Industry News

On November 15, 2022, S&P Global Ratings released its pension brief, A Closer Look At A New Actuarial Liability Measure And What It Means for U.S. Public Finance Issuers. The brief discusses the revised version of Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions recently approved by the Actuarial Standards Board (ASB).

Specifically, the brief addresses the meaning and implications of ASOP No. 4 and a new requirement that was added to calculate and disclose a reasonable actuarially determined contribution and “Low-Default-Risk Obligation Measure” (LDROM). The LDROM is the value of liabilities using an interest rate derived from low-default-risk fixed income securities. The new liability measure was added to provide guidance regarding the calculation of this measure when the actuary is performing a pension plan actuarial valuation. 

ASOP No. 4 provides guidance to actuaries when performing actuarial services with respect to measuring obligations under a defined benefit pension plan and determining periodic costs or actuarially determined contributions for such plans. The ASOP revisions to the version adopted in December 2013, expand the scope to clarify the application of the standard when the actuary selects an output smoothing method and when an assumption or method is not selected by the actuary. The revisions include a number of technical items relating to funding calculations and related disclosures. 

The revised standard is effective for any actuarial report issued on or after February 15, 2023; and if the measurement date in the actuarial report is on or after February 15, 2023.  

The brief indicates, “We foresee that the inclusion of LDROM could result in some confusion and potential misunderstanding, as it will have the lowest funded ratio, which is likely to generate discussion and could be misconstrued as a true measure of funded status. Although LDROM could be a valuable tool in risk and benefit security discussions, it does not represent a real-word expectation of future funding needs, so a ratio of assets to LDROM may be less of a “funded ratio” than a tool for risk analysis.”

The brief is available here.