New actuarial standards on the way

The changes will become effective Dec. 31, 2010.

The company’s latest News and Views publication explains that plan sponsors may have noticed increasing disclosure in their reports over the past two years resulting from changes in 2007 requiring actuaries to provide rationales for the selection of their assumptions. Plan sponsors can expect to see increased emphasis on disclosure, such as:

• disclosure of rationales for methods used and method changes;
• sensitivity analysis demonstrating the effect of a 1% decrease in the interest rate assumption; and
• the cost of benefits between valuation dates on not only the going-concern basis but also the solvency (or hypothetical windup) basis (otherwise known as the “incremental cost”).

According to Morneau Sobeco, plan sponsors are likely to become more involved in the valuation process as the terms of the actuary’s engagement by the plan sponsor can factor into the valuation’s preparation to a much greater degree than under the current standards.

Best-estimate valuations are now allowable, meaning that the actuary would not include a margin for conservatism in the assumptions, thus potentially increasing the valuation interest rate (and, as a result, lowering required funding levels).

The firm explains that many investment policies and current valuation interest rate assumptions call for active investment managers to add value over and above broad market index returns. But actuaries will no longer be able to include an allowance in their interest assumption for the benefits of an actively managed investment portfolio in excess of the additional fees charged for active management. However, an exception is made if the actuary is able to justify that such additional returns will be consistently and reliably earned over the long term. This requirement is expected to result in lower valuation interest rate assumptions.

Read Morneau Sobeco’s News and Views here.

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