Key Actuarial Changes for Public Pension Plans in 2023

Changed actuarial standards of practice—ASOP 4—are no epic bedtime story.

Funding valuation reports for public pension plans will have to include additional information following several actuarial changes approved by the Actuarial Standard Board, part of the American Academy of Actuaries, in the finalized Actuarial Standards of Practice No. 4., Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.

The changed standards are effective for any actuarial report that meets the following criteria, according to the ASOP 4:

• The actuarial report is issued on or after February 15, 2023; and
• The measurement date in the actuarial report is on or after February 15, 2023.

“In some cases, these are things that some [public pension plan] reports already include. So for any given public pension plan, they may see all of these as changes or some of them may not represent a change,” says Rebecca Sielman, a principal and consulting actuary at Milliman.

The changes require public pension plans in the valuation report to include an assessment of the portfolio investment risk with a low default risk obligation measure. This will disclose a reasonable actuarially determined contribution and additional analysis of how the plan’s funded status changed from the prior measurement, she says.  

Sielman outlined four changes: “Does the report include this new liability measurement using the low default risk obligation measure? Secondly, does the report include splitting the investment gain or loss from noninvestment gains or losses? The third change requires the report disclose a reasonable actuarially determined contribution.”

She adds, “The fourth is: Does the report talk about the implications of the plan’s funding policy on the expected levels of future contributions and funded status? Those are the four things. That’s our checklist as we look through our valuation reports to make sure that those four things are in place for public pension plans.”

The changes “should have no impact on the prevalence of public pension plans or levels of benefits provided,” Sielman says. “It’s providing additional information in our funding valuation reports, so it shouldn’t have any impact on costs on benefits or whether pension plans continue to exist or how they’re funded. We’re just providing additional information.”

Sielman explains this is to get at the question of “How can we get our arms around the impact of the risk that is being taken with the investments?”

The changed standards are driving at improved transparency, disclosures and risk assessments within public pension plans’ diversified asset portfolios, says Todd Tauzer, national public sector retirement practice leader at Segal.

Requiring pensions to use low default risk obligation measures to calculate the plan’s portfolio assets changes the discount rate. Public and private pension plans use a discount rate, which is the interest rates used to determine the current value of estimated future benefit payments, according to the Government Accountability Office website.

The reasonable calculation rate change was approved to help public pension plans arrive at a greater assessment of the appropriate yearly funding amount to bring the pension to complete funded status. Not all public pension plans use a funding policy that is based on the employer contributing an actuarily determined contribution rate, says Sielman.

Instead, some public pension plan sponsors use a predetermined contribution rate, explains Sielman.

“Typically, it’s expressed as a percentage of payroll that is fixed and not actuarially determined at 12% of pay or 14% of pay [and] it’s a fixed contribution rate, not an actuarially determined contribution rate,” she says. “That fixed contribution rate may not be enough to bring the plan to a fully funded position within a reasonable period. This modification to is to make sure that plan sponsors have the framework for judging a fixed contribution rate and whether it is adequate to bring a plan to a fully funded position within a reasonable period of time.”

She adds, “There are many pension plans that do already have an actuarially determined contribution and contributed, or maybe they don’t contribute it, but at least they know what it is.”