans.”
  • The proposed approach is narrow minded. “Investment risk defeasement measure” suggests that this is a measure of investment risk. However, it would not test or reflect other aspects of risk, such as investment return volatility. Furthermore, a more broad-based approach has been reflected in other proposed actuarial standards (ASOP No. 51).

The comment letter concluded by explaining that public pension plan boards and staff are “constantly working toward the defined goals of ensuring transparency and accountability while promoting contribution rate stability and intergenerational equity.”

PERA staff will continue to monitor the Actuarial Standards Board proposal on and update readers of PERA on the Issues if there are further developments.

Review PERA’s Comments to ASOP No. 4 Exposure Draft Letter here.

VolatilityVolatility of returns is the measurement used to define risk. It describes the variation of price of a financial instrument over time. The greater the volatility, the higher the risk.

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