Comments on Regulator Issues
In a Sept. 22 letter to the Pension Benefit Guaranty Corporation (PBGC), the Pension Committee commented on the calculation of unfunded vested benefits for plans that are at risk. The committee requested that the PBGC consider clarifying that the 4 percent and $700 per-participant load (applicable when a plan has been at risk for two of the prior four years) not be included in the premium funding target for purposes of determining the variable rate premium.
In an Oct. 14 letter to the Internal Revenue Service and the Department of Labor, the Pension Committee requested clarification of the instructions for Form 5500, Schedule H on the reporting of premium payments made to the PBGC from qualified defined benefit DB plan assets. The PBGC clarified the instructions in a Nov. 2 letter to the committee.
The Pension Practice Council submitted comments on two exposure drafts released by the Governmental Accounting Standards Board (GASB) in July. The exposure drafts proposed amendments to existing pension standards that would change how the costs and obligations associated with the pensions that governments provide to their employees are calculated and reported. The council’s Oct. 14 letter included separate comments from the Public Plans Subcommittee and the Joint Academy/Society of Actuaries Pension Finance Task Force.
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The Public Plans Subcommittee recommended separating asset and liability deferral items in the schedule of changes to the employer’s statement of net position related to pensions. It also recommended that an actuarially calculated employer contribution be required and that the discussion of what the pension expense is intended to represent (and how the new expense measure accomplishes this intent) be expanded. In addition, the subcommittee requested that large multiple employer pension plans be allowed to use the plan’s year-end to measure and report agent and cost-sharing expenses, rather than each employer using its own fiscal year-end. |
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The Pension Finance Task Force supports GASB’s move to a single-cost method, the reduction in deferrals relative to prior versions of the standards, and the expanded disclosure information that was included in the exposure drafts. The task force described several issues created by using an expected rate of return for discounting in the calculation of a pension actuarial liability used for accounting purposes. It also pointed out that the entry-age-normal method for determining liabilities and periodic costs that GASB calls for is better suited as a funding-cost method and is not appropriate for accounting purposes. |
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Capitol Hill Briefing
The private defined benefit pension system is facing increased minimum required contribution, the Pension Practice Council said as it presented a joint Capitol Hill briefing with the Society of Actuaries (SOA) on Oct. 11. Panelists discussed research from the SOA on the projected aggregate contribution requirements for private sector pension plans over the next decade and analyzed how the funding challenges will affect plan sponsors, beneficiaries, and public policy. Speakers at the briefing were Don Fuerst, the Academy’s senior pension fellow; Ethan Kra, chairperson of the Pension Practice Council; Joe Silvestri, the SOA’s retirement research actuary; and Tom Terry, chair of the SOA’s Rapid Research Modeling Oversight Group. The SOA’s research report is available online. The Academy’s slide presentation and a video of the briefing are available on the Academy website.
ASOP Reviewed
There are a number of difficulties associated with attempting to define a universally applicable market-consistent measure (MCM), the Pension Committee wrote in an Oct. 11 letter to the Actuarial Standards Board (ASB). The committee’s comments came in response to proposed changes to Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions. The changes are outlined in an ASB discussion draft released in January 2011 that includes a proposal to define MCMs of pension obligations. Rather than define a single MCM for pension obligations, the committee recommended that the ASB identify MCMs as a class of measures and include a discussion of factors that could be considered in the development of such a measure. The committee also suggested that an Academy practice note might be a more appropriate vehicle for advancing practice in this area.
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New Publications
Are we ready to put Social Security on automatic pilot? The Social Security Committee poses the question in its recently updated issue brief, Automatic Adjustments to Maintain Social Security’s Long Range Actuarial Balance. Although Social Security already has some automatic adjustment features in place, they are not intended to maintain the program’s actuarial balance, the committee wrote, because they don’t address demographic factors such as lower birth rates and higher life expectancies. The issue brief looks at how adjustments to contributions or benefits initiated by triggering mechanisms could help the program achieve long-range actuarial balance. It also examines automatic adjustment mechanisms that have been adopted in other industrialized nations.
The Selecting and Documenting Mortality Assumptions for Pensions practice note has been updated to reflect the changes in Actuarial Standard of Practice (ASOP) No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations. ASOP No. 35 was revised to emphasize the need for actuaries to reflect an appropriate level of mortality improvement both up to and beyond the liability measurement date. The practice note discusses the new requirement in the ASOP that the mortality improvement assumption, a fundamental and necessary assumption, be disclosed explicitly and separately from the basic mortality assumption. The practice note changes are in effect for measurement dates occurring on or after June 30, 2011, as are the changes to ASOP No. 35.
Coming Soon …
The Social Security Committee is working on a new issue brief on the significance of the Social Security trust funds. The Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund often have served as the centerpiece of partisan debates over the very nature of the Social Security program. Their purpose, unfortunately, often is lost in the political crossfire. The trust funds provide a social contract that enhances the legitimacy of beneficiaries’ claims to benefits. They also provide a useful resource tracking function and help smooth the program’s costs across generations. The economic consequences of the trust funds differ based on the specific perspective; the program itself, the overall federal budget, and the economy. The issue brief will address these topics in detail and will answer many of the questions that have been raised about the trust funds. Look for the issue brief, Significance of Social Security Trust Funds, later this year.
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