Pensions, Benefits & Investments Briefings

On February 15, 2023, changes to Actuarial Standard of Practice (ASOP) No. 4 will be effective, and defined benefit plans will need to comply with these new rules in all actuarial funding valuations with measurement dates after the effective date. In the latest episode of Pensions, Benefits & Investments Briefings (formerly Public Pensions & Investments Briefings), Ashley Dunning welcomes Graham Schmidt, an actuary with Cheiron, and Todd Tauzer, an actuary with Segal, who explain three significant changes arising from the new ASOP and discuss some of the implications of those changes.

Transcript: What Public Retirement Systems Need to Know Now About Changes to Actuarial Standard of Practice No. 4

_{0:00:00.0 Ashley Dunning: The ASOPs dictate–in large part the information to be included in a defined benefit plans actuarial valuation. ASOP No. 4 is changing some of those rules and those who administer and oversee such retirement systems should take note.}

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_{0:00:25.8: Welcome to Public Pensions & Investments Briefings, Nossaman's podcast, exploring the legal issues impacting public pension systems and their boards.}

_{0:00:47.6 AD: My name is Ashley Dunning and I'm co-chair of Nossaman's Public Pensions and Investments Group. In this episode of Public Pensions & Investment Briefings, we talk with Graham Schmidt, an actuary with Cheiron and Todd Tauter and actuary with Segal, who will explain three significant changes arising from the new ASOP and we'll discuss some of the implications of those changes. Todd, why don't we start off with you to give us a little bit of overview on this change?}

_{0:01:19.5 Todd Tauter: Sure, I'd be happy to, thank you, Ashley, for having us here today. It's good to be on this podcast. For the Actuarial Standard of Practice number four, the ASOP 4 that we're talking about today, it's called measuring pension obligations and determining pension plan costs or contributions, which is a mouthful. But if you think about the two things, it's talking about, measuring pension obligations or you can think of it as liabilities and then determining pension plan costs or contributions. That is the core element of what an actuary does when they provide an actuarial evaluation to a pension system. So, we like to call this ASOP the mother of all ASOPs for pension plans because of how central it is to the work we do. And if I take a step back for a minute, just on the actuarial profession as a whole, we are not a practice that is governed by some external body like the SEC.}

_{0:02:11.0 TT: We have an internal group of actuaries. It's called the Actuarial Standards Board, or ASB for short, and that's a nine member group of actuaries that helps evaluate and then eventually provide and finalize standards of practice for actuaries related to all the different areas of work that we practice in. Under the Actuarial Standards Board, there are different committees that help work with the standards board. And included in that there's a pension committee. So, this ASOP 4 is coming up through the pension committee and it's finalized with the Actuarial Standards Board. It went through a variety of revisions along the way. They would send out a version or a proposal and they'd get a lot of comment letters back from actuaries, and then we'd go back and forth quite a bit. And then they ended up on this final version that we see, this version is effective February 15th, 2023. The last time it was revised, ASOP 4, was December of 2013. So, we have almost 10 years since this has changed in any way, shape or form and many things here have stayed the same, but there are some notable changes and that's why we're here today and I'll turn it over to Graham to talk about those changes.}

_{0:03:19.4 Graham Schmidt: Yeah, thanks Todd and thanks Ashley. It's good to be here. Yeah, there are three main changes that Todd and I are going to talk about today in terms of this current Actuarial Standard of Practice. The first is a requirement that plans as part of your annual actuarial funding valuation. You have to include what's known as a reasonable, actuarially determined contribution and we'll go into the specifics of what we mean by reasonable. I also want to point out throughout this conversation, we're going to start using acronyms, because we're actuaries and we love acronyms. But for this one we're going to call that one the ADC. So, the actuarially determined contribution. So again, with any funding valuation, we are going to be required to calculate and disclose this measure. Then we're also going to need to talk about the implications of both your funding policy and this contribution allocation procedure.}

