4. Actuarial Credentials Cheat Sheet
There are several different actuarial societies and organizations from which a U.S.
actuary may hold a credential:
• Society of Actuaries (SOA)
• Casualty Actuarial Society (CAS)
• Joint Board for the Enrollment of Actuaries (JBEA)
• American Academy of Actuaries (AAA)
• Conference of Consulting Actuaries (CCA)
• American Society of Pension Professionals and Actuaries (ASPPA)
U.S. pension actuaries typically hold one of more of the following designations:
• FSA – Fellow of the Society of Actuaries
• ASA – Associate of the Society of Actuaries
• MAAA – Member of the American Academy of Actuaries
• EA – Enrolled Actuary
• FCA – Fellow of the Conference of Consulting Actuaries
• FSPA - Fellow, Society of Pension Actuaries
• MSPA - Member, Society of Pension Actuaries
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5. Role of the Enrolled Actuary
• What is an enrolled actuary?
• Any individual who has satisfied the qualifications of the Joint Board for the Enrollment
of Actuaries (JBEA) and has been approved by the Joint Board to perform actuarial
services under the Employee Retirement Income Security Act (ERISA) of 1974
– Actuarial services is defined by the JBEA as “performance of actuarial valuations and
preparation of any actuarial valuation reports”
• How can I find out whether a practitioner is an enrolled actuary in good
standing with the Joint Board?
• Review the roster of enrolled actuaries in active status at:
www.irs.gov/PUP/taxpros/Active%20EA%20Roster.pdf
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6. Role of the Enrolled Actuary
U.S. Qualified Defined Benefit Plans must meet certain criteria to
maintain their qualified status
An EA is needed to meet some of these criteria, for example -
• Internal Revenue Code (IRC) section 412 – Minimum Funding Standards
– An enrolled actuary must certify the minimum required contribution for a plan for a plan year
• Internal Revenue Code (IRC) sections 432/436 – Actuarial Zone Certification for
Multiemployer Plans and Funding-Based Limits on Benefits and Benefit Accruals
Under Single-Employer Plans
– An enrolled actuary must certify to the funded status of a plan for a plan year which will
govern how the plan is operated for such plan year
• An EA must sign Schedule SB/MB of Form 5500 setting out the plan's funded
status
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7. Role of the Enrolled Actuary
• Some other relevant IRC sections
• 404 Deductible employer contributions to a deferred-payment plan
• 412 Minimum funding standards
• 413 Collectively bargained plans, etc.
• 418 Multiemployer plan reorganization rules
• 430 Minimum funding requirements for single-employer defined benefit
pension plans
• 431 Minimum funding requirements for multiemployer defined benefit
plans
• 432 Additional funding rules for multiemployer plans in endangered status
or critical status
• 436 Funding-based limits on benefits and benefit accruals under single-employer
plans
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9. Actuarial Standards of Practice (ASOPs)
• Enrolled Actuaries must ensure they follow ASOPs pertaining to
pension plans as issued by the Actuarial Standards Board (ASB)
• To name a few….
• ASOP 4 – Measuring Pension Obligations and Determining Pension Plan Costs or
Contributions
• ASOP 27 – Selection of Economic Assumptions for Measuring Pension Obligations
• ASOP 35 – Selection of Demographic Assumptions and other Noneconomic
Assumptions for Measuring Pension Obligations
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10. ASOP 4 – Measuring Pension Obligations
The actuary may be required to make judgments or recommendations on
the choice of actuarial assumptions, actuarial cost methods, asset
valuation methods, and amortization methods
• The actuary may have the responsibility and authority to select some or
all assumptions
or
• The actuary may be asked to advise the individuals who have that
responsibility and authority
or
• The actuary may perform actuarial calculations using assumptions or
methods prescribed by applicable law or selected by others
ASOP No. 4 addresses actuarial cost methods and provides guidance for
coordinating and integrating all of these elements of an actuarial valuation
of a plan.
