ASOP 4
(MEASURING PENSION OBLIGATIONS AND DETERMINING PENSION PLAN COSTS OR CONTRIBUTIONS)
SECTION 3
(ANALYSIS OF ISSUES AND RECOMMENDED PRACTICES)

Section 3
Analysis of Issues and Recommended Practices

ASOP 4 | §3.1 | OVERVIEW

Measuring pension obligations and determining periodic costs or actuarially determined contributions are processes in which the actuary may be required to make judgments or recommendations on the choice of assumptions, actuarial cost methods, asset valuation methods, amortization methods, and output smoothing methods.

The actuary may have the responsibility and authority to select some or all assumptions, actuarial cost methods, asset valuation methods, amortization methods, and output smoothing methods. In other circumstances, the actuary may be asked to advise the individuals who have that responsibility and authority. In yet other circumstances, the actuary may perform actuarial calculations using prescribed assumptions or methods set by another party or prescribed assumptions or methods set by law.

ASOP 4 | §3.2 | GENERAL PROCEDURES

When measuring pension obligations, determining periodic costs, or determining actuarially determined contributions, the actuary should perform the following general procedures:

a. identify the purpose of the measurement (section 3.3);

b. identify the measurement date (section 3.4);

c. identify plan provisions applicable to the measurement and any associated valuation issues (section 3.5);

d. gather data necessary for the measurement (section 3.6);

e. obtain from the principal other information necessary for the purpose of the measurement (section 3.7);

f. select assumptions (section 3.8);

g. measure accrued or vested benefits, if applicable (section 3.9);

h. measure market-consistent present values, if applicable (section 3.10);

i. calculate a low-default-risk obligation measure, if applicable (section 3.11);

j. reflect how plan or plan sponsor assets as of the measurement date are reported, if applicable (section 3.12);

k. select an actuarial cost method, if applicable (section 3.13);

l. select an amortization method, if applicable (section 3.14);

m. select an asset valuation method, if applicable (section 3.15);

n. select an output smoothing method, if applicable (section 3.16);

o. select a cost allocation procedure or contribution allocation procedure, if applicable (sections 3.17 and 3.18);

p. assess the implications of the contribution allocation procedure or plan’s funding policy, if applicable (section 3.19);

q. take into account the contribution lag, if applicable (section 3.20);

r. calculate a reasonable actuarially determined contribution, if applicable (section 3.21);

s. perform a gain and loss analysis, if applicable (section 3.22);

t. take into account the sources of significant volatility, if applicable (section 3.23);

u. assess the assumptions and methods not selected by the actuary, if applicable (section 3.24); and

v. consider preparing and retaining documentation (section 3.26).

The actuary should refer to ASOP No. 56, Modeling, for guidance with respect to models when measuring pension obligations, determining periodic costs, or determining actuarially determined contributions.

In addition, the actuary may use approximations and estimates where circumstances warrant (section 3.25).

ASOP 4 | §3.3 | PURPOSE OF THE MEASUREMENT

The actuary should reflect the purpose of the measurement.

Examples of measurement purposes include the following:

a. determining periodic costs or actuarially determined contributions;

b. assessing funded status;

c. pricing benefit provisions;

d. comparing benefit provisions between plans;

e. determining withdrawal liabilities or benefit plan settlements; and

f. measuring pension obligations for plan sponsor mergers and acquisitions.

3.3.1 Projected or Point-in-Time Measurements

The actuary should consider using different assumptions or methods for measurements projected into the future versus point-in-time measurements.

3.3.2 Uncertainty or Risk

The actuary should refer to the guidance on uncertainty and risk in ASOP No. 41 and ASOP No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.

ASOP 4 | §3.4 | MEASUREMENT DATE CONSIDERATIONS

The actuary should address the following measurement date considerations:

3.4.1 Information as of a Different Date

The actuary may estimate asset and participant information at the measurement date on the basis of information as of a different date. In these circumstances, the actuary should make appropriate adjustments to the data. Alternatively, the actuary may calculate the obligations as of a different date and then adjust the obligations to the measurement date (see section 3.4.3 for additional guidance). In either case, the actuary should determine that any such adjustments are reasonable in the actuary’s professional judgment, given the purpose of the measurement.