_{0:04:10.5 GS: When I say contribution allocation procedure, I'm talking about the method by which we come up with the ADC. So, what are the processes that we use to come up with that Actuarially Determined Contribution? And we have to talk about, what are the implications of the plan's funding policy and this reasonable ADC in terms of what do we expect to happen in the future to the funded status of the plan, when we compare the assets and liabilities, and what do we expect to happen to the contributions of the plan in the future. Finally, the biggest change affecting public plans is the new requirement to disclose what's known as a low default risk obligation measure. And again, with our love of acronyms, we've come up with a new one, the LDROM, and we'll get into specifics about this one later in terms of how is this measure calculated and what does it mean? But this is the one true thing where it's really a very new requirement for public plans to include this in your funding valuations.}

_{0:05:08.5 AD: Thank you Graham, for that overview of the three significant changes we'll be talking about today. We'll turn it back to Todd now to dive a little deeper into the reasonable ADC. Todd?}

_{0:05:19.9 TT: Thank you Ashley, and I'm happy to talk about this reasonable ADC. I think even though it doesn't have as big implications as potentially the LDROM might have, I think it's still a very important change and a positive change that we're seeing through this ASOP. There's a little background here on my perspective, I'll keep it as short as possible. Prior to Segal, I worked for S&P, I was hired by S&P to evaluate pension plans across the country and evaluate the decisions that have been made in the past and the contributions that were being made today, and what would that look like in the future? What would that result in terms of future contribution rates? What would that result in terms of future funded status and concept of future plan health? And when evaluating the contributions in particular, this is related to the ADC, we would ask three questions.}

_{0:06:07.9 TT: The first would be, are plan sponsors paying what they're told to pay by the plan. Second one is, if they are, then is that based on an actuarially determined contribution or is it based on something else? There could be a number of other things that they could use to set the contributions coming to the plan. And then finally, if it is also an actuarially determined contribution, how effective is that actuarial contribution in paying off the unfunded liability over time? So, we had these three considerations and they were actually pivotal for understanding plan trajectory over time. And when you combine those three and you're looking for how effective the actuarially determined contribution is at paying off the unfunded liability over time, you can almost just replace that word effective with reasonable. How reasonable is that actuarially determined contribution in funding the plan over time? So, that's the idea behind this reasonable ADC that we have here.}

_{0:06:58.9 TT: Whenever we're performing an actuarial evaluation, whether or not this reasonable ADC is going to be used to actually fund the plan or not, we now must calculate and disclose it within the actuarial evaluation. Doesn't matter if the plan is a fixed rate plan and just pays 15% a year and hopes for the best, or if they're targeting 90% funding, no matter what they're doing, they still have to calculate and disclose this measure. So, this breaks down into a few different components. The first is, well, we need to use a cost method. That cost method allocates the cost of funding the plan over different periods of time, and most plans use the entry age normal and that's completely fine for a reasonable ADC. So, I don't think we need to spend more time on that. The second one is asset smoothing. Many plans use asset smoothing within their valuation.}

_{0:07:45.9 TT: You may have heard the term actuarial valuation of assets. The idea here is to mitigate a lot of that volatility that we see in the markets, from year to year, through a smoothing mechanism and here what the reasonable ADC says is any asset smoothing that you use, if you're using, for example, an actuarial value of assets, it must fall within a reasonable range of the market value of assets. It also says any differences between the actuarial value of assets and the market value of assets must be recognized in a reasonable period of time. So, you're going to hear this word reasonable alot throughout this discussion. Actuaries love to use this term, it's a beautiful term of art, where there's a little bit of wiggle room, but there's not too much wiggle room, if you're using reasonable. So, cost method asset smoothing.}