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11. Actuarial Assumptions
Actuary’s best estimate
of occurrence of future
events and those
prescribed
Reflects sponsor’s
knowledge of special
situations
Reflects past
experience
Used to determine
funding and accounting
requirements
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12. Actuarial Assumptions
• Pension obligation values incorporate assumptions about pension
payment commencement, duration, and amount
• They also require discount rates to convert future expected payments
into present values
Economic assumptions are covered under ASOP No. 27
Noneconomic assumptions are covered under ASOP No. 35
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13. ASOP 27 - Economic Assumptions
• The actuary should consider the following factors when identifying the
types of economic assumptions to use for a specific measurement:
– the purpose of the measurement
– the characteristics of the obligation to be measured
– materiality of the assumption to the measurement
• Each economic assumption should be consistent with every other
economic assumption for the measurement period
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14. ASOP 27 - Economic Assumptions
Some examples of economic assumptions that affect the measurement of pension
obligations are the following:
Discount rate – rate used to calculate the present value of expected future plan
payments, this may be a single rate or a series of rates
Inflation rate – general economic inflation, defined as price changes over the whole
of the economy
Investment return – anticipated returns on the plan’s current and, if appropriate for
the measurement, future assets
Compensation increase – assumed year-to-year change in compensation, generally,
a participant’s compensation will increase over the long term in accordance with
inflation, productivity growth and merit increases
14
15. ASOP 35 - Demographic Assumptions
• The actuary should use professional judgment to estimate possible
future outcomes based on past experience and future expectations
• Reasonable demographic assumptions based on the particular
characteristics of the defined benefit plan should be selected
• A reasonable assumption is one that is expected to appropriately model
the contingency being measured and is not anticipated to produce
significant cumulative actuarial gains or losses over the measurement
period
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16. ASOP 35 - Demographic Assumptions
Some examples of demographic assumptions that affect the measurement of
pension obligations are the following:
Retirement rates – probability that a participant will retire at any given age once
eligible to do so under the plan provisions
Termination rates – probability that a participant will terminate employment at any
given age prior to becoming eligible to retire under the plan provisions
Mortality rates – probability that a participant will die at any given age
Optional Form of Benefit Election rates – probability that a participant will elect a
specific form of payment upon commencement of benefit from the plan
Input from the plan sponsor is critical in helping to set these assumptions
e.g., the introduction of an early retirement subsidy could influence the plan’s
incidence of retirement
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17. Purpose of Experience Studies
• Comparison of actual plan experience with actuarial assumptions
• Generally performed every 3 to 5 years
• Watch for trends (e.g. improving mortality, changes in retirement
patterns)
• Adjust for special events which occurred during investigation period
(e.g. early retirement windows/reduction in force)
• Modify assumptions as needed
Auditors have been asking more frequently for the basis of demographic
assumptions and specifically whether and when an experience study
has been done
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18. Effect on Liabilities and Contributions
Due to Changes in Major Assumptions
Assumption Action Usual Liability Effect
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Discount Rate
Inflation Rate
Retirement Rate Retire younger
Turnover Rate More terminations
20. Introduction to Pension Funding
Governed by laws in the Internal Revenue Code (IRC) which determine
the annual minimum required contribution and maximum tax-deductible
contribution
• Pre-funding required under IRC to secure benefits and maintain a US tax-qualified
plan status (IRC 430 and IRC 431)
• Maximum tax-deductible limit to prevent the “pension piggy bank” (IRC 404)
Actuarial method and certain assumptions prescribed by IRC
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21. Introduction to Pension Funding
The Pension Protection Act of 2006 (PPA) was signed into law on
August 17, 2006
• Most comprehensive reform of pension laws since the enactment of
ERISA
• Designed to increase the minimum funding requirements and
strengthen the pension insurance system (PBGC)
• Effective for plan years beginning in 2008
• Changed the landscape of funding rules
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22. Key Definitions/Terms
Actuarial Accrued Liability (AAL): present value of a plan’s accrued benefits based on the plan’s
funding method
Funding Target (FT): mandated AAL for single employer plans
Normal Cost (NC): present value of benefits expected to accrue during the plan year based on
the plan’s funding method.
Target Normal Cost (TNC): NC for single employer plans using mandated funding method.