3.4.2 Events after the Measurement Date

If the actuary is aware of events that occur subsequent to the measurement date and prior to the date of the actuarial communication, the actuary should reflect those events appropriately for the purpose of the measurement. Unless the purpose of the measurement requires or prohibits the inclusion of such events, the actuary may, but need not, reflect these events in the measurement.

3.4.3 Adjustment of Prior Measurement

The actuary may adjust the results from a prior measurement in lieu of performing a new detailed measurement if, in the actuary’s professional judgment, such an adjustment would produce a reasonable result for the purpose of the new measurement. To determine whether such an adjustment would produce a reasonable result, the actuary should consider reflecting items such as the following, if known to the actuary:

a. changes in the number of participants or the demographic characteristics of that group;

b. length of time since the prior measurement;

c. differences between actual and expected contributions, benefit payments, expenses, and investment performance;

d. changes in economic and demographic expectations; and

e. changes in plan provisions.

When adjusting obligations from a prior measurement date, the actuary should consider using revised assumptions to determine the obligations if appropriate for the purpose of the new measurement.

ASOP 4 | §3.5 | PLAN PROVISIONS

When measuring pension obligations and determining periodic costs or actuarially determined contributions, the actuary should reflect all significant plan provisions known to the actuary, as appropriate for the purpose of the measurement.

However, if in the actuary’s professional judgment, omitting a significant plan provision is appropriate for the purpose of the measurement, the actuary should disclose the omission in accordance with section 4.1(e).

3.5.1 Adopted Changes in Plan Provisions

Unless contrary to applicable law or not appropriate for the purpose of the measurement, the actuary should reflect plan provisions adopted on or before the measurement date for at least the portion of the period during which those provisions are in effect. Unless the purpose of the measurement requires or prohibits that such plan provisions be reflected, the actuary may, but need not, reflect plan provisions adopted after the measurement date.

3.5.2 Proposed Changes in Plan Provisions

The actuary should reflect proposed changes in plan provisions as appropriate for the purpose of the measurement.

3.5.3 Plan Provisions That are Difficult to Measure

Some plan provisions may create pension obligations that are difficult to appropriately measure using traditional valuation procedures. Examples of such plan provisions include the following:

a. gain-sharing provisions that trigger benefit increases when investment returns are favorable but do not trigger benefit decreases when investment returns are unfavorable;

b. floor-offset provisions that provide a minimum defined benefit in the event a participant’s account balance in a separate plan falls below some threshold;

c. benefit provisions that are tied to an external index, but subject to a floor or ceiling, such as certain cost-of-living-adjustment provisions and cashbalance-crediting provisions; and

d. benefit provisions that may be triggered by an event such as a plant shutdown or a change in control of the plan sponsor.

For such plan provisions, the actuary should consider using alternative valuation procedures, such as stochastic modeling, option-pricing techniques, or deterministic procedures in conjunction with assumptions that are adjusted to reflect the impact of variations in experience from year to year. When selecting alternative valuation procedures for such plan provisions, the actuary should use professional judgment based on the purpose of the measurement and other relevant factors.

The actuary should disclose the valuation procedures used to value any significant plan provisions of the type described in this section 3.5.3, in accordance with section 4.1(f).

ASOP 4 | §3.6 | DATA

With respect to the data used for measurements, including data supplied by others, the actuary should refer to ASOP No. 23, Data Quality, for guidance.

3.6.1 Participants

The actuary should include in the measurement all participants reported to the actuary, except in appropriate circumstances where the actuary may exclude persons such as those below a minimum age or service level. When appropriate, the actuary may include employees who might become participants in the future.

3.6.2 Hypothetical Data

When appropriate, the actuary may prepare measurements based on assumed demographic characteristics of current or future plan participants.