_{0:08:35.3 TT: The next component is amortization. Of course amortization is how we pay off the unfunded liability over time and work towards fully funding a plan. Now the requirement here is that the amortization that is used, either must pay off the unfunded liability in full over a reasonable period of time, or it must reduce the unfunded liability by a reasonable amount in a sufficiently short period of time. The idea here being, "Hey, we're either paying this thing off and we're paying it off in full over a certain amount of time that's not too long." Or if that's not the plan then in any given year or any given short amount of period of time, we should be paying off a chunk of it. And so, those are the two ways by which we can fulfill having a reasonable ADC in terms of the amortization.}

_{0:09:19.6 TT: And then the final component worth mentioning is output smoothing. And, I guess, a little guidance around output smoothing, now what output smoothing is, is when we have a change in an actuarially determined contribution, and let's say it's going up and maybe it's going up significantly, well, output smoothing says, "Well we can take a little bit of time to get there, we can smooth in that change over a couple years or a few years." This is one example at least of output smoothing, and you most commonly see this if there's a large experience study and that experience study is going to lead to a significant change in the actuarially determined contribution. In that case we might say, "Hey, we're going to get to this ultimate new contribution rate, but for budgetary purposes, let's smooth that in over two years or three years to give a little bit more predictability and time in getting there." So, there's some guidance and the primary disclosure requirement from the ASOP is that, if you're going to use output smoothing, you also must disclose what the original actuarially determined contribution was without output smoothing.}

_{0:10:17.4 TT: So, you don't have to use that, but you've have to disclose it. So, you've got both sets of information in front of you. So, the conclusion here with the reasonable ADC is that it's required, it must be calculated, it must be disclosed, whether you use it or not, gives guidance over multiple things, the cost method, the asset smoothing, the amortization, even output smoothing. And again, the point here is that we can have this additional reasonable, actuarially determined contribution to be compared against. So, we can compare whether it's comparable to the actual contribution being made or perhaps one is higher or lower and what the long-term implications of that is.}

_{0:10:54.0 AD: That was really helpful, thank you. Coming at this discussion, as a lawyer who's heard a lot of actuarial evaluation presentations over the years, primarily in California, elsewhere too, but focusing on California for the moment, a lot of the terminology you've used is familiar in the sense that in actuarially funded plans these methodologies are presented. In my experience, I've seen them discussed and adopted. In those circumstances where you've been working with a plan that every year has had their actuary determine or recommend a contribution rate that is actuarially based, are we going to see a material or even any difference in the calculations, do you think, as a result of this reasonable ADC requirement?}

_{0:11:44.1 TT: Yes, actually that question is spot on and that's a very good point here. So, the short answer is, no, we won't see any change. Those that fund on an actuarially determined basis and then specifically on a reasonable actuarially determined basis, they can continue to do exactly what they've already been doing. And that's true for the vast majority of plans, as you indicated in California. The rest of the country, there's more of a mix of the plans that we see. Some, they're doing exactly that same thing and others maybe not so much. So, there might be some more transparency and clarity out there, particularly in the rest of the country for some of these plans and what contributions are being made.}

_{0:12:21.7 AD: Thank you, that's helpful. Turning to you, Graham, if you could talk with us more about the second significant change that we're discussing today, which is the implications of the cost allocation procedure and funding policy, provision of ASOP No. 4.}

_{0:12:39.2 GS: Thanks, Ashley. So, one of the things that's required in this, in the update of the ASOP is to communicate how this reasonable actuarially determined contribution is going to affect the plan's funding status and contribution requirements in the future. If you are not making an actuarially determined contribution, so as Todd pointed out, there are some plans out there that are just doing a fixed contribution rate, it's not necessarily related to the actuarially determined contribution, you may have to talk about the implications of that policy itself on your funding requirements and your funding status. So, the standard requires a qualitative analysis, not necessarily quantitative. So, there's not a specific set of numerical projections that you have to include in the valuation report, with a few exceptions that I'll come back to. But at the baseline it does require that the actuary has to make a statement as to how this funding policy or the contribution allocation procedure is going to affect the contributions and funded status.}