– Includes effect of expected increases in compensation and estimated expenses during the
coming year
Actuarial Value of Assets (AVA):
• Market Value of Assets (MVA) unless averaging elected
• Single Employer: Averaging up to 24 months; must fall within a corridor of 90% to 110% of MVA
• Multiemployer: Averaging up to 5 years; must fall within a corridor of 80% to 120% of MVA
Funding Shortfall: excess, if any, of the funding target over the value of plan assets as of the
valuation date
22
23. Key Definitions/Terms (continued)
Yield Curve: Each month the IRS publishes its yield curve, segment rates,
and 24-month average segment rates based on yields of high quality corporate
bonds rated A or better
– Segment rates are the average of spot rates for the first 5 years, next 15 years, and
after 20 years
– Can elect to use full yield curve (without 24 month average)
Effective interest rate: single interest rate that produces the same funding target as
that produced in the valuation using segment rates or full yield curve
23
24. Funding Comparison
Assumption
& Methods
Single Employer Multiemployer
Interest Mandated: Segment Rate or
Yield Curve
Actuary’s Assumption: Long term
expected return on plan assets
Mortality Mandated: Generational/Static
(can use plan specific)
Actuary’s Assumption
Funding Method Mandated Varies
Asset Method Up to 24 month averaging with
90%-110% corridor
Up to 5 year smoothing with 80% -
120% corridor
Lump Sum Interest Same as funding Actuary’s Assumption
Amortization Period 7 years 10 or 15 years depending on type
of base (can have extensions)
24
25. Key Elements of Funding Rules
Single Employer Multiemployer
Minimum contribution Minimum contribution
Maximum contribution Maximum contribution
“At-Risk” Status Reorganization Status
AFTAP Certification Actuarial Certification
Benefit Limitations Zone Statuses
25
26. Single Employer Funding
Minimum Required Contributions (MRC)
• Minimum contribution is the sum of:
– Target normal cost : funding future liabilities year by year
– Shortfall amortization charge (seven-year amortization): funding past liabilities
• If asset value exceeds funding target, the target normal cost will be reduced by this
excess
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27. Single Employer Funding
Minimum Required Contributions (MRC) – Timing
• Quarterly Installments
– Required if plan is less than 100% funded
– Each required quarterly installment equals 25% of the lesser of A and B:
A = 90% of the MRC for the current plan year
B = 100% of the MRC for the prior plan year
– Installments for a calendar plan year are due by April 15th, July 15th, and October
15th of the current year and January 15th of the following year
• Final Installment
– Due no later than September 15th following the end of the plan year
– Remainder of MRC not paid via quarterly installments
27
28. Single Employer Funding
Maximum Tax-Deductible Contributions
• Amount to bring assets up to funding target, plus “cushion”
– 50% of funding target
– Expected increase in funding target for:
• Salary increases in pay related plan
• Benefit increases in non-pay related plan
• Increases in maximum benefit and compensation limits
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29. Single Employer Funding
At-Risk Plans
• Plan is deemed “at-risk” if the funded status for the preceding year falls below certain
thresholds
• Must use the “at-risk” assumptions for valuation
– Assume employees eligible to retire in next 10 years will retire at earliest possible
date and elect most valuable option
• Results in higher minimum required contribution
– Goal is to get the plan’s funded status up more quickly
• At-risk status of plan must be disclosed in Annual Funding Notice
• Funding of deferred compensation plans during periods when the pension plan is
considered “at-risk” results in adverse tax consequences to deferred compensation
plan participants
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30. Single Employer Funding
AFTAP Certification
• Adjusted Funding Target Attainment Percentage (AFTAP) is generally the ratio of plan
assets to the funding target
• IRC Section 436 places restrictions on certain benefits when a plan’s AFTAP falls below
certain thresholds
Condition Benefits Restricted
AFTAP 80% Amendments that improve benefits cannot take effect
unless plan sponsor makes a contribution to bring the
AFTAP back up to 80% after the amendment
80% AFTAP 60% Accelerated benefit distributions (i.e. lump sum payments)
are partially restricted
AFTAP 60% Accelerated benefit distributions (i.e. lump sum payments)
are fully restricted
Benefit accruals are frozen
Shutdown benefits cannot be paid
• Each year the plan’s enrolled actuary must sign an AFTAP certification which determines
whether any benefit restrictions apply to the plan year
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31. Multiemployer Funding
Minimum Required Contributions
Minimum Required Contribution = Charges - Credits
• Charges: Credits:
Funding Deficiency Credit Balance
+ Normal Cost + Amortization Credits
+ Amortization Charges + Full Funding Credits
+ Interest to end of year + Interest to end of year
• For plans in critical status (not endangered), excise taxes waived in event of
funding deficiency
• Shortfall Funding Method - Multiemployer plans generally cannot assess
employers for additional contributions to meet minimum funding requirement.