ASOP 4 | §3.7 | OTHER INFORMATION FROM THE PRINCIPAL

The actuary should obtain from the principal other information, such as accounting policies or funding elections, necessary for the purpose of the measurement.

ASOP 4 | §3.8 | ASSUMPTIONS

The actuary should refer to ASOP Nos. 27 and 35 for guidance on the selection and assessment of assumptions.

In addition, the actuary should assess whether the combined effect of assumptions is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic) except when provisions for adverse deviation are included or when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 51. For this purpose, the actuary should assess assumptions other than

1) prescribed assumptions or methods set by law and

2) assumptions that the actuary has not selected and is unable to assess for reasonableness for the purpose of the measurement.

ASOP 4 | §3.9 | MEASURING THE VALUE OF ACCRUED OR VESTED BENEFITS

Depending on the scope of the assignment, the actuary may measure the value of any accrued or vested benefits as of a measurement date. The actuary should take into account the following when making such measurements:

a. relevant plan provisions and applicable law;

b. the status of the plan (for example, whether the plan is assumed to continue to exist or be terminated);

c. the contingencies upon which benefits become payable, which may differ for ongoing-basis and termination-basis measurements;

d. the extent to which participants have satisfied relevant eligibility requirements for accrued or vested benefits and the extent to which future service or advancement in age may satisfy those requirements;

e. whether or the extent to which death, disability, or other ancillary benefits are accrued or vested;

f. whether the plan provisions regarding benefits earned provide an appropriate attribution pattern for the purpose of the measurement (for example, if the plan’s benefit accruals are significantly back-loaded, it may be appropriate to value accrued benefits with a less back-loaded attribution pattern); and

g. the impact of a special event (such as a plant shutdown or plan termination), when applicable. Examples of factors that may impact the measurement include the following:

1. the effect of the special event on continued employment;

2. the impact of the special event on participant behavior due to factors such as subsidized payment options;

3. expenses associated with a potential plan termination, including transaction costs to liquidate plan assets; and

4. changes in investment policy.

ASOP 4 | §3.10 | MARKET-CONSISTENT PRESENT VALUES

When calculating a market-consistent present value, the actuary should do the following:

a. select assumptions based on the actuary’s observation of the estimates inherent in market data in accordance with the guidance in ASOP Nos. 27 and 35, depending on the purpose of the measurement; and

b. reflect benefits earned as of the measurement date.

In addition, the actuary may reflect benefit payment default risk or the financial health of the plan sponsor in the calculation.

ASOP 4 | §3.11 | LOW-DEFAULT-RISK OBLIGATION MEASURE

When performing a funding valuation, the actuary should calculate and disclose a low-default-risk obligation measure of the benefits earned (or costs accrued if appropriate under the actuarial cost method used for this purpose) as of the measurement date. The actuary need not calculate and disclose this obligation measure more than once per year.

When calculating this measure, the actuary should use an immediate gain actuarial cost method.

When calculating this measure, the actuary should select a discount rate or discount rates derived from low-default-risk fixed income securities whose cash flows are reasonably consistent with the pattern of benefits expected to be paid in the future. Examples of discount rates that may meet these requirements include, but are not limited to, the following:

a. US Treasury yields;

b. rates implicit in settlement of pension obligations including payment of lump sums and purchases of annuities from insurance companies;

c. yields on corporate or tax-exempt general obligation municipal bonds that receive one of the two highest ratings given by a recognized ratings agency;

d. non-stabilized ERISA funding rates for single employer plans; and

e. multiemployer current liability rates.

When plan provisions create pension obligations that are difficult to appropriately measure using traditional valuation procedures, such as benefits affected by actual investment returns, movements in a market index, or other similar factors, the actuary should consider using alternative valuation procedures such as those described under section 3.5.3 to calculate the low-default-risk obligation measure of those benefits earned or costs accrued as of the measurement date.

For purposes of this obligation measure, the actuary should consider reflecting the impact, if any, of investing plan assets in low-default-risk fixed income securities on the pattern of benefits expected to be paid in the future, such as in a variable annuity plan.

