We examine the use of pension expense as an earnings management tool by examining each of the individual components that make up pension expense. Given the complexity and numerous required assumptions and estimations needed to arrive at pension expense, and the difficulty in verifying these items, pensions are a logical area in which one would expect to find earnings management.
COLA Cuts in State/Local Pensions
The Center for Retirement Research at Boston College released a report today detailing Cost-of-Living-Adjustments. What states have reduced them? What states have eliminated them altogether? And what is the legal basis for such cuts? From the CRR:
The brief’s key findings are:
- Since the financial crisis, 17 states have reduced, suspended, or eliminated cost-of-living-adjustments (COLAs) for public employee pensions.
- This response was surprising as current employees and retirees tend to be legally shielded from benefit cuts.
- But the COLA cuts have largely been upheld in the courts under the rationale that – unlike core benefits – they are not part of a contractual right.
- In short, defined benefit promises in the public sector are not as secure as many thought.
Read the full report here.
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Actuarial Standards of Practice Documents: The Complete Collection
Courtesy of the Actuarial Standards Board: Below are all current actuarial standards of practice adopted by the ASB. Note: Each ASOP has been updated to reflect the newly adopted Deviation language effective May 1, 2011. Click here to propose an idea for a Standard.
To obtain a hard copy of any current ASOP, please e-mail asbrequests@actuary.org.
Actuarial Standard of Practice No. 1—Introductory Actuarial Standard of Practice
Actuarial Standard of Practice No. 2—Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity Contracts
Actuarial Standard of Practice No. 3—Continuing Care Retirement Communities
Actuarial Standard of Practice No. 4—Measuring Pension Obligations
Actuarial Standard of Practice No. 4 [Revised]—Measuring Pension Obligations and Determining Pension Plan Costs or Contributions
Actuarial Standard of Practice No. 5—Incurred Health and Disability Claims
Actuarial Standard of Practice No. 6—Measuring Retiree Group Benefit Obligations
Actuarial Standard of Practice No. 6 [Revised]—Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions
Actuarial Standard of Practice No. 7—Analysis of Life, Health, or Property/Casualty Insurer Cash Flows
Actuarial Standard of Practice No. 8—Regulatory Filings for Health Plan Entities
Actuarial Standard of Practice No. 8 [Revised]—Regulatory Filings for Health Benefits, Accident and Health Insurance, and Entities Providing Health Benefits
Actuarial Standard of Practice No. 9—Documentation and Disclosure in Property and Casualty Insurance Ratemaking, Loss Reserving, and Valuations
Actuarial Standard of Practice No. 10—Methods and Assumptions for Use in Life Insurance Company Financial Statements Prepared in Accordance with U.S. GAAP
Actuarial Standard of Practice No. 11—Financial Statement Treatment of Reinsurance Transactions Involving Life or Health Insurance
Actuarial Standard of Practice No. 12—Risk Classification (for All Practice Areas)
Actuarial Standard of Practice No. 13—Trending Procedures in Property/Casualty Insurance
Actuarial Standard of Practice No. 14—When to Do Cash Flow Testing for Life and Health Insurance Companies
Actuarial Standard of Practice No. 15—Dividends for Individual Participating Life Insurance, Annuities, and Disability Insurance
Actuarial Standard of Practice No. 16—Actuarial Practice Concerning Health Maintenance Organizations and Other Managed-Care Health Plans
Actuarial Standard of Practice No. 17—Expert Testimony by Actuaries
Actuarial Standard of Practice No. 18—Long-Term Care Insurance
Actuarial Standard of Practice No. 19—Appraisals of Casualty, Health, and Life Insurance Businesses
Actuarial Standard of Practice No. 20—Discounting of Property/Casualty Unpaid Claim Estimates
Actuarial Standard of Practice No. 21—Responding to or Assisting Auditors or Examiners in Connection with Financial Statements for All Practice Areas
Actuarial Standard of Practice No. 22—Statements of Opinion Based on Asset Adequacy Analysis by Actuaries for Life or Health Insurers
Actuarial Standard of Practice No. 23—Data Quality