Adoption of shortfall method is a funding method change.
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32. Multiemployer Funding
Maximum Tax Deductible Contributions
Maximum Tax Deductible Contribution =
1) Normal Cost + 10 year Amortization of Unfunded AAL.
2) Full Funding Limit = Greater of RPA and ERISA Full Funding Limits
3) Lesser of 1 and 2
4) 140% RPA Unfunded Current Liability, not less than MRC
5) Greater of 3 and 4
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33. Multiemployer Funding
Reorganization Status
Reorganization Status
• Definition of reorganization: Vested Benefit Charge Net Charge to FSA
– Vested Benefit Charge = 10 year amortization of unfunded pays status benefits +
25 year amortization of non-pay status benefits
• apply assets to pay status benefits first
• Consequences of Reorganization
– Minimum Contribution Requirements
– Potential reductions in vested benefits
– Post-PPA ’06: projected insolvency determination every 5 years
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34. Multiemployer Actuarial Certification
Under IRC 432, fund actuary is required to certify annually to a
multiemployer plan’s zone status by the 90th day of plan year.
• Not Critical or Endangered
• No Waivers for MRC Green Zone
• Endangered/Seriously Endangered
• Funding Improvement Plan Yellow Zone
• Critical/Seriously Critical
• Rehabilitation Plan Red Zone
34
35. Multiemployer Funding
Actuarial Certification
Actuarial Certification is based on projections using:
• Liabilities from most recent valuations completed (prior
valuation results) reflecting any significant changes that have
occurred during the year
• Current asset information
• Projected Industry Activity from Trustees
• Contribution rates and benefit accruals under current Collective
Bargaining Agreements (CBAs)/Rehabilitation Plan/Funding
Improvement Plan
Funding percentages based on Unit Credit
35
36. Multiemployer Funding
Actuarial Certification
Red Zone (Critical Status):
I. Funded % less than 65% AND
(MVA + contributions over next 7 years)
(benefits and administrative expenses over next 7 years)
OR
II. Projected to have funding deficiency within 4 years
(5 years if Funded % = 65%)
OR
III. (Normal Cost + interest on unfunded liability) contributions AND
PV inactive benefits PV active benefits AND
Projected to have funding deficiency within 5 years
OR
IV. (MVA + PV 5 years of contributions)
(PV 5 years of benefits + administrative expenses)
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37. Multiemployer Funding
Actuarial Certification
Yellow Zone (Endangered Status):
Not in Critical Status and
I. Funded % 80%
OR
II. Expected to have funding deficiency within 7 plan years
Seriously Endangered Status:
Meets both conditions I. and II. for Endangered Status
37
38. Multiemployer Funding
Zone Statuses
Red Zone (Critical Status):
• Automatic removal of non-increasing annuity forms (lump sums)
with exception of corrective retroactive payment
• Adjustable Benefits – Trustees can remove benefits otherwise
protected under 411(d) but cannot :
– Change normal retirement age / Reduce normal retirement benefit
– For retirees in pay status, benefits payable based on amendments in
effect for less than 5 years may be adjusted, but only after retirees
have received required notification of Actuarial Certification of initial
year of Critical Status
– Limitation on reduction to future accruals under default schedule –
accrual rate cannot be less than smaller of:
– Monthly normal retirement benefit equal to 1% of contributions or
– Pre-Rehabilitation Plan accrual rate
38
39. Multiemployer Funding
Zone Statuses
Yellow Zone (Endangered Status):
• Can reduce future benefits
• Can reduce/ remove unprotected benefits for those not currently in
receipt (always an option)
• No plan amendments increasing liabilities by: increasing benefits,
changing accrual rates or accelerating vesting schedule
– Amendments permitted if actuary certifies:
i) amendment consistent with Funding Improvement Plan and
ii) additional contributions were made to pay for cost
39
41. Form 5500 – Actuarial Report
The plan’s enrolled actuary must complete the Schedule SB / MB with
attachments for a qualified defined benefit plans which summarizes
actuarial results
Schedule SB
• Single employer and multiple employer plans
Schedule MB
• Multiemployer plans
• Report progress of funding improvement /rehabilitation plan
41
42. ERISA 104(d) Notice (Multiemployer)
Summary of Plan Information for Employers and Unions:
Plan must provide report to each union and contributing employer:
Description of contribution and benefit schedules
Information reported on the Schedule R of the Form 5500
Endangered or Critical Status Information
Notice of right to copy of Form 5500
Summary plan description
Summary of any material modifications
42
43. PBGC – Annual Premium Filings
PBGC is the insurance agency for defined benefit pension established in 1974.
