How To Read An Actuarial Valuation Report

Georgia Government Finance Officers Association October 1, 2013 How to Read an Actuarial Valuation Report: “It’s Not Just a Sleep Aid” Speaker  Alisa Bennett, Principal and Consulting Actuary, Cavanaugh Macdonald Consulting, LLC Kennesaw, GA Over 20 years of Public Sector Actuarial Experience  Consult with many GA Plans  Table of Contents        Actuarial Jargon Main Purposes of the Valuation Report Funding Requirements Assets Gain/Loss GASB Accounting Assumptions Actuarial Jargon Actuarial Communication – Actuarial Standards of Practice (ASOPs)  MVA  PVFB EAN  PUC  AAL  NC  UAAL  AVA  ARC  NPO  GASB  OPEB  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)  Main Purposes of Valuation Report Provide summary of participant data as of snapshot valuation date  List all Assumptions and Methods that went into developing liabilities  Provide summary of Plan Provisions  Funding Valuation Process Present Value of Future Benefits (PVFB) Actuarial Accrued Liability (AAL) Assets (AVA, MVA) Unfunded Accrued Liability (UAL) Future Normal Costs (NC) 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 10 GASB Accounting Information  Disclosure for GASB 25 and 27 (soon to be 67 and 68) and/or 43 and 45 for OPEB Valuations Distribution of Number of Employees by Type of Membership  Schedule of Funding Progress  Schedule of Employer Contributions  Calculation of Net Pension Obligation (soon to be Net Pension Liability (NPL) and/or Net OPEB Obligation  Solvency Test  29 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  30 Schedule of Employer Contributions  Six Year History of the following: Annual Required Contributions (ARC)  Percent of ARC Contributed  31 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 32 Solvency Test   Displays the Portion of the Accrued Liabilities that are covered by the Assets in Percentage Form Liabilities broken down into components: 1) 2) 3) Active Member Contributions Retirees, Survivors and Inactive Liabilities Active Members (Employer Provided Benefits) 33 Selecting Assumptions    Demographic Economic Specific to OPEB 34 Demographic        Withdrawal Death in active service Disability Retirement Death after retirement Special Terminations (e.g Shutdowns) Spouse Assumptions 35 Demographic Adjustments  Experience Investigations Compares actual plan experience with actuarial assumptions used in the valuation  Performed every 3-5 years     Follow experience Watch trends (e.g Improving Mortality) Factor in special events (e.g re-employment legislation) 36 Economic Assumptions  Inflation should be consistently applied Asset return  Salary increases  COLAs   Real returns should reflect asset mix 37 Understanding Economic Assumptions 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 38 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  39 Assumptions Specific to OPEB  Healthcare Trend Applied annually to the plan’s assumed per member claims cost  Considers such things as  price inflation,  leverage (the effect of fixed co-payments and deductibles),  future utilization and cost shifting,  legislative and technological changes  40 Assumptions Specific to OPEB  Healthcare Trend (continued)  Recent experience indicates very high medical inflation rates outstripping both salary and general inflation rates, but these are generally expected to level off  Affordable Care Act (ACA)  Excise tax on high-value health insurance plans beginning in 2018 (if applicable), Mandated benefits and Participation changes due to the individual mandate/exchanges Overall future plan costs and the resulting liabilities are driven by amounts employers and retirees can afford (i.e., 41 trend).     Assumptions Specific to OPEB  Participation   Most post-employment health plans require retirees to pay part of the premium What percent will pay the premium and participate – what percent will waive coverage? Depends on the premium the retiree is required to pay May depend on age and/or service at retirement  Affordable Care Act (ACA)  Exchanges Participation changes due to the individual mandate  42 Questions ??? Alisa Bennett Cavanaugh Macdonald Consulting 678-388-1703 alisab@cavmacconsulting.com