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Cypen & Cypen
July 4, 2013

Stephen H. Cypen, Esq., Editor

1. REVIEWING, UNDERSTANDING AND USING THE ACTUARIAL VALUATION REPORT AND ITS ROLE IN PLAN FUNDING: A new Best Practice from Government Finance Officers Association states that the actuarial valuation report has always played an important role as the basic source document for information regarding actuarially determined contributions (formerly annual required contributions), and the funded status of pension and other post-employment benefit plans. The actuarial valuation report, prepared in accordance with Actuarial Standards of Practice, will soon come to play an even more critical role in the wake of the implementation of GASB Statement No. 68, Accounting and Financial Reporting for Pensions, because funding information for pensions will no longer automatically be provided in financial reports. In other words, the actuarial valuation report will soon be the sole source of information for many financial decision makers desiring to make informed decisions about the funding of pension benefits.  GFOA recommends that state and local government finance officials and others with decision-making authority carefully review and understand their actuarial valuation report and use information it contains to make policy decisions that ensure pension benefits are funded in a sustainable manner, consistent with pension funding guidelines developed by GFOA and the other major state and local government professional organizations. The purpose of an actuarial valuation is 1) to determine the amount of actuarially determined contributions, (an amount that, if contributed consistently and combined with investment earnings, would be sufficient to pay promised benefits in full over the long-term) and 2) to measure the plan’s funding progress. Key items to consider in reviewing the valuation report include: 

  • Actuarially Determined Contribution. The actuarially determined contribution represents the amount needed to fund benefits over time. If contributions are not fully paid, interest accrues on the unpaid portion at the plan’s expected long-term rate of return. Persistent underfunding will ultimately jeopardize the plan’s sustainability. GFOA recommends that the full amount of the actuarially determined contribution be paid to the plan each year.  
  • Liabilities, Assets, and Funded Ratio. The actuarial accrued liability represents the present value of benefits earned, calculated using the plan’s actuarial cost method. The actuarial value of assets reflects the financial resources available to liquidate the liability. The unfunded actuarial accrued liability is the difference between the AAL and the AVA. The funded ratio (AVA/AAL) reflects the extent to which accumulated plan assets are sufficient to pay future benefits. GFOA recommends that the funding policy aim to achieve a funded ratio that approaches 100%, with asset smoothing and amortization methods consistent with the government’s funding policy and ASOP.  
  • Actuarial Assumptions. Since the future is unknown, actuarial valuations must be based on assumptions. For an actuarial valuation to be reliable, the assumptions used should reflect the best information available, which should be supported by rigorous discussion and analysis. Likewise, information concerning the demographic characteristics of the covered population needs to be current. 
  • Historical Information. Certain historical information may be especially useful for understanding funding.  Multi-year information on the plan’s funding progress, funding ratio and the UAAL as a percentage of payroll and multi-year information on both actuarially determined contributions and actual amounts contributed.  
  • Actuarial Comments. ASOP requires actuaries to make certain disclosures in their reports. These comments include the report’s intended purpose; cautions regarding risk and uncertainty; and constraints regarding use of the report for other than its intended purpose.

To draw full benefit from the information contained in an actuarial report, review of the information it contains must be followed by appropriate action steps:

  • Making Required Contributions.
  • Assessing Funding Progress.
  • Mitigating Risks.
  • Ensuring Reliable Data.
  • Validating Methods and Assumptions through Experience Studies.

2.   U.S. RETIREMENT ASSETS TOTAL ALMOST $21 TRILLION IN THE FIRST QUARTER 2013: Total U.S. retirement assets were $20.8 trillion as of March 31, 2013, up 4.6% from $19.9 trillion on December 31, 2012. Retirement assets accounted for 36% of all household financial assets in the United States at the end of the first quarter of 2013. Assets in individual retirement accounts totaled $5.7 trillion, an increase of 5.1% from year-end 2012. Defined contribution plan assets rose 5.7% in the first quarter to $5.4 trillion. Government pension plans -- including federal, state, and local government plans -- held $5.2 trillion in assets, a 5.3% increase.   Private-sector defined benefit plans held $2.7 trillion in assets, and annuity reserves outside of retirement accounts accounted for another $1.9 trillion. As of March 31, 2013, target date mutual fund assets totaled $529 billion, an increase of 10.0%.  Retirement accounts held the bulk of target date mutual fund assets: 91% of target date mutual fund assets was held through DC plans and IRAs according to Investment Company Institute.   
3.  FUNDING STATE AND LOCAL PENSIONS (2012–2016): Center for State & Local Government Excellence has released an Issue Brief entitled “The Funding of State and Local Pensions: 2012-2016.”  This 2012 update on the funded status of state and local pensions will be one of the last two based on the Governmental Accounting Standards Board’s old provisions, under which assets are reported on an actuarially smoothed basis, the discount rate is the long-run expected rate of return and the annual required contribution (ARC) serves as a well-defined metric against which to measure the extent to which plan sponsors are meeting their obligations. Under these standards, despite a rising stock market, the rebound in tax revenues and increased employee contributions, funded status in 2012 declined slightly. This result, which at first seems surprising, reflects the fact that liabilities continued to grow -- albeit at a slower pace compared to the past -- while the actuarial value of assets increased only modestly, reflecting asset smoothing procedures that continue to include losses from the 2008–09 market crash. In addition to providing a 2012 update, this brief offers a glimpse of the world when GASB’s new proposals go into effect in 2014, and reports projections for the period 2013-2016 under both the old and new GASB standards.  The first section reports that the ratio of assets to liabilities for the sample of 126 plans declined from 75% to 73% in 2012 (for the Florida Retirement System, from 86.9% to 86.4%).  The second section shifts from a snapshot of funded status to sponsors’ required payment. The update shows that the ARC -- at 15.3% of payroll -- and the percent of ARC paid -- at 80% -- were virtually unchanged between 2011 and 2012. These funded ratios and ARCs, however, are based on promised benefits discounted by the expected long-term yield on plan assets, roughly 8%, so the third section revalues liabilities using the riskless rate, as advocated by many economists, for reporting purposes. The fourth section provides a preview of funding under GASB’s new provisions and compares the new GASB-funded ratios with those produced by the current standards. The fifth section projects funded ratios for the sample plans for 2013–16 under three alternative economic scenarios and under both the old and new GASB standards. The final section concludes that while the shift in GASB standards will make monitoring funding more difficult, the public pension landscape should improve over the next few years if financial markets do not collapse again. In 2016, assuming a healthy stock market, plans should be slightly more than 80% funded using either the market or actuarial value of assets. 
4.   WHEN INSULTS HAD CLASS: He has no enemies, but is intensely disliked by his friends...   Oscar Wilde

5.   PHILOSOPHY OF AMBIGUITY:  Why do they lock gas station toilets? Are they afraid someone will break-in and clean them?
6.   TOMORROW IN HISTORY: In 1776…[NEED we tell you?]
7.  KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers.  Subject to editorial discretion, we may print them.  Rest assured that we will not publish any names as referring sources. 
8. PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at



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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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