Key Actuarial Changes for Public Pension Plans in 2023

The Actuarial Standards Board approved changes for public pension plans’ investment portfolio risk assessments, disclosures of employer contributions and investment gain/loss analyses.  

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.”

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Deloitte Vindicated in Excessive Fee Dismissal

An ERISA suit filed in 2021 alleged that Deloitte did not monitor the fees being charged to its 401(k) plan.

A U.S. District Court judge in the Southern District of New York granted on Friday Deloitte LLP’s motion to dismiss a lawsuit brought under the Employee Retirement Income Security Act that was filed in October of 2021.

The complaint said that Deloitte’s 401(k) and profit sharing plan totaling over $14 billion in assets used a revenue sharing fee structure whereby the plan was charged a percentage of assets managed instead of a per-participant fee. Vanguard was the plan recordkeeper.

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The suit acknowledged that revenue sharing is not imprudent per se but, if left unmonitored, fees could increase significantly, despite there being no additional recordkeeping services rendered.

Deloitte moved to dismiss the lawsuit for lack of standing and failure to state a claim in March 2022, and U.S. District Court Judge John G. Koeltl granted the dismissal with leave to amend, giving the plaintiffs 30 days to refile the complaint with changes.

The PSP was only available to partners, managing directors and principals. Since none of the plaintiffs held those positions, Koeltl ruled they did not have standing to challenge the PSP. They did have standing to challenge the 401(k) offered to all full-time employees, Koeltl found.

Additionally, though the plaintiffs challenged the prudence of six funds offered in Deloitte’s retirement plan, only one plaintiff, Jeffrey Popkin, invested in any of them. Popkin invested in two of the six: a real estate fund and an emerging markets fund, both managed by T. Rowe Price, making those the only parts of the case Koeltl considered further.

Koeltl dismissed the rest of the case for failure to state a claim. The ruling stated that the plaintiffs cannot argue that the fees charged in the plan are greater than comparators but must argue that the fees are excessive relative to the actual services rendered. The ruling stated that the plaintiffs had never outlined the specific services that Vanguard offered the plan or compared them to the services provided for the plans to which Vanguard charged lower fees.

Koeltl also noted that the plaintiffs’ appeal to median fee levels for similar plans cannot be evidence of imprudence, because that would mean the top half of plans are imprudent fiduciaries by definition.

The ruling read, “In effect, the plaintiffs have only alleged that some funds in the world are more expensive than other funds.”

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