The Retirement Report, Fall 2022

Q&A: Working With Augmented Mortality Models—What Users Need to Know

Lowman

Members of the Pension, Multiemployer Plans, and Public Plans committees published a discussion brief intended to familiarize actuaries with commonly used approaches and considerations when dealing with augmented mortality assumptions. Actuarial Considerations When Using Augmented Mortality Models was released to help pension actuaries who use and select mortality tables for actuarial valuation purposes understand the commonly used approaches. A Nov. 15 Academy webinar will review the brief, and presenters will discuss the data considerations commonly employed to develop such tables and offer suggestions to help the actuary judge whether the augmented table is or is not a more reliable or predictive basis for valuation mortality.

The Retirement Report spoke with Tom Lowman, one of the primary drafters of the discussion brief.

At a high level, what is an augmented mortality table?

As the paper says, “An augmented pension mortality assumption is a valuation assumption that uses additional predictive information taken from nontraditional data elements…. from a source external to that data set, in order to stratify the data and then create a secondary model that attempts to refine the assumption.” Such additional predictive information may include lifestyle and socioeconomic data that may have an effect on participant longevity. This predictive information may be linked to plan participants through ZIP code or census tract.

Where do augmented mortality modelers get that data?

One source can be the U.S. Census Bureau or other federal agencies. However, developers of these tables may access other big data sources to gather information on lifestyle and socioeconomic indicators.

What are some of the considerations a modeler using geospatial identifiers would typically weigh?

Developers try to band groups that they think have similar characteristics. There may be many indicators of wealth and health that can be considered and tested to determine the best groupings. The paper (Section 5) covers a list of items than can impact the credibility and consistency of the geospatial groupings. However, the paper’s audience is for the pension actuary as the user of these tables and not the smaller group of developers. Specific regression or other techniques may vary by developer.

How can a user of an augmented model be assured that including multiple factors will provide credible results?

Great question. Part of the answer is knowing how the table was developed (including the data used) and whether there is anything special about the plan actuary’s data. The paper has a whole section about understanding the underlying data (Section 6) and another about testing for reasonableness (Section 7).

Some of this is about what questions to ask, and that is what the paper does—e.g., What is the expected impact on gains and losses, and does it justify the effort and cost? As is said in the paper’s summary: The creation and use of augmented tables are an evolving practice. That is a core reason why this paper is considered a “discussion brief” and not an issue brief or a practice note. As practice evolves, we may see an issue brief and/or a practice note.

What are some professionalism considerations that pension actuaries should bear in mind when working with augmented models?

This question touches on several important issues, some of which may be legal and not actuarial. Here are three thoughts:

• The tables may be proprietary, which might create issues if the work is either audited or transferred to another actuary.
• Using tables that vary by where someone lives is not likely appropriate for benefit calculations.
• This question also brings into focus precepts 1 and 8 of the Code of Professional Conduct and Actuarial Standard of Practice (ASOP) No. 23, Data Quality, and ASOP No. 56, Modeling.

Can you point readers to additional Academy resources that they may find helpful?

Here is a list of Academy documents you might want to look at, starting with the discussion brief:

• Discussion brief: Actuarial Considerations When Using Augmented Mortality Models (October 2022)
• Issue brief: An Actuarial View of Correlation and Causation—From Interpretation to Practice to Implications (July 2022)
• Monograph: Big Data and Algorithms in Actuarial Modeling and Consumer Impact (November 2021)
• Practice note: Selecting and Documenting Mortality Assumptions for Pensions (June 2015)

The Academy webinar, Discussion Brief: Actuarial Considerations When Using Augmented Mortality Models, to be held on Tuesday, Nov. 15 will feature panelists providing examples of augmented mortality models, explaining how they differ from traditional models, identifying their features, and discussing keys to understanding the underlying data and testing for reasonableness. I am moderating this webinar; Jim Berberian and John Popiolek—two of the other primary drafters of the discussion brief—are the panelists.

Experts Discuss Pension Issues at Annual Meeting

Clockwise from top left: Chan in the DEI session; speakers at the public plans,
single-employer plans, and Social Security sessions

The Academy’s Envision Tomorrow: 2022 Annual Meeting, held Nov. 2–3 in Washington, D.C., included several pension practice area breakout sessions, including an off-the-record breakout session on single-employer plans that included staff members from the U.S. Senate Finance and Health, Education, Labor & Pensions committees. Pension Vice President Sherry Chan also participated in a general session panel discussion on diversity, equity & inclusion (DEI), which looked at the Academy’s ongoing DEI efforts in from all practice areas.