When calculating this measure, the actuary should not reflect benefit payment default risk or the financial health of the plan sponsor.

Other than the discount rate or discount rates, the actuary may use the same assumptions used in the funding valuation for this measure. Alternatively, the actuary may select other assumptions that are consistent with the discount rate or discount rates and reasonable for the purpose of the measurement, in accordance with ASOP Nos. 27 and 35.

The actuary should provide commentary to help the intended user understand the significance of the low-default-risk obligation measure with respect to the funded status of the plan, plan contributions, and the security of participant benefits. The actuary should use professional judgment to determine the appropriate commentary for the intended user.

ASOP 4 | §3.12 | RELATIONSHIP BETWEEN ASSET AND OBLIGATION MEASUREMENT

The actuary should reflect how plan or plan sponsor assets as of the measurement date are reported. For example, if the plan or plan sponsor assets have been reduced to reflect a lump sum paid, the lump sum or the related annuity value should also be excluded from the obligation.

ASOP 4 | §3.13 | ACTUARIAL COST METHOD

When selecting an actuarial cost method to assign periodic costs or actuarially determined contributions to time periods in advance of the time benefit payments are due, the actuary should select an actuarial cost method that meets the following criteria:

a. the period over which normal costs are allocated for a participant begins no earlier than the date of employment and does not extend beyond the last assumed retirement age. The period may be applied to each individual participant or to groups of participants on an aggregate basis;

When a plan has no active participants and no participants are accruing benefits, a reasonable actuarial cost method will not produce a normal cost for benefits. For purposes of this standard, an employee does not cease to be an active participant merely because he or she is no longer accruing benefits under the plan;

b. the attribution of normal costs bears a reasonable relationship to some element of the plan’s benefit formula or the participant’s compensation or service. The attribution basis may be applied on an individual or group basis. For example, the actuarial present value of projected benefits for each participant may be allocated by that participant’s own compensation or may be allocated by the aggregated compensation for a group of participants;

c. expenses are considered when assigning periodic costs or actuarially determined contributions to time periods. For example, the expenses for a period may be added to the normal cost for benefits, or expenses may be reflected as an adjustment to the investment return assumption or the discount rate. As another example, expenses may be reflected as a percentage of pension obligation or normal cost; and

d. the sum of the actuarial accrued liability and the actuarial present value of future normal costs equals the actuarial present value of projected benefits and expenses, to the extent expenses are included in the actuarial accrued liability and normal cost. For purposes of this criterion, under a spread gain actuarial cost method, the sum of the actuarial value of assets and the unfunded actuarial accrued liability, if any, shall be considered to be the actuarial accrued liability.

When disclosing a funded status measurement using a spread gain actuarial cost method, the actuary should also calculate and disclose a funded status measurement using an immediate gain actuarial cost method.

ASOP 4 | §3.14 | AMORTIZATION METHOD

When selecting an amortization method, the actuary should select an amortization method for each amortization base that is expected to produce amortization payments that fully amortize the amortization base within a reasonable time period or reduce the outstanding balance by a reasonable amount each year.

For purposes of determining a reasonable time period or a reasonable amount, the actuary should take into account factors including, but not limited to, the following, if applicable:

a. whether the amortization method is open or closed;

b. the source of the amortization base;

c. the anticipated pattern of the amortization payments, including the length of time until amortization payments exceed nominal interest on the outstanding balance;

d. whether the amortization base is positive or negative;

e. the duration of the actuarial accrued liability;

f. the average remaining service lifetime of active plan participants; and

g. the funded status of the plan or period to plan insolvency.

When selecting an amortization method, the actuary should select an amortization method that is expected to produce total amortization payments that are expected to fully amortize the unfunded actuarial accrued liability within a reasonable time period or reduce the unfunded actuarial accrued liability by a reasonable amount within a sufficiently short period.

The actuary should assess whether the unfunded actuarial accrued liability is expected to be fully amortized.

For purposes of this section, the actuary should assume that all assumptions will be realized and actuarially determined contributions will be made when due.

