Greene Finney Annual Conference May 30, 2019 The Actuarial Process Greene Finney Annual Conference May 30, 2019

Property and Casualty Insurance Areas of Practice Life Insurance Health Insurance Property and Casualty Insurance Retirement 2

Retirement Plan Actuarial Services Defined Benefit Pension Plans (DB Plans) Postretirement Welfare Plans (OPEB) Non-Qualified DB Plans Other 3

DB Plans (Private) – Annual Actuarial Services Annual actuarial valuation for IRS funding purposes FASB ASC 715 valuation and year end disclosure for accounting purposes Benefit calculations and plan administration Non-discrimination testing Cost analysis Plan design analysis Preparation of required government forms (IRS and PBGC) Plan audit support 4

DB Plans (Public) – Annual Actuarial Services Funding valuation Accounting valuation Benefit calculations and plan administration Benefit statements Experience studies Cost analysis Plan design analysis 5

Actuarial Valuation Process Census Data Processing Selection of Assumptions Perform Actuarial Valuations Preparation of Required Calculations and Exhibits Preparation of Actuarial Report 6

Actuarial Valuations – Key Concepts Present value of Future Benefits (PVFB) Project salary and service Actuarial Accrued Liability (AAL), includes: Projected Benefit Obligation (PBO) – FASB 715 Funding Target (FT) – IRS Funding Total Pension Liability (TPL) – GASB 68 Total OPEB Liability (TOL) – GASB 75 Normal Cost (NC), includes: Service Cost (SC) Present value of future normal costs (PVFNC) PVFNC = PVFB – AAL 7

Actuarial Cost Methods Unit Credit Projected Unit Credit Entry Age Other funding methods not commonly used Aggregate Frozen Initial Liability Individual Level Premium 8

Census Data Preparation Annual census data reconciliation Data items collected is dependent on plan design Typical data items include: Basic demographic information (name, gender, DOB, DOH, DOP) Compensation (current and historical) Hours, if applicable (current and historical) Other information (form of payment, spousal information, subdivision, group codes) 9

Example – Census Data Reconciliation Exhibit 10

Actuarial Assumptions Economic Discount rate Expected rate of return Future salary increases Inflation COLA, if applicable Demographic Mortality Retirement Termination Disability Percent Married Form of Payment 11

Actuarial Standards Board Actuarial Standards of Practice (ASOPs) Describe the procedures an actuary should follow Identify what actuary should disclose when communicating results 12

Retirement Related ASOPs ASOP 4 – Measuring Pension Obligations and Determining Pension Plan Costs or Contributions ASOP 6 – Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined ASOP 23 – Data Quality ASOP 27 – Selection of Economic Assumptions for Measuring Pension Obligations ASOP 34 – Actuarial Practice Concerning Retirement Plan Benefits in Domestic Relations Actions ASOP 35 – Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations ASOP 41 – Actuarial Communications ASOP 44 – Selection and Use of Asset Valuation Methods for Pension Valuations ASOP 51 – Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions 13

Overview of Selected ASOPs ASOP 4 – Measure Liabilities, Determine Costs Coordinates other major ASOPs (27,35,44) to integrate all the elements of an actuarial valuation. Outlines issues and recommended practices for an actuarial valuation. ASOP 23 – Data Quality Actuaries not required to audit data. Actuaries are required to assess whether the data is appropriate and sufficient for the assignment. 14

Overview of Selected ASOPs ASOP 27 – Selection of Economic Assumptions Examples: investment return, inflation, compensation increases, etc. Provides guidance to actuaries, not prescriptive. Selecting reasonable assumptions defined by Section 3.6. Reflect actuary’s estimate of future experience. No significant bias (not significantly optimistic or pessimistic). A range can no longer be provided by the actuary. An actuary must recommend a specific value. (September 2013 revision) Prescribed assumptions 15

Overview of Selected ASOPs ASOP 35 – Selection of Demographic Assumptions Examples: mortality rates, termination rates, percent married, etc. Provides guidance to actuaries, not prescriptive. Reflect actuary’s estimate of future experience. Credibility of population when selecting demographic assumptions. Prescribed assumptions 16