_{0:13:43.8 GS: But as I said, there are a few things that are required, and some of these are new requirements. You are supposed to estimate how long it will be until this policy results in a contribution that exceeds the normal cost plus the interest on the unfunded liability. Now, we sometimes refer to this as the tread water amount. Basically this is the amount that needs to be contributed to the plan in order for the unfunded liability to remain stable from year to year if all of your assumptions are met. So that the normal cost is the cost of the benefit that members are earning this year, for the active members. And then you have that interest on the unfunded liability. So, if you're just covering the interest on the unfunded liability and the cost of new benefits, that should be enough to keep the unfunded liability even from year to year.}

_{0:14:36.2 GS: If you fall below that level, it's known as negative amortization. And what the standard requires is that you have to disclose if you're in negative amortization and if you are, how long you're expected to be there. So now, what could cause you to be in negative amortization? Well, as Todd pointed out, there are some plans that are just making a fixed contribution. It's not necessarily tied to what the actuarially determined contribution is. In that case, if you're not covering the interest on the unfunded liability plus the cost of new benefits, there'll be a negative amortization. There are other plans that may be contributing an actuarially determined contribution and maybe even a reasonable actuarially determined contribution. But if the amortization periods are long enough and you have an unfunded liability, it may be that at least for the next few years, you may not be contributing enough to cover the interest on the unfunded liability and that normal cost.}

_{0:15:30.4 GS: So, there may be plans that that have a perfectly good ADC and a perfectly good funding policy, but they may still find themselves in a negative amortization period for a certain period of time. They're going to be needing to make a disclosure to that effect in the report. We are also required to estimate the time until the unfunded liability is expected to be paid off. So, for a lot of plans, particularly plans that have a fixed amortization schedule, this is going to be a very easy thing to do. You just look at that amortization schedule and you see when the unfunded liabilities is expected to be paid off. There are some plans that use alternative modes of amortizing their unfunded liabilities, something known as a rolling amortization period. Well, essentially what you're doing is refinancing the remaining debt each year over a new period of time.}

_{0:16:14.7 GS: If you're taking that approach, then the technical answer to the question of when is this unfunded liability going to be paid off? The answer may be never, because you may be paying off a chunk of that unfunded liability each year, but each year you're pushing out the date at which you're expected to pay off the full unfunded liability. As Todd said, that can still result in a reasonable actuarially contribution as long as you're paying off a reasonable chunk of the unfunded liability. So, that means that if you got into a situation where you had a plan with a rolling unfunded liability amortization policy and it was long enough that you weren't making a significant payment towards the unfunded liability, if you were in a negative amortization situation, you're not going to be able to provide a good answer for that question of when is that unfunded liability going to be paid down?}

_{0:17:04.1 GS: So, and again, in that case, you'll need to have some additional disclosures in your report and even in as a baseline, you have to show when that unfunded liability will be paid off. Finally, we need to disclose if the funding policy or that contribution allocation procedure is expected to result in the plan running out of assets before all promised benefits are expected to be paid. Now this is not entirely a new requirement within the ASOP. The ASOP always, you had to make a statement if your funding policy wasn't going to be expected to result in sufficient assets to pay benefits. But we also need to now estimate the approximate time that would occur if your policy is not going to be expected to be able to cover those benefit payments.}

_{0:17:47.2 AD: Graham, thank you for that explanation. It's interesting that this new provision is requiring a qualitative assessment by the actuary and then some metrics around topics that have gotten attention over the years, such as negative amortization, but generally have been viewed, at least in California, as permissible within reason. Is there something to be discerned from this new rule or new standard different from that history or not?}

_{0:18:20.3 GS: It's not necessarily different. Reasonable actuarially determined contribution contains still a fair amount of wiggle room in terms of your actual contributions. Just because you have negative amortization does not mean that the plan is not being financed appropriately. You could have negative amortization period that only lasts for a few years and then you could still pay that unfunded liability down over a reasonable period of time. It does put a little more in terms of guardrails up there though, that if you had a policy in place that was expected to have that negative amortization for a long period of time and you're not going to be making any progress towards paying down that unfunded liability, it really is going to result in these additional disclosures. While I think negative amortization isn't necessarily a negative event, it does put some parameters around that, that if it's not something that you're going to get out of at some point in time, you're going to have to show some additional things to show what the consequences of that are going to have to be, on your plan.}