ASOP 4 | §3.15 | ASSET VALUATION METHOD

The actuary should refer to ASOP No. 44 for guidance on the selection and use of an asset valuation method.

ASOP 4 | §3.16 | OUTPUT SMOOTHING METHOD

When selecting an output smoothing method, the actuary should select an output smoothing method that results in a reasonable relationship between the smoothed contribution and the corresponding actuarially determined contribution without output smoothing. A reasonable relationship includes the following:

a. the output smoothing method produces a value that does not fall below a reasonable range around the corresponding actuarially determined contribution without output smoothing; and

b. any shortfalls of the smoothed contribution to the corresponding actuarially determined contribution without output smoothing are recognized within a reasonable period of time.

ASOP 4 | §3.17 | ALLOCATION PROCEDURE

When selecting a cost allocation procedure or contribution allocation procedure, the actuary should take into account the following:

a. the balance among benefit security, intergenerational equity, and stability or predictability of periodic costs or actuarially determined contributions;

b. the timing and duration of expected benefit payments;

c. the nature and frequency of plan amendments; and

d. relevant input from the principal, for example, a desire to achieve a target funding level within a specified time frame.

ASOP 4 | §3.18 | CONSISTENCY BETWEEN CONTRIBUTION ALLOCATION PROCEDURE AND THE PAYMENT OF BENEFITS

When selecting a contribution allocation procedure, the actuary should select a contribution allocation procedure that, in the actuary’s professional judgment, is consistent with the plan accumulating adequate assets to make benefit payments when due, assuming that all assumptions will be realized and that the plan sponsor or other contributing entity will make actuarially determined contributions when due. In some circumstances, a contribution allocation procedure may not be expected to produce adequate assets to make benefit payments when they are due even if the actuary uses a combination of assumptions selected in accordance with ASOP Nos. 27 and 35, an actuarial cost method selected in accordance with section 3.13 of this standard, and an asset valuation method selected in accordance with ASOP No. 44.

Examples of such circumstances include the following:

a. a plan covering a sole proprietor with funding that continues past an expected retirement date with payment due in a lump sum;

b. using the aggregate actuarial cost method for a plan covering three employees, in which the principal is near retirement and the other employees are relatively young; and

c. a plan amendment with an amortization period so long that overall plan actuarially determined contributions would be scheduled to occur too late to make plan benefit payments when due.

ASOP 4 | §3.19 | IMPLICATIONS OF CONTRIBUTION ALLOCATION PROCEDURE OR FUNDING POLICY

When performing a funding valuation, the actuary should do the following:

a. qualitatively assess the implications of the contribution allocation procedure or the plan’s funding policy on the plan’s expected future contributions and funded status;

b. estimate how long before any contribution as determined by the contribution allocation procedure or the plan’s funding policy is expected to exceed the normal cost, plus interest on the unfunded actuarial accrued liability, if applicable;

c. estimate the period over which the unfunded actuarial accrued liability, if any, is expected to be fully amortized; and

d. assess whether the contribution allocation procedure or funding policy is significantly inconsistent with the plan accumulating assets adequate to make benefit payments when due, and estimate the approximate time until assets are depleted.

For purposes of this section, contributions set by law or by a contract, such as a collective bargaining agreement, constitute a funding policy.

For purposes of this section, the actuary may presume that all assumptions will be realized and the plan sponsor (or other contributing entity) will make contributions anticipated by the contribution allocation procedure or funding policy.

ASOP 4 | §3.20 | CONTRIBUTION LAG

When calculating an actuarially determined contribution, the actuary should consider reflecting the passage of time between the measurement date and the expected timing of actual contributions.

