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Editorial

Is your risk really covered? Maybe not

Many state and local government politicians, corporate executives, union officials and pension plan officials likely will get a surprise after the first actuarial reviews of their plans when a new actuarial standard on pension obligation risk assessment becomes official Nov. 1.

Reviews done under the new standard, officially known as Actuarial Standard of Practice No. 51, will show just how vulnerable their public, corporate and multiemployer plans are to shocks from underperformance, underfunding, life expectancy changes or changes in the number of plan participants.

Some of these plan officials will have suspected for some time that their plans are at greater risk than they wanted to acknowledge publicly. Others will be shocked by the revelations as the standards go into effect and the actuaries for their plans issue new reports.

All plan and fund officials should study the new actuarial reports and consider the implications for the future of their plans. They should then develop plans of action to reduce, where appropriate, the levels of risk revealed.

According to the Actuarial Standards Board, "this standard applies to actuaries when performing a funding valuation of a pension plan. This standard also applies to actuaries when performing a pricing valuation of a proposed pension plan change that would, in the actuary's professional judgment, significantly change the types or levels of risks of the pension plan. This standard also applies to actuaries when performing a risk assessment that is not part of a funding valuation or pricing valuation."

Risks might include the possibility that future contributions might deviate from the expected future contributions, for example, as politicians decline to provide the full amount required for prudent funding; that beneficiaries might live longer than assumed by the plan, or retire earlier; that the number of participants in the plan might grow faster than expected; or that the number of employers in a multiemployer plan might decline faster than expected.

While in some assignments the actuary might be asked to provide guidance on risk reduction or management, the new standard does not provide guidance on such risk management, the Actuarial Standards Board noted.

This means the actuaries can point out the possible fiscal potholes for the plans after using the new standard, but filling those potholes is the responsibility of plan fiduciaries.

The first step plan fiduciaries can take is to ask their actuaries for an evaluation under the new standard, and then publicize the findings of that evaluation, both to those with the ultimate responsibility for the plans — whether they be politicians, union and/or corporate executives — and to the public.

They should also make sure the stakeholders — the beneficiaries and, in the case of public employee plans, the taxpayers — understand what risks the plans are exposed to and what steps need to be taken to reduce those risks. The taxpayers and the beneficiaries are the ones likely to pay if appropriate measures to reduce the risks are not taken.

They should then have the actuary for their plans do a stress test seeking answers to what happens if the identified risk factors change. For example, what impact would changes in asset values that are not matched by changes in the value of liabilities have on the funding level of the plan? How much mismatch can the plan tolerate, and for how long? What impact will changes in interest rates have?

The new actuarial standard should prompt action by fiduciaries to examine the risk exposure of their plans and take action to counter those risks.