_{0:19:22.0 AD: Todd, turning to our final significant change, the LDROM, I think, one of you noted earlier that this is most significant of the three for purposes of the public pension plan community. So, go ahead and tell us about it, and I think both of you will be talking about this one, so thank you.}

_{0:19:38.0 TT: Sure. So, I'll start with some of the basics, and you're right, this is probably the most significant for public plans, and it also was the one that created the most back and forth between actuaries and the standards board. When we're going through iterations and doing exposure drafts and comment letters, there is a whole bunch of comment letters related to this LDROM. So, LDROM is our low default risk obligation measure, and it requires the actuary to calculate and disclose, essentially what I'd call an additional assessment of liability or an additional assessment of the obligation, the way that it's written. But this is supplemental to the normal funding, the actual accrued liability that the actuary is already calculating and putting into your actual evaluation. And really to make the point here, all of what Graham and I are discussing with all three of these, the new standard of practice does not require us to remove things that we are already putting in the actual evaluation.}

_{0:20:34.0 TT: It doesn't really change any of the base information that you'll be getting in the actual evaluation. It simply adds additional disclosures and potential disclosures on top of it. And this LDROM is one of those additional disclosures that are required. So, with the LD ROM, we can use the same, I mentioned earlier, the cost method used, we can use the same cost method that we use in the funding valuation, which again, for the vast majority of our plans is entry age. But then when we get to the discount rate, which of course the discount rate is looking out at benefits to be paid in the future and discounting them back to the present, so that we can get them to base what we'd call a present value of future benefits. So, that discount rate is actually very important. If a discount rate is high, well, a lot of discounting happens and costs are anticipated to be lowered today.}

_{0:21:25.7 TT: And if the discount rate is low, well, not very much discounting happens and the costs are higher today. So, with LDROM, this requires the discount rate used for that calculation to be derived from low default risk fixed income securities, where the cash flows from those securities are reasonably consistent with the pattern of benefits expected to be paid by the pension plan in the future. So, we've got this comparability between the cash flows of the securities, and the cash flows of the benefit plans, and it gives a couple examples of what kind of securities they think could fulfill this requirement even directly in the ASOP. One example they use is US Treasury Yields. Another one is highly rated corporate bonds or even highly rated municipal bonds. Basically, any security that has very low default risk. And then of course with that low default risk comes very low expected return.}

_{0:22:22.9 TT: So, we'll talk about that more in a minute, but that's important to keep in mind as we go through this. So, that's really the whole idea here. We have a new obligation or liability measure. The only necessary change to that measure is using a discount rate that is based on low default risk fixed income securities, and based on the present market and the way things are looking, that discount rate would be significantly lower than what we see today. The final thing to mention before I forget, is if your plan has variable aspects to it, it gets a bit more complicated in how to potentially calculate this measure. We're not going to use this podcast to go into those details, but if your plan has significant variable features, you may be having a discussion with your plan actuary to figure out how to handle all of that.}

_{0:23:05.8 AD: Thank you, Todd. Graham, can you tell us a little bit about some implications you see from this LDROM figure?}

_{0:23:16.6 GS: Sure. First and foremost, the biggest implication is going to be, there's now going to be this much larger liability number included somewhere in the valuation report. So, we've done some sample calculations for some of our clients, and in some cases the numbers are something like 40 to 50% higher than the traditional actuarial liability measurement. And Todd talked about the differences in discount rates and so forth where traditional valuation report for a pension plan might have something like a 7%, I assume, greater return on their assets, which they then use as their discount rate. If you're talking about this low default risk obligation measure and you're talking about yields on bonds, you might be looking at something like a 4% expected return. So, the difference in using those discount rates can increase your liabilities by 40 to 50%. But it's really going to be important, and we're going to talk about this is, is how do you put that number into context and what does it actually mean?}

