USA: What should you ask your actuary?

As trustees or staff members of a pension plan, you probably interact with actuaries several times a year.

The actuaries rely on the information you provide to analyze the financial health of your plans and identify the biggest financial risks to your system. As an insider, you are privy to the workings of your system better than outsiders, so the more detailed information you share with the actuaries, the more meaningful their analysis will be.

In order to prepare an annual valuation of your plan, the actuaries rely on you to share information about the demographics of your covered members, your benefits structure and workforce trends, such as anticipated hiring surges or hiring freezes, and contribution levels. On top of that, they overlay other information such as the expected rate of inflation, trends in interest rates and investment returns to build assumptions about the trajectory of your plans.

To ensure that your interactions with actuaries help you make the best decisions about managing the plans, we believe that it’s important that you not only share information with your actuaries, but also ask questions. We’ve developed a list of questions to get you started. We hope that our list along with some ideas of areas to consider will prompt you to think of other questions.

For example, if you know that there is a hiring freeze, ask how that will impact your pension plan’s funding status. If there are changes to a memorandum of understanding that may affect salaries or hours, ask how those too could affect your pension plan. Be sure also to ask about how changes in other employee benefits such as postemployment health benefits could indirectly affect the plan.  

You might find it easiest to start by asking the actuaries about the key assumptions they have built into their models and how they arrived at them. Ask about the degree that each assumption is based on the experience and characteristics of your system. For example, the extent to which your mortality assumptions are set on your population varies significantly by system, ranging from being based solely on a plan’s experience to being based entirely on the general population without reflecting your plan’s demographics and experience.

To get more value out of the work your actuary does, we also suggest you ask about the recent experience of the plan. How has your plan’s recent experience compared with the assumptions? And how has this affected your liabilities and contribution requirements?

Also inquire about the actuarial projections for your plan. What is the expected trajectory of your plan’s funding status and contribution requirements assuming your plan meets all the assumptions? A good follow-up question is how could these change if the experience deviates from these assumptions?

You may also find it helpful to ask the actuaries to separately discuss the legacy obligations of the system and the ongoing risks to better understand the trajectory of the system.

Don’t hesitate to interrupt your actuary’s presentations to ask him or her to explain actuarial terms that you don’t understand. Not only will this help you understand the actuary, but it will also help your actuary understand what information is useful to you as the fiduciaries and stewards of the system.

Some sample questions:

  • To what degree are each of the assumptions used in the valuation set by the experience of our system?
  • What has been the recent experience compared to the assumptions and how have these affected our funded status and contribution requirements? Which assumptions are the most significant?
  • What is the projected status of the system in the long term? What are the biggest risks that could result in these projections changing?
  • What are the anticipated benefit payouts for the next five years? And what is the projected net cash flow for each of these years, both in dollars and as a percentage of our assets?
  • What actuarial practices, such as audits or experience studies should we consider  that we aren’t already doing?
  • What are the advantages and disadvantages of lowering the expected rate of return on investments while keeping the existing asset allocation intact?
  • Are there any ways that we can preserve the benefits while lowering costs or reducing risk?
  • How should we think about the existing or legacy liabilities of the plan and the ongoing risks of the plan?

Asking questions will strengthen your relationship with the actuary and help both of you deepen your understanding of your plan.

By Elizabeth Wiley

Consulting Actuary, Cheiron