Actuarial Standard of Practice No. 24—Compliance with the NAIC Life Insurance Illustrations Model Regulation
Actuarial Standard of Practice No. 25—Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages
Actuarial Standard of Practice No. 25 [Revised]—Credibility Procedures
Actuarial Standard of Practice No. 26—Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small Employer Health Benefit Plans
Actuarial Standard of Practice No. 27—Selection of Economic Assumptions for Measuring Pension Obligations
Actuarial Standard of Practice No. 27 [Revised]—Selection of Economic Assumptions for Measuring Pension Obligations (Revised Edition)
Actuarial Standard of Practice No. 28—Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets
Actuarial Standard of Practice No. 29—Expense Provisions in Property/Casualty Insurance Ratemaking
Actuarial Standard of Practice No. 30—Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking
Actuarial Standard of Practice No. 31—Documentation in Health Benefit Plan Ratemaking
Actuarial Standard of Practice No. 32—Social Insurance
Actuarial Standard of Practice No. 33—Actuarial Responsibilities with Respect to Closed Blocks in Mutual Life Insurance Company Conversions
Actuarial Standard of Practice No. 34—Actuarial Practice Concerning Retirement Plan Benefits in Domestic Relations Actions
Actuarial Standard of Practice No. 35—Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations
Actuarial Standard of Practice No. 36—Statement of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves
Actuarial Standard of Practice No. 37—Allocation of Policyholder Consideration in Mutual Life Insurance Company Demutualizations
Actuarial Standard of Practice No. 38—Using Models Outside The Actuary’s Area of Expertise (Property and Casualty)
Actuarial Standard of Practice No. 39—Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking
Actuarial Standard of Practice No. 40—Compliance with the NAIC Valuation of Life Insurance Policies Model Regulation with Respect to Deficiency Reserve Mortality
Actuarial Standard of Practice No. 41—Actuarial Communications
Actuarial Standard of Practice No. 42—Determining Health and Disability Liabilities Other Than Liabilities for Incurred Claims
Actuarial Standard of Practice No. 43—Property/Casualty Unpaid Claim Estimates
Actuarial Standard of Practice No. 44—Selection and Use of Asset Valuation Methods for Pension Valuations
Actuarial Standard of Practice No. 45—The Use of Health Status Based Risk Adjustment Methodologies
Actuarial Standard of Practice No. 46—Risk Evaluation in Enterprise Risk Management
Actuarial Standard of Practice No. 47—Risk Treatment in Enterprise Risk Management
Actuarial Standard of Practice No. 48—Life Settlements Mortality
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Report: Blue Ribbon Panel on Public Pension Plan Funding
American Academy of Actuaries Pension Commitee Comments on RPEC Mortality Experience Studies
Illinois judge halts reforms until constitutionality determined
When Illinois lawmakers passed their landmark pension reform law in December, they marked their calendars for June 1, 2014.
That’s the date the law was supposed to go into effect, but lawmakers, unions and most citizens knew better—a myriad of legal challenges would surely push back the implementation of the reforms and pave the law’s path to the state Supreme Court.
Today, an Illinois judge confirmed that sentiment when he ordered a temporary restraining order on the law that will prevent it from taking effect on June 1. The ruling ensures that the law won’t go into effect until the legal battles over the law’s constitutionality are resolved.
The decision is a major victory for the group whose challenge catalyzed today’s judgment: We Are One Illinois, a coalition of retiree groups and unions.
From the Chicago Tribune:
The groups argued the law is unconstitutional because it scales back benefits and raises retirement ages. Under the Illinois Constitution, public employee pensions are a “contractual relationship” with benefits that cannot be “diminished or impaired.”
“This is an important first step in our efforts to overturn this unfair, unconstitutional law and to protect retirement security for working and retired Illinois families,” said Michael T. Carrigan, president of the Illinois AFL-CIO, the point man for the union coalition.