_{0:24:12.8 GS: One thing we also know is that this measure is likely to bounce around a lot as interest rates change. So, if we had start to put this number in our reports a couple of years ago when interest rates were near zero, those liability measurements could have easily been double what the traditional liability measurement was. Not 40 to 50% higher, but double. Now that interest rates have gone back up over the last 12 months and we're, look, significantly from where they were, the impact is not quite as high as it as it would've been, but we're still seeing, again, much higher liability numbers compared to the traditional measure. And that's going to be really important for plans as they add these measures into their reports to put them into context.}

_{0:24:57.8 AD: Speaking of context, Todd, could you talk to us a little bit about various ways to interpret reports that have this figure in it? I think the audience will be really interested in understanding both how this type of measurement already is used in some circumstances, and then also how to respond to the observation that Graham just made, which is that this number may be much higher than what they're used to seeing in actual evaluation reports, in reporting on liabilities.}

_{0:25:25.8 TT: If I start by taking a step back and look back to the Actuarial Standards Board, remember this all starts with the standards board and starting with the disclaimer, of course, I cannot speak for them, I'm not representing them here, but I get the feeling that at least at some level, there's a concept here of looking at this from an LDI type perspective. Now it's another acronym, liability driven investing. And so, the idea is, "Hey, if you compare securities with similar cash flows to the cash flows of the benefit payments coming out of the plan and you use discount rate that's comparable between the two, then you get a pretty decent idea of what the cost of the plan would be with very little market risk, at least very little default market risk or as the low default risk obligation measure.}

_{0:26:11.3 TT: So, if I said that more succinctly, the LDROM shows an assessment of liability, if the plan were to fund exactly the way they are now, except that on the investment side, they're only invested in low default risk fixed income security. So, you just sell off the entire current portfolio and then you go out and buy a bunch of treasuries or a bunch of high grade corporate or municipal bonds, and then you take the discount rate based off of that and you do your measurement of your obligations, then you could go forward from there and set actual costs. It's worth mentioning the LDROM does not require us to actually calculate costs on this measure, it's just to calculate the obligation or the liability side. But if you were to do that, then you'd get an idea of what Graham was talking about, with the 50% or a 100% extra cost that you'd see in terms of total liability to the plan.}

_{0:27:00.4 TT: Another way to look at it is if you turn that on its head, and if we were to calculate the LDROM and then compare it to exactly as plans are funding today, with the discount rates that they're using today, with the diversified portfolio. The difference in liability between those two plans is exactly what the plan is attempting to or expects to save taxpayers over time by investing in that diversified portfolio, by taking advantage of the range of stocks in real estate or whatever else they're investing in and taking advantage of that compounded return over time. It's worth mentioning, on top of just talking about possible interpretations, it's worth mentioning that some plans already do use a form of the LDROM in some circumstances. For example, I know multiple plans where there's a provision that allows particular plan sponsors, or what we call them, employers, particular employers, to terminate from the plan, which means they leave the plan and they don't have any further risks.}

_{0:27:55.3 TT: The plan can't go back to them later and say, "Hey, you owe us more money because investments went poorly, or whatever else happened." So, if they leave the plan, terminate and take no risk with them, then the plan turned around and said, "If you're going to leave with no risk attached to you, we're going to invest your assets in as a low risky portfolio as we can. So, we're going to invest them in low default risk securities." In essence, it's exactly what this LDROM is calculating, is we're going to turn around and invest in such a way that we're basically taking risk off the table so you can pay for all that risk upfront and then you can leave scott free and never talk to us again. So, that actually does exist out there today, and that's maybe not so much an interpretation, but an example of practical application of a measure such as this.}