Koren Holden, a member of the Public Plans Committee, represented the pension perspective on the “Inflation Nation: Actuarial Perspectives on Inflation’s Effects on Insurance and Pensions” general-session panel, looking at not only the current inflation environment, but interest rates and the potential for a recession. And John Popiolek provided the pension viewpoint on the “Data Analytics: New and Emerging Considerations for Actuaries in the Age of Big Data” general-session panel discussion.

Also at the meeting, Ken Kent, a pension actuary, became the Academy’s 58th president. Kent previously served terms as the Academy’s vice president of pension and vice president of professionalism, and in many other Academy volunteer roles. See the forthcoming November Actuarial Update Annual Meeting supplement for full coverage.

Social Security—This breakout session featured a discussion of ongoing and evolving economic, workforce, and pandemic factors and their potential effect on Social Security’s long-term solvency, and possible disparate impacts in Social Security benefits across society due to differences in earnings levels, whether a job is covered by Social Security, family composition, individual life expectancies, or marital history.

Richard Jackson, president and founder of the Global Aging Institute, laid the groundwork with an overview of the dynamics and implications of population aging, identifying possible levers and course changes they could engender. Hilary Waldron, senior economist in the U.S. Department of the Treasury’s Office of Microeconomic Analysis, presented approaches used to analyze and evaluate the Social Security program, showing how demographic mechanics of aging in the United States are framed, analyzed, and evaluated with regard to the program. Dan Doonan, executive director of the National Institute on Retirement Security, was also on the panel.

Academy Social Security Committee Chairperson Amy Kemp moderated a lively Q&A session that followed as the audience dug into questions surrounding methodology and evaluation as well as political and economic implications of aging trends, both in the United States and abroad.

Public Plans—This session explored funding concerns in public sector pension plans, including practices in fixed-rate funding, surplus funding, and other funding policies in use, in guidance, and in discussion. General trends that plans experienced over the past few decades were identified and tied back into specific funding policies and conditions, With some notably large plans highlighted.

Sanford Rich, executive director of the New York City Board of Education Retirement System, provided a case study of that system—identifying particular policies, trends, and challenges that have shaped the current plan status, as well as identifying questions  for the future. Also on the panel was Alex Brown, research manager for the National Association of State Retirement Administrators. Todd Tauzer, chairperson of the Academy’s Public Plans Committee, who received a Rising Actuary Award at the meeting , moderated.

Issue Brief Examines Social Security Trustees Report

The Social Security Committee released an issue brief, An Actuarial Perspective on the 2022 Social Security Trustees Report. It noted the projected solvency of the Old-Age, Survivors, and Disability Insurance (OASDI) combined trust funds improved slightly since last year’s report.

Social Security Infographic

The Social Security Committee also released a one-page infographic to accompany the issue brief examining the latest detailed annual assessment by the federal government of the program’s solvency.

‘Essential Elements’ updated

In addition, the Academy updated the related Essential Elements paper, “Securing Social Security.” The Essential Elements series is designed to make actuarial analysis of public policy issues clearer to general audiences.

Issue Briefs Tackle Social Security Benefits, Taxation

Two issue briefs released by the Social Security Committee examine how the Social Security system could be adapted to make it more solvent by enacting reforms related to benefits and taxation.

After a brief background discussing the foundational philosophies of the program, Social Security Reform: Benefit Formula Options examines several recent and current proposals for benefit changes. The issue brief discusses the ramifications of various proposals, accompanied by graphical depictions and helpful tables. It closes with a series of questions that policymakers might consider as they weigh the various options for benefit formula reform.

Similarly, Social Security Reform: Taxation Options is a deep dive into several current and recent proposals for changes to  taxation affecting  Social Security. Like its benefits counterpart, it culminates with a series of policy questions that lawmakers may  consider as they seek to set the Social Security system on more stable financial footing.

Taken together, these issue briefs offer a useful primer for how various reform proposals might affect the program—and they give policymakers options to consider once they take up legislative reforms  to make the Social Security program  solvent. The Academy is pleased to share these resources with the broader actuarial community; this objective, nonpartisan analysis can only serve to elucidate a challenging area of concern for all Americans.

Three Issue Briefs Offer Timely Information on Annuities

The Academy released a trio of issue briefs that aim to shed light on how annuities can be used to assure lifetime income for retirees:

• What Are the Various Types of Insured Annuities? is a useful starting point for any discussion of annuities. It describes the myriad options retirees and savers have in the annuity space, deciphering the “alphabet soup” that can be a barrier to entry for some.
• Adding Annuity Options to DC Plans investigates some of the considerations around offering annuities in defined contribution (DC) plans like 401(k)s. A federal law past several years ago—the Setting Every Community Up for Retirement Enhancement (SECURE) Act—changed the landscape, and many questions remain.
• A Review of Qualifying Longevity Annuity Contracts (QLACs) is a deep dive into QLACs, an instrument specifically designed to address the challenge of guaranteeing a stream of income for an uncertain number of years.