ASOP 4 | §3.21 | REASONABLE ACTUARIALLY DETERMINED CONTRIBUTION

When performing a funding valuation, except where the actuarially determined contribution is based on a prescribed assumption or method set by law, the actuary should also calculate and disclose a reasonable actuarially determined contribution. For this purpose, an actuarially determined contribution is reasonable if it uses a contribution allocation procedure that satisfies the following conditions:

a. all significant assumptions selected by the actuary are reasonable, all significant prescribed assumptions or methods set by another party do not significantly conflict with what in the actuary’s professional judgment is reasonable in accordance with ASOP Nos. 27 and 35, and the combined effect of these assumptions is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic) except when provisions for adverse deviation are included;

b. the actuarial cost method used should be consistent with section 3.13. If an actuarial cost method with individual attribution is used, each participant’s normal cost should be based on the plan provisions applicable to that participant;

c. if an amortization method is used, it should be consistent with section 3.14;

d. if an asset valuation method is used, it should be consistent with section 3.15;

e. if an output smoothing method is used, it should be consistent with section 3.16; and

f. the contribution allocation procedure should, in the actuary’s professional judgment, be consistent with the plan accumulating assets adequate to make benefit payments when due, assuming that all assumptions will be realized and that the plan sponsor or other contributing entity will make actuarially determined contributions when due.

ASOP 4 | §3.22 | GAIN AND LOSS ANALYSIS

When performing a funding valuation, the actuary should perform a gain and loss analysis for the period between the prior measurement date and the current measurement date, unless in the actuary’s professional judgment, successive gain and loss analyses would not be appropriate for assessing the reasonableness of the assumptions. For example, successive gain and loss analyses may not provide useful information about the reasonableness of the assumptions for a small plan in which a single individual accounts for most of the actuarial accrued liability. If a gain and loss analysis is performed, the actuary should at least separate the total gain or loss into investment gain or loss and other gain or loss.

ASOP 4 | §3.23 | VOLATILITY

If the scope of the actuary’s assignment includes an analysis of the potential range of future pension obligations, periodic costs, actuarially determined contributions, or funded status, the actuary should take into account sources of volatility that, in the actuary’s professional judgment, are significant. Examples of potential sources of volatility include the following:

a. plan experience differing from that anticipated by the economic or demographic assumptions, as well as the effect of new entrants;

b. changes in economic or demographic assumptions;

c. the effect of discontinuities in applicable law or accounting standards, such as full funding limitations, the end of amortization periods, or liability recognition triggers;

d. the delayed effect of smoothing techniques, such as the pending recognition of prior experience losses; and

e. patterns of rising or falling periodic cost expected when using a particular actuarial cost method for the plan population.

When analyzing potential variations in economic and demographic experience or assumptions, the actuary should refer to ASOP No. 51 for additional guidance, where applicable.

ASOP 4 | §3.24 | ASSESSMENT OF ASSUMPTIONS AND METHODS NOT SELECTED BY THE ACTUARY

For each measurement date, the actuary should assess whether an assumption or method not selected by the actuary is reasonable for the purpose of the measurement, other than

1) prescribed assumptions or methods set by law and

2) assumptions or methods that the actuary has not selected and is unable to assess for reasonableness for the purpose of the measurement.

For purposes of this assessment, reasonable assumptions or methods are not necessarily limited to those the actuary would have selected for the measurement. In this assessment, the actuary should determine whether the assumption or method significantly conflicts with what, in the actuary’s professional judgment, would be reasonable for the purpose of the measurement. If, in the actuary’s professional judgment, there is a significant conflict, the actuary should disclose this conflict in accordance with section 4.2(a).

ASOP 4 | §3.25 | APPROXIMATIONS AND ESTIMATES

Where circumstances warrant, the actuary may use approximations or estimates in performing the actuarial services. The following are some examples of such circumstances:

a. situations in which the actuary reasonably expects the results to be substantially the same as the results of detailed calculations;

b. situations in which the actuary’s assignment requires informal or rough estimates; and

c. situations in which the actuary reasonably expects the amounts being approximated or estimated to represent only a minor part of the overall pension obligation, periodic cost, or actuarially determined contribution.

When using approximations or estimates, the actuary should use professional judgment to establish a balance between the degree of refinement of methodology and whether the impact on the results is material.

ASOP 4 | §3.26 | DOCUMENTATION

The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. If preparing documentation, the actuary should consider preparing such documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. The degree of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.