Separate trusts for single and multiemployer plans.
Single Employer Plans Multiemployer Plans
Year Flat Rate Variable Rate Flat Rate
43
Premium
(Per Participant)
Premium
(% of UVB)
Cap
(Per Part.)
Premium
(Per Participant)
2016* $64.00 2.9% $500 $12.00
2015* $57.00 2.4% $412 $12.00
2014 $49.00 1.4% $412 $12.00
Select Historical Premiums
2007 $31.00 0.9% -- $8.00
2005 $19.00 0.9% -- $2.60
1984 $2.60 -- -- $1.40
1974 $1.00 -- -- $0.50
* Subject to indexing
44. PBGC – Coverage
Coverage for basic benefits at normal retirement age, most early retirement
benefits, annuity benefits for survivors of plan participants, and disability benefits.
Maximum monthly benefit guarantee varies by age and form of payment. Varies
by years of service for multiemployer plans.
Single Employer Plans Multiemployer Plans*
Year Maximum Monthly Guaranteed Benefits
2014 $4,843.18 $1,072.50
Select Historical Maximum Monthly Guaranteed Benefits
2007 $4,125.00 $487.50
2005 $3,698.86 $487.50
1984 $2,556.82 $487.50
1980 $2,164.77 $487.50
*100% of first $11/month per year of service, plus 75% of next $33/month per year of service
with a maximum of $35.75/month.
44
45. PBGC Filing Requirements – 4010 Filing
• An FTAP that is less than 80% for any plan sponsored by the Company
triggers an ERISA §4010 filing for the plan year
• Exempt from filing if aggregated unfunded liability is less than $15M
45
46. Notices to Participants – Annual Funding Notices
PPA requires the administrator of a ALL defined benefit plan that is
insured by the PBGC to provide an annual notice of plan funding to all
participants and beneficiaries under the plan
• Provided to active participants, current retirees, beneficiaries of
deceased retirees, and terminated participants with a vested right
to future benefits
• Provided to all labor unions representing any participant or
beneficiary
• Provided no later than 120 days after the end of the plan year,
which is April 30th for plans with a calendar year plan year
• Includes information about the Plan’s assets and liabilities, how
Plan assets are allocated among different categories of
investments, the Company’s investment and funding policies, and
participant rights and protections
46
48. Funding Relief
Effective January 1, 2012 the Moving Ahead for Progress in the 21st
Century Act (MAP-21) added collars to segment rates
– Based on 25 year average of each of the segment rates as of September 30 of the
preceding calendar year
• Collar is based on the valuation year
Valuation Year Min Max
2012 90% 110%
2013 85% 115%
2014 80% 120%
2015 75% 125%
2016+ 70% 130%
• Only applies to the minimum contribution, FTAP and AFTAP
48
49. Funding Relief
The Highway and Transportation Funding Act (HATFA) was signed into law
on August 8, 2014
– The 90 to 110% corridor under MAP-21 was extended through 2017, with the 5%
adjustments beginning in 2018
Plan Year
Beginning MAP-21 HATFA
2012 90 to 110%
90 to 110%
2013 85 to 115%
2014 80 to 120%
2015 75 to 125%
2016
2017
2018 85 to 115%
70 to 130%
2019 80 to 120%
2020 75 to 125%
2021 and later 70 to 130%
Plan sponsors are permitted to delay using the new rates to 2014 plan years to
avoid revising valuation work and plan operations during 2013
As with the original MAP-21 choices, employers are permitted to limit the delay
to only section 436 benefit restrictions
49
50. Funding Relief
Funding relief and the Annual Funding Notice (AFN)
• MAP-21 Supplement
• Required when
– A plan’s funded ratio without regard to MAP-21 is less than 95%, and
