ASOP 51 – Are They Prepared?

When I first heard someone mention ASOP 51, I immediately thought that this individual was speaking about Aesop, a slave and storyteller believed to have lived in ancient Greece between 620 and 564 BCE, and one of his many fairy tales. I suspect that many of our regular readers would accuse me of being the “Boy Who Cried Wolff” for my consistent pronouncements regarding the retirement crisis that continues to unfold.

In September 2017, the Actuarial Standards Board (ASB) adopted a new Actuarial Standard of Practice (ASOP) No. 51 entitled, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions (otherwise known as AaDRAwMPOaDPPC or something to that effect). The new ASOP is effective for actuarial work produced on or after November 1, 2018. It is intended to be used for both private and public pension plans, but not OPEBS.

Importantly, the new ASOP is applicable to actuaries performing funding valuations, pricing valuations, or other, where the actuary is retained to perform a risk assessment that is not part of a funding or pricing valuation. Obviously, risk is in the eye of the beholder, but for this purpose, risk is defined as, “the potential of actual future measurements deviating from expected future measurements resulting from actual future experience deviating from actuarially assumed experience”. And they claim that actuaries aren’t comfortable with small talk at cocktail parties. Phew!

ASOP 51 requires the actuary to identify risks that may reasonably be predicted to significantly affect the pension plan’s future financial condition. Examples include investment risk, asset/liability mismatch risk, interest rate risk, longevity and other demographic risk, and contribution risk. These are all doozies. In addition to identifying the risk, the actuary is asked (required) to assess the identified risk on the plan’s future financial condition. Have you had a conversation with your actuary on how they plan to execute this new requirement?

Investment Risk

Poor investment return performance can significantly affect a public plan’s financial condition most importantly in two ways: computed contribution rate and funded status. For many plans covering general employees, the ratio of assets to payroll is about 5 or so. For plans covering public safety employees, this ratio can be 10 or higher. If a plan with a 7% investment return assumption experienced an annual market value return of –3% (i.e., a 10% investment loss), this would equate to a dollar loss of 50% of payroll for general plans and 100% of payroll for public safety plans. Based upon a reasonable amortization period and payroll growth assumption, this could translate into an increased computed contribution rate of 4.5% of payroll for general plans and 9.0% of payroll for public safety plans. The 2008–2009 Great Recession provides a stark case study for the effect on a plan’s funded status. For many plans that had a 100% fun