Judge John Belz recognized the retirees and others in the pension systems could suffer “irreparable harm” if the law is allowed to go forward while the constitutionality issues is still being fought out in the courts, according to his order. The case is expected to wind up in the Illinois Supreme Court.
The decision won’t affect Illinois’ budget; lawmakers anticipated the legal challenges against the reform law, and didn’t incorporate its projected effect into the budgets for fiscal year 2013 or fiscal year 2014, which begins July 1.
Photo Credit: SalFalko via Flickr Creative Commons License
California Teachers’ Retirement System 2013 Actuarial Valuation: Cash Balance Program
Retirements in Illinois surge as workers try to shield pensions from reform law
In a normal month in Illinois, the state expects about 200 public workers to retire.
Apparently, last April wasn’t a normal month. That’s because an estimated 1,100 state workers retired in April 2014 in an attempt to lock in their pensions, which could otherwise be affected by the state’s pension overhaul, signed into law in December.
It’s unknown whether early retirements will actually protect pensions from the reform measures. And while the staggering number of retirements caught state legislatures off guard, representatives from labor groups are less surprised.
From the Saint Louis Post-Dispatch:
Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees Council 31, said the increase in retirements is not a surprise.
“It’s indicative of the harm done to employees and retirees and the complications posed by the implementation of Senate Bill 1,” Lindall said.
It’s not just state workers who are leaving the work force because of the changes.
Thousands of university employees also are retiring sooner than they expected because of mistake in Senate Bill 1 that calculates a university employee’s benefits as of last year instead of this year.
Lawmakers have pledged to fix the mistake, but that hasn’t stopped the departures.
Illinois’ pension overhaul, which raises retirement ages and decreases COLAs, among other things, was set to go into effect on June 1, 2014. But various legal challenges may push that date back.
Until then, the state’s public workers are left to roll the dice on whether they should retire early for a chance at an un-modified pension.
Photo Credit: TaxCredits.net via Creative Commons License
Report: Kentucky reforms benefit most workers—but hurt some, too
It’s early yet, but a new analysis of Kentucky’s recent pension overhaul says that the reforms are working—at least for some.
The study, released by the Urban Institute today, shows that the state’s reform measures will result in more benefits for most workers, although the most experienced workers in Kentucky’s system are not likely to benefit at all.
From the Courier-Journal:
Researchers concluded that the shift will provide at least as much lifetime benefit to 55 percent of vested employees and that most workers with up to 24 years of service will fare better compared to the traditional plan.
But, the report notes, most workers with more than 25 years of service, or those hired later in life, would benefit more from the traditional plan. And employees with 30 years or more will receive about $180,000 less under the change, it said.
The reform measures, signed into law last year, switch public employees from a defined-benefit plan to a hybrid cash-balance plan.
A recap of the new plan:
The state’s traditional retirement plan determined pension benefits based on an employee’s salary. The cash balance approach guarantees a 4 percent return while basing additional benefits on investment performance at Kentucky Retirement Systems. But the change only applies to employees hired after Jan. 1.
Proponents argue that it will help spread out investment risks between government and workers and save the state money during economic downturns.
Draine said the report shows 90 percent of the benefits went to only a quarter of employees under the old system, while that number drops to 66 percent with the reforms.
But critics contend that it makes retirement income less predictable for public employees.
Kentucky is also required under the law to make its full Actuarially Required Contribution, which it frequently skipped out on over the past decade. That comes at a cost of about $100 million annually, which was paid for by eliminating COLAs and increasing the state’s personal income tax.
As of 2011, Kentucky’s retirement system has the 7th highest unfunded pension liability in the country. The Kentucky Employees Retirement System is only 50.5% funded.
Photo Credit: OZinOH via Flickr Creative Commons License
Risk-Taking Behavior Of Public Pension Plans Before And After The Financial Crisis Of 2008
ABSTRACT: This paper investigates whether public pension plans’ risk-taking behavior has changed after the recent financial crisis of 2008 by testing two contrasting hypotheses on pension funding: risk transfer and risk management hypotheses.
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