Readers who absorb the information in these three papers will come away with a deeper understanding of the retirement annuity space, the challenges would-be retirees face as they consider them, and possible approaches to improving the efficiency of the market for these important options.

Webinar Examines Variable Annuity Plans Practice Note

Barnes presents at the webinar

The Sept. 13 pension webinar, “Discussion of Variable Annuity Plans Practice Note,” reviewed the Variable Annuity Plans practice note published in 2019, relevant for private, multiemployer plan, and public plan defined benefit (DB) pension plans that contain variable annuities. Presenters were Bruce Cadenhead, former chairperson of the Pension Committee, and Lloyd Katz, a member of the Pension Committee. Rachel Barnes, also a committee member, moderated.

Presenters discussed current and emerging practices for measuring obligations of defined benefit plans that include variable annuity benefits, including the determination of lump-sum payments. They also covered variable annuity benefit features, and issues that actuaries may consider when setting assumptions or providing advice for setting assumptions for funding and financial accounting, and how actuarial standards of practice (ASOPs) apply.

Slides and audio are available free to logged-in members as a member benefit.

JBEA Seeks Applications for Actuarial Examinations Advisory Committee

The Joint Board for the Enrollment of Actuaries (JBEA) is seeking applications for the next term of its Advisory Committee on Actuarial Examinations, which will run from March 1, 2023, through Feb. 28, 2025. The committee plays an integral role in the JBEA’s examination program by assisting in offering examinations that enable examination candidates to demonstrate the knowledge necessary to qualify for enrollment. For more information, see the IRS website. Applications are being accepted through Dec. 6—interested individuals can find application instructions in the Sept. 6 Federal Register notice.

Intersector Group Notes Released

The cross-organization U.S.-based actuarial Intersector Group released notes from its spring virtual meeting with the IRS/Treasury Department.

In This Issue

• Q&A—Augmented Mortality Discussion Brief
• Experts Discuss Pension Issues at Annual Meetings
• Issue Brief Examines Social Security Trustees Report
• Issue Briefs Tackle Social Security Benefits, Taxation
• Three Issue Briefs Offer Timely Information on Annuities
• Webinar Examines Variable Annuity Plans Practice Note
• JBEA Seeks Applications for Actuarial Examinations Advisory Committee
• Intersector Group Notes Released
• In the News

In the News

Academy Senior Pension Fellow Linda K. Stone was quoted in an AARP story on use of life expectancy calculators. Stone also provided comments and an illustrative example for an Investopedia article on the periodic recalculation of lump-sum values.

Social Security Committee Chairperson Amy Kemp penned the feature article “Solvency and Sustainability of Social Security” for Advisor Magazine.

Multiemployer Plans Committee Chairperson Christian Benjaminson commented to Pensions & Investments on the release of a proposed Pension Benefit Guaranty Corporation (PBGC) rule on plan withdrawal liability.

Think Advisor and Advisor Magazine reported on the Academy’s lifetime income August issue brief, What Are the Various Types of Insured Annuities?

MarketWatch cited analysis from an Academy presentation to the NAIC on contingent deferred annuities. The article was reprinted by Morningstar.

Pensions & Investments quoted Joseph Hicks, vice chairperson of the Multiemployer Plans Committee, on the PBGC’s interim final rule concerning the federal assistance program for struggling multiemployer funds.

An Engineering News-Record story on the restoration of benefits for an ironworkers’ plan through the PBGC’s Special Financial Assistance program cited the Academy for history of the multiemployer system.

An article on mortality impacts of COVID-19 for life insurance in the Annals of Actuarial Science (U.K.), published by the Institute and Faculty of Actuaries and Cambridge University Press, cited the Pension Committee issue brief, Impact of COVID-19 on Pension Plan Actuarial Experience and Assumptions, Including Mortality.

Investment News, ETF Trends, AOL, the Journal of Economic Behavior & Organization, and Smart Asset cited the Actuaries Longevity Illustrator, developed jointly by the Academy and the Society of Actuaries.

A Think Advisor story on life expectancy impacts of the COVID-19 pandemic cited the Pension Committee’s December 2021 issue brief, Interpreting Pandemic-Related Decreases in Life Expectancy.

A Richmond Times-Dispatch story on the funded status of a public employee defined benefit plan used Academy research for context reporting on the plan’s financial health.