– Funding shortfall is greater than $500,000, and
– There are at least 50 participants in the plan
• Not required for plan years beginning on or after January 1, 2015
• Supplement shows the plan’s MRC and funded status without regard
to MAP-21
• DOL issued Field Assistance Bulletin (FAB) No. 2013-11 on March 8,
2013 containing a model MAP-21 Supplement
No guidance has been issued for HATFA yet, expectation is that supplement will be
required beyond 2015 and model language will be updated to cover HATFA
50
51. Mortality Table Update
Mortality assumption used to determine how long plan participants are
expected to live and collect their pension. Also used to determine the value
of lump sum payments.
Society of Actuaries (SOA) studies US mortality trends and develops tables
for pension plan actuarial valuations
SOA has been working on updated tables for uninsured pension plan
experience since 2009
Current IRS prescribed mortality table uses 2000 as the base year with
projected improvements
51
52. Mortality Table Update
RP-2014 and MP-2014 Background
Current study used participant data for years 2004 through 2008
• Over 10.5 million life-years of exposure
• Over 220,000 deaths
• Results of study projected to 2014 based on observed rates of annual
improvement
Study also analyzed improvement in mortality over time
• Finds that mortality is improving faster than expected based on prior
studies
• Finds that rates of improvement are accelerating
e.g., people now age 50 are expected to have more improvement after
age 60 than a person now age 60
52
53. Mortality Table Update
Impact and Timing
New tables will generally increase pension liabilities by 6-10%
Final tables expected to be published by the end of October 2014
• Audit firms are likely to expect/question/push for adoption for 2014
year-end disclosure
• IRS unlikely to adopt new table for funding until 2016, due to drag in
required regulatory process
• New table will likely take effect for qualified plan administration
(417(e) lump sums) at same time as funding
53
54. PPA Sunset – Multiemployer Plans
PPA is set to sunset at the end of 2014
Written into the act is sunset provisions which state that plans operating
under a rehabilitation or funding improvement plan upon expiration of PPA
will continue to do so upon the sunset of the law.
1 year extension has been included as part of legislation considered
during 2014, but nothing passed. Currently unclear whether Congress will
act before the end of 2014.
54
55. NCCMP Proposal
NCCMP “Solutions, Not Bailouts”
• itemizes the severe funding deficiencies of multiemployer plans and the
multiemployer PBGC fund that insures these plans
• outlines several potential solutions including encouraging plan mergers,
alternate plan design…
• but most controversial the ability to reduce the benefits for those
currently in receipt of benefits
55
57. Presenters
José M. Jara, JD, LLM Shirley Cheung, FSA, EA, MAAA
Principal, National Practice Leader Multiemployer Plans Director, Retirement
Wealth Practice Wealth Practice
Buck Consultants, LLC, A Xerox Company Buck Consultants, LLC, A Xerox Company
Jose.Jara@xerox.com Shirley.Cheung@xerox.com
212.330.1114 212.330.1029
Suzanne Hughes, ASA, EA, MAAA Melissa M. Conklin
Director, Retirement Senior Consultant, Retirement
Wealth Practice Wealth Practice
Buck Consultants, LLC, A Xerox Company Buck Consultants, LLC, A Xerox Company
Suzanne.Hughes@xerox.com Melissa.Conklin@xerox.com
201.902.2615 201.553.6317
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