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SEPTEMBER 15, 2013

LOUISIANA ASSOCIATION OF PUBLIC RETIREMENT SYSTEMS. Mortality Tables. Shelley R. Johnson. SEPTEMBER 15, 2013. Lousiana Law. Boards of Trustees are responsible for selecting actuarial assumptions.

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SEPTEMBER 15, 2013

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  1. LOUISIANA ASSOCIATION OF PUBLIC RETIREMENT SYSTEMS Mortality Tables Shelley R. Johnson SEPTEMBER 15, 2013

  2. Lousiana Law Boards of Trustees are responsible for selecting actuarial assumptions. Boards rely on actuaries to make appropriate recommendations, but ultimate decision lies with the Board. PRSAC, by adopting a valuation, is in effect adopting valuation assumptions.

  3. Actuarial Assumptions Assumptions used to determine actuarial costs and funding requirements: • Discount Rate • Salary Scale • Mortality Table • Disability Rates • Withdrawal Rates • Retirement/DROP Rates • Other Demographic Assumptions (marriage, etc)

  4. Mortality Assumption Used in nearly every actuarial calculation for every member of the plan: • Pre-retirement mortality What is the probability a member will survive until retirement? What is the probability a survivor benefit will be paid? • Inactive members Regular Retirees – How long will a regular retiree receive benefit? Disability Retirees – How long will a disabled retiree receive benefit?

  5. Measurements Impacted by the Mortality Assumptions • Employer Contribution • Normal Cost • Actuarial Accrued Liability • Funded Ratio • Cost of COLA’s • Cost to purchase/transfer service • Actuarially reduced benefits: • Initial Benefit Option (IBO), Initial Lump Sum Benefit (ILSB) • Early Retirement, Retirement Options

  6. Responsibility of the Actuary • Actuarial Standards Board issues Actuarial Standards of Practice (ASOPs) to provide guidance to actuaries when performing professional services. • It is the professional responsibility of an Actuary to observe applicable standards of practice or be prepared to justify use of other procedures. • There are currently 47 ASOPs, many of which are specific to actuarial services regarding pension plans.

  7. ASOP Statement 35: Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations • Requires actuaries to use professional judgment to estimate possible future outcomes based on past experience and future expectations • Select reasonable assumptions based the application of that professional judgment • 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

  8. Actuarial Standard of Practice Statement 35 • Factors to consider when choosing mortality assumptions: • Possible use of different mortality assumptions before and after retirement • Use of different mortality table for disabled lives • Use of different mortality tables for different participant subgroups and beneficiaries. • Likelihood and extent of mortality improvement in the future

  9. Actuarial Standard of Practice Statement 35 • Disclosure Requirements: • Mortality table(s) used • Does it include assumptions for mortality improvement? • Sufficient explanation for another actuary to understand

  10. Review of Experience • If credible, analysis of actual plan mortality experience versus assumed experience may be conducted and documented regularly. • If credible experience cannot be obtained for a plan, a comparison of the mortality assumptions to past experience may not be useful. • Actuary may choose to rely on a standard table or table developed from credible experience for a similar group

  11. Mortality Improvement • Mortality rates consistently have improved in the past. • Data from experience studies may be considered when determining the likelihood and extent of future mortality improvement. • Past experience indicates mortality rates have continued to improve. • Many unknowns, such as: • Whether there is a limit to mortality improvements • How the rate of mortality improvement is expected to change

  12. Mortality Improvement • Some experts expect a continued long term trend of mortality improvements • Others argue mortality improvement is limited, given other trends (such as increased obesity, increases in sedentary lifestyles, increases in drug resistant bacteria, and the possibility of pandemic diseases) • Future mortality trends is the subject of extensive study and debate • A published mortality table without improvement can be used if it reflects expected mortality in the actuary’s professional judgment • Necessary to establish a rationale for selecting a particular improvement scale or method, or for not selecting one

  13. Mortality Improvement • Static Projection • A projection of the base mortality rates to a specific date that results in a table applied to all durations after the measurement date. • Example • Suppose a15-year static projection is used. • Consider a member currently age 40 • The mortality rate at age 50 will be the current age 50 rate with 15 years of projected mortality improvement applied. • For the same person, the mortality rate at age 65 will be the current age 65 rate, also with 15 years of projected improvement in mortality.

  14. Mortality Improvement • Static Projection • May overstate liability for some participants and understate it for others. • May be less accurate for each individual participant, but may produce a reasonable result for a larger diverse group.

  15. Mortality Improvement • Generational projection • Generates a unique table for each year of birth. • Example • Consider a member currently age 40 • The mortality rate at age 50 for someone now age 40 will be the current age 50 rate with 10 years of projection applied. • For the same person, the mortality rate at age 65 will be the current age 65 rate with 25 years of projection.

  16. Static vs Generational • Generational Projection • Possibly theoretically more valid, more refined • Significantly more complicated • More costly to administer (for actuaries and plans) • Little agreement on exactly what will happen with future mortality. • May add administrative cost without providing corresponding improvement in results.

  17. Mortality Improvement Scales for Static Projections • Mortality Improvement Scale AA • Developed in the mid-90’s • Widely used for projecting rates beyond 2000 • Mortality Improvement Scale BB • Recently introduced (Sept 2012) • Determined based on more recent data and new techniques • Designed to be used with generational projections, but can be used for static projections • Actuaries continue to refine projection methods

  18. Questions?

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