Overview of Selected ASOPs ASOP 41 – Actuarial Communications Provides guidance on all necessary disclosure elements Communication is an ongoing and interactive process ASOP 44 – Asset Valuation Methods Provides guidance for selecting appropriate asset valuation method Developing Actuarial Value of Assets 17

Overview of Selected ASOPs ASOP 51 – Assessment and Disclosure of Risks Effective for any work product with a measurement date on or after November 1, 2018. Identify risks to be assessed Investment risk, longevity, contribution risk, etc. Assessment of risk Can be qualitative or quantitative Determine if a detailed risk assessment is significantly beneficial Provide plan maturity measures Ratio of market value of assets to payroll, ratio of retired actuarial accrued liability to total actuarial accrued liability, cash flow measures, etc. Provide relevant historical values 18

Applicable Standards – DB Plans Private Plans Funding rules – IRC and ERISA PBGC Regulations Employer accounting – FASB ASC 715 Plan Accounting – FASB ASC 960 Public Plans Funding rules – State and local law Employer Accounting – GASB 68 Plan Accounting – GASB 67 19

Applicable Standards – OPEB Private Plans Employer accounting – ASC 715 - 60 Public Plans Employer Accounting – GASB 75 Plan Accounting GASB 74 20

Key Actuarial Assumptions Varies depending on standard FT, PBO, TPL, ASC 960 AAL all have different requirements Discount Rate Hot topic in recent years 2014 SOA mortality study Must include mortality improvement Static vs. generational mortality tables Mortality 21

Discount rate definition – ASC 715 Section 44 – The assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates currently published by the Pension Benefit Guaranty Corporation). In making those estimates, employers may also look to rates of return on high‐quality fixed‐income investments currently available and expected to be available during the period to maturity of the pension benefits. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost. Section 44A - Pursuant to paragraph 44, an employer may look to rates of return on high‐quality fixed‐income investments in determining assumed discount rates. The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high‐quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. Notionally, that single amount, the projected benefit obligation, would equal the current market value of a portfolio of high‐quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of the expected future benefit payments. Because cash inflows would equal cash outflows in timing and amount, there would be no reinvestment risk in the yields to maturity of the portfolio. However, in other than a zero coupon portfolio, such as a portfolio of long‐term debt instruments that pay semiannual interest payments or whose maturities do not extend far enough into the future to meet expected benefit payments, the assumed discount rates (the yield to maturity) need to incorporate expected reinvestment rates available in the future. Those rates shall be extrapolated from the existing yield curve at the measurement date. 22

Mortality – ASOP 35 3.5.3 MORTALITY AND MORTALITY IMPROVEMENT The actuary should consider factors such as the following in the selection of mortality and mortality improvement assumptions: a. the possible use of different assumptions before and after retirement (for example, in some small plan cases a reasonable model for mortality may be to assume no mortality before retirement); b. the use of a different assumption for disabled lives, which in turn may depend on the plan’s definition of disability and how it is administered; and c. the use of different assumptions for different participant subgroups and beneficiaries. The actuary should reflect the effect of mortality improvement both before and after the measurement date. With regard to mortality improvement, the actuary should do the following: i. adjust mortality rates to reflect mortality improvement before the measurement date. For example, if the actuary starts with a published mortality table, the mortality rates may need to be adjusted to reflect mortality improvement from the effective date of the table to the measurement date. Such an adjustment is not necessary if, in the actuary’s professional judgment, the published mortality table reflects expected mortality rates as of the measurement date. ii. include an assumption as to expected mortality improvement after the measurement date. This assumption should be disclosed in accordance with section 4.1.1, even if the actuary concludes that an assumption of zero future improvement is reasonable as described in section 3.3.5. Note that the existence of uncertainty about the occurrence or magnitude of future mortality improvement does not by itself mean that an assumption of zero future improvement is a reasonable assumption. 23

Actuarial Report Review FASB ASC 715-30 (Private pension) GASB 75 (Public OPEB) 24