ASOP 4 – Third draft of the standard was approved in June

The Actuarial Standards Board (ASB) is responsible for setting standards for actuarial practice in the United States and they accomplish that objective through the development of Actuarial Standards of Practice (ASOPs). One such standard, ASOP No. 4 addresses “measuring pension obligations and determining pension plan costs or contributions”. This guideline is not specific to either FASB or GASB, so this standard should be applied by all actuaries when performing the following tasks:

Measurement of pension obligations, funded status, solvency risk, and the pricing of benefits. There are several other areas of focus, but the assessment of a Low-Default-Risk Obligation Measure was the one that grabbed our attention. Section 3.11 of ASOP No. 4 states that “when performing a funding valuation, the actuary should calculate and disclose a low-default-risk obligation measure of the benefits earned or costs accrued as of the measurement date”. When calculating this measure, the actuary should select a discount rate derived from low-default-risk fixed income securities whose cash flows are reasonably consistent with the pattern of benefits to be paid in the future. Sounds like cash flow matching to us. Examples of permitted discount rates include, US Treasury yields, rates implicit in the settlement of pension obligations, yields on corporate bonds of the two highest ratings given by recognized rating agencies, multiemployer current liability rates, and non-stabilized ERISA funding rates for a single employer plan. Notice that the return on asset assumption (ROA) is not one of the approved rates.

The actuary should provide commentary to help plan sponsors AND participants understand the significance of the low-default-risk obligation measure with respect to the funded status of the plan, future contributions, and importantly, the security of participant benefits. It is up to the actuary to use their professional judgement when producing the commentary. This measurement is not intended to highlight one discount rate as being the most appropriate. It is intended to provide a more transparent view of the current financial condition of the plan with respect to its future commitments. Final comments on this third draft are due by October 15th.

Ryan ALM is one of the few vendors that provide U.S. Treasury STRIPS and AA corporate zero-coupon (ASC 715 requirement) discount rates. We also created and provide a Custom Liability Index (CLI) as a monthly report that calculates: Future Value (grows and net of contributions), Present Value, Growth Rate, Interest Rate Sensitivity, and Statistical Summary (average YTM, duration, etc.) of the plan’s liabilities.

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