1. The Building Blocks of an Actuarial Valuation
LAPERS 2017
The Building Blocks of an Actuarial Valuation
Gregory M. Curran, FCA, MAAA, ASA, EA
Consulting Actuary
G. S. Curran & Company, Ltd.
10555 N. Glenstone Place
Baton Rouge, Louisiana 70810
(225)

2. Points of Discussion Training required to be an actuary
Building an actuarial valuation model

3. Topics Studied By Actuaries
Probability Exam
General probability and statistics
Univariate probability distributions
Multivariate probability distributions
Financial Mathematics
Time value of money/Interest theory
Annuities and cash flows with non-contingent payments
Loans
General cash flows and portfolios
Portfolio Immunization

4. Topics Studied By Actuaries (continued)
Models for Financial Economics
Derivative securities
General properties of options
Binomial Option Pricing Model
Black-Scholes Option Pricing Model
Models for Life Contingencies
Present Value Random Variables
Calculation of insurance premiums
Insurance Reserves
Applying models to pension benefits

5. Topics Studied By Actuaries (continued)
Construction and Evaluation of Actuarial Models
Security Models
Frequency Models
Aggregate Claim Models
Risk Measures
Construction of Empirical Models
Credibility
Simulation

6. Topics Studied By Actuaries (continued)
Required College Coursework
Economics
Corporate Finance
Applied Statistics and Methods

7. In addition to Actuarial Exams and required coursework:
8 Learning Modules on the Fundamentals of Actuarial Practice titled …
Role of the Professional Actuary
Core External Forces
Risk in Actuarial Calculations
Actuarial Solutions
Design and Pricing of Actuarial Solutions
Model Selection and Solution Design
Selecting Assumptions
Monitoring Results

8. Enrolled Actuary Exams – for Pension Actuaries
Mathematics of Compound Interest
Mathematics of Life Contingencies
Demographic Analysis
Exam 2 – Segment F
Actuarial Assumptions
Actuarial Cost Methods
Calculation of Minimum Required Contributions
Calculation of Maximum Deductible Contributions
Exam 2 – Segment L
Covers ERISA and related federal laws

9. Description of Items Needed in Building an Actuarial Valuation Model

10. Building an Actuarial Model
Actuarial valuation software must be set up to include benefit projections for each type of benefit available at future dates along with setting eligibility rules for each benefit.
Withdrawal benefits
Disability benefits
Retirement benefits
DROP or Back-DROP benefits
Survivor benefits

11. Building an Actuarial Model
Build a set of assumptions within the model
Demographic Assumptions
Probabilities/Rates of Withdrawal, Disability, Retirement, DROP Entry
Mortality Tables for actives, retired, and disabled
Rates of remarriage
Probability of service related disability/death
Family Statistics
Percent of members who are married
Percent of members with Children
Average Number of Children
Average Age of Children

12. Building an Actuarial Model (Continued)
Financial assumptions
Valuation Interest Rate/Discount Rate/Assumed Rate of Return
Inflation Assumption
Salary scale assumption
Final average compensation Period
Account for Early Retirement Reductions when not set to be reduced actuarially

13. Building an Actuarial Model (Continued)
Must consider minimum service required for each type of benefit
Vested benefits
Disability benefits
Survivor benefits
Lifetime spousal benefits
Minor child benefits
Retirement benefits

14. Actuarial models include many types of payments like…
Level payment lifetime monthly annuity
Deferred lifetime monthly annuity – payments do not begin until a member reaches a particular age or until a certain number of years have passed
Deferred Lump Sum – Payment of DROP/IBO/Back-DROP lump sums occur after an accumulation period and perhaps an additional service period
Immediate Lump Sum
Geometrically increasing lifetime monthly annuity

15. A few types of annuities:
Life Annuity - Payable for the life of the member
Reversionary Annuity - Payable for the life of a named beneficiary upon death of the member if the beneficiary is alive at the member’s death
Life Annuity (Cease on Remarriage) - Survivor benefits payable until remarriage of the recipient.
Temporary Life Annuity - Payable while alive but only during a specified period.
Period Certain Annuity - Payable for a specified period even if the member dies

16. A few types of annuities (continued):
Certain and Continuous Annuity – Lifetime annuity with a guarantee of payments for a certain period regardless of death
Cash refund annuity – Annuity that pays a designated beneficiary the difference between the cash balance originally annuitized and the sum of annuity payments received prior to death, if any.

17. Special Situations Account for benefit limits
Account for members who are vested but choose to take a refund at termination
Inclusion of average accumulated leave in benefit formulas for systems that allow conversion of unused leave to retirement credit
Do contributions cease for employees who reach 100% accrual?
Does the system receive contributions during DROP period?
Accrual rates that change after reaching a specified period of service

18. Special Situations (Continued)
Option factors needed within the model to account for automatic option 2 benefits to survivors
Different setup for each tier of benefits
May have to separate data into multiple sub-plans with different benefit rules and possibly different assumptions

19. A funding method is needed to determine funding requirements
The funding method determines the annual cost allocations – Normal Cost
The funding method also specifies the method for determining the Unfunded Accrued Liability, if any.
Determining the Unfunded Accrued Liability is separate from determining the annual payments required to pay off the UAL.
Funding methods seek to collect sufficient assets to reach full funding over a particular time frame
Some methods seek to fully fund over the future working lifetime of members
Some set arbitrary periods over which to pay off Unfunded Accrued Liabilities

20. Items considered in determining the minimum actuarially required employer contribution
Normal cost
Payments on any Unfunded Accrued Liabilities
Anticipated administrative costs (unless handled through a change in assumptions)
If not explicitly handled in determining required contributions or implicitly through adjusting assumptions, will affect UAL or NC and be spread over a specified period or future working lifetime of members
Adjustment for employee contributions and other dedicated funds which offset employer contributions

21. Inputs to the valuation process
Data on every member, former member, retiree and beneficiary potentially due payments from the system in the future.
Audited financial statements for the system as of the valuation date with support for certain payable liabilities set up by the auditor.
Administrative questionnaire – information provided by the Director related to the system, Board decisions over the past years, and the membership.

22. Inputs to the valuation process (continued)
Data related special circumstances
Handling of split benefits payable to alternate payees
Annualizing salaries for new hires or individuals who did not work a full year
Handling of members on leave without pay or worker’s compensation as of the valuation date
Reemployed retirees
Offset benefits for disabled members with outside income or financial awards

23. Actuarial Reports
Although the primary purpose of the actuarial valuation is to determine the minimum recommended employer contribution rate, the actuarial report has many additional purposes, including:
Determining rates of return for use in administration of the retirement system
Providing the Board of Trustees with commentary on system risks and funded status
Providing information to the Board and other stakeholders related to the impacts of gains and losses
Discussing the cost and availability of COLAs to system retirees in accordance with the law.

24. Actuarial Reports (Continued)
Providing historical information related to the system’s actuarial funded status
Summarizing statutory changes affecting the retirement system in the most recent legislative year
Describing the system’s census of members, former members due some payment, and retirees
Providing a Summary of Plan Provisions
Providing the actuary’s recommended changes in assumptions and methods
Providing important communications from the actuary to the Board necessary to support upcoming decisions.