Do you have the right actuary?

Actuaries are educated and trained to analyze risks and determine the financial consequences of these risks. In the case of defined benefit pension plans, they are trained and have experience in the area of retirement risks such as:

• What is the promised benefit stream (amount and duration) for the expected lifetime of the plan?
• What is the investment return that will be earned on plan assets to help pay for these plan benefits?
• What other critical assumptions are needed to forecast plan liabilities (e.g. salary increase, inflation, turnover, retirement ages, and mortality)?
• What are the minimum, maximum and recommended company contributions?
• What are the accounting costs and liabilities?

Actuaries usually perform an annual actuarial valuation report for a retirement plan and present it to the plan sponsor. For calendar year 2011 plans, the valuation is prepared as of January 1, 2011 and is usually presented to the client in the late summer or fall of 2011. By the time plan sponsors receive their 2011 actuarial valuation report, it will be too late to budget for 2011 plan year unexpected cost and contribution increases that are due in 2012. Unless the volatile investment markets improve during the remainder of 2011, there will be significantly higher costs and contributions in 2012 than there were on 2011. But, most companies don’t know what their 2012 contribution will be based on several different investment returns for the remainder of 2011. Furthermore, most companies may not know of any other risk areas they may be exposed to if liabilities grow at a faster rate than plan assets.

Companies need to receive timely forecasts from their actuaries more than once a year and well after the end of the plan year. It is very important to actively manage the retirement plan to help achieve the short-term and long-term goals of the company. Companies need to be prepared for the risks that market fluctuations, as well as changes to fiscal policy, may have on the plan. Being proactive will help a company reduce exposure to these risks.

There is an excellent white paper on this subject for frozen retirement plans located on this web site’s home page. While this white paper addresses frozen plans, all plans are in the same situation. Chief Financial Officers of all companies want stable and predictable costs, contributions and unfunded liabilities.

If CFOs don’t want surprises, then why don’t companies have more timely communications with their actuary?

• If the actuary is not requesting these timely discussions, then the company has the wrong actuary.
• If the company is not requesting these discussions, because the actuary’s fees are too high, then the company has the wrong actuary.

All actuaries should be able to forecasts costs, contributions and unfunded liabilities for their clients as the investment climate changes throughout the year. The only fee should be the hourly rate for the actuary on the telephone call. All of the results should be shown simultaneously on the company’s computer and the actuary’s computer and all “what if” modeling should be instantaneous. Companies will be glad to have these discussions with their actuary because they are timely, informative and inexpensive. This is the right actuary for every plan sponsor.