New actuarial standard could have disclosure implications

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ST. LOUIS – Issuers may have to consider whether to make more robust disclosures about their pension liabilities as a result of actuarial standards effective later this year, a bond insurer actuary told public officials Sunday.

Les Richmond, an actuary and vice president at bond insurer Build America Mutual, made that suggestion during a session on pension de-risking at the Government Finance Officers Association’s annual conference. His comment stemmed from the fact that the Actuarial Standards Board has approved an Actuarial Standard of Practice (ASOP) known as ASOP 51 which becomes effective for work done on or after Nov. 1. Richmond told issuers present at the session that they’ll be receiving more information from their actuaries than they previously did, meaning they may want to think about disclosing more.

Titled “Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions,” ASOP 51 states that actuaries should “identify risks that, in the actuary’s professional judgment, may reasonably be anticipated to significantly affect the plan’s future financial condition.” Among those things are investment risk, interest rate risk, and demographic risk. Richmond said he didn’t want to draw a conclusion about whether being armed with this new information from their actuaries would require municipalities to make new or updated disclosures to bondholders, but said he thought issuers should be having that conversation.

“I think about pension risk pretty much all day long,” said Richmond, who performs an analysis of that risk when BAM considers whether to insure a bond issuance. Pension risk is a major consideration for bond investors and insurers because an overly-burdensome pension liability can eventually conflict with a government’s ability to pay debt service, and can lead to downgrades and even bankruptcy in some cases. Richmond pointed out that other stakeholders think about pension risk differently. For taxpayers it means the possibility of increased taxes or reduced services, for pensioners it means the risk of reduced benefits, and for state and local leaders it means service reductions, budget problems, and a negative perception of their performance.

After Richmond discussed risk and ASOP 51, public officials discussed steps that they were taking to “de-risk” their pensions. Mark Whelan, the chief financial officer at the Kentucky Teachers’ Retirement System (TRS), described a variety of changes his underfunded system is making to mitigate pension risk. Currently only 56.4% funded, the state paid to the TRS the contributions recommended by the actuary in fiscal years 2017 and 2018. It also enacted a budget to do so for fiscal years 2019 and 2020, Whelan said.

Whelan added that Kentucky is committed to moving TRS to a level dollar funding schedule by 2021. In that scenario, which works much like a home mortgage, payments would rise in the short-term but long-term costs would be reduced. The plan has its critics in Kentucky, where some say the up-front pressures it creates would create the need for overly harsh austerity measures.

Douglas J. Fiddler, a senior actuary at South Dakota Retirement System, described how his system had put in a new benefit structure for hires after June 30, 2017. The state also enacted COLA changes that same year, Fiddler said. He told the gathered finance officers that he considers it key to plan for crisis conditions and to understand that it is important to maintain flexibility in the face of unpredictable market conditions.

“Key to us is that we’re staying within the resources of the plan,” Fiddler said. “We think we’re in a great spot right now.”

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Municipal disclosure Bond insurance Pension reform Public pensions GFOA Build America Mutual