_{0:28:42.1 AD: Thank you for that discussion. Your comment about the benefit to taxpayers of the retirement systems having a diversified portfolio made me also think about it in terms of the members of these plans, because wouldn't it also be fair to say that if the expectation were that the plan would not diversify its investments and were only to invest in very low risk bonds, that you'd have to assume a much lower rate of return for purposes of your discount rate, which would, correspondingly, require quite a bit higher normal cost contributions by your members. So in effect, everyone is benefiting from having a diversified portfolio that reasonably anticipates a higher rate of return. What this number shows is what would happen if you did not do that, in a sense.}

_{0:29:42.0 TT: That's exactly right, and that's particularly true after PEPRA, as we've had more and more employees, for example, paid 50% of the normal cost. Well, if the normal cost is going to be quite a bit higher, then those employees are going to be on the hook for a much, much larger cost as well. So, exactly to your point there, Ashley.}

_{0:30:01.8 AD: Thank you, Todd. It sounds like what you've described is really a termination liability and you're needing to include that in the valuation, not necessarily characterized as that, but if I'm understanding you correctly. And then secondly, would it also be fair to say that what you're really measuring is the opportunity cost or the opportunity benefit of a diversified portfolio? So, the actuarial value of assets and liabilities that you're currently calculating is based on a diversified portfolio, but if the system were to not do that, it would cost a lot more money both to taxpayers and then if you incorporate that idea into how you set your discount rate and assume a much lower discount rate, it also impacts normal cost, which impacts members. Is that a fair way of thinking about this?}

_{0:30:53.4 TT: Yeah, there was a lot in there, but I agree, if I take your latter statement first, completely right, it's definitely showing the benefits of that investment in a diversified portfolio. Of course, there are risks attached to it as well, and those risks have to be understood, but it is showing the long-term benefits, both for the employers, the plan sponsors, and the members who are also going to be shouldering part of the contribution burden over time. The first thing you said in terms of a termination liability, you're absolutely right. A termination liability would, if that was being calculated, it would fit this requirement of the LDROM. I mentioned before that on a actuarial cost method basis, that the LDROM allows you to use the current cost method for the plan. And so, that's usually entry age and it's usually based on assuming ongoing funding and all of that. You might handle that a bit differently on a termination basis, you might use a different cost method. You might not allow for anticipate future salary increases or service or any of that. So, that might change a little bit, but certainly calculating it on a termination basis still fulfills this requirement of the LDROM.}

_{0:31:57.5 AD: Thank you. Graham, why don't you step in here with some final comments about LDROM and maybe some concerns about this particular disclosure obligation, if you have them.}

_{0:32:08.9 GS: Sure, Ashley. There are certainly some concerns. As we expect to see these much larger liability numbers go into public valuation reports, we certainly expect that some observers are going to pounce on this number and point it out and say that public plans have been trying to hide the "true liabilities of the plan." But the standard itself actually addresses this head on. In the introduction, it explicitly says, and I'm going to read it here, "The calculation and disclosure of this additional measure is not intended to suggest that this is the "right liability measure" for a pension plan." So, it's explicitly saying that this is not the one true measure that you should look to for the liability. And as we've been discussing, this does not represent the funding target for most public pension plans. Public pension plans are not invested in a 100% treasury bond portfolio.}

_{0:33:01.8 GS: So, what it's really trying to get at is, more in terms of what's the investment risk that your plan is taking on and how you go about quantifying that, at least compared to a 100% fixed income portfolio. But there are a lot of other ways to quantify risk, many of which are already used by public plans. Several years ago, the Actuarial Standards Board released a different ASOP, ASOP 51, which really dealt with the assessment and disclosures of risks associated with pension plan. And the standard provided guidance to actuaries, in terms of coming up with different ways to measure risks and doing what this ASOP is requiring and comparing your traditional liability measure to something akin to an LDROM, that was included as one possible method for assessing risks, but the standard did not require it, and it also had other possible methods as well, some of which I think are probably more effective at getting at the actual risk faced by your individual pension plan.}

_{0:34:05.0 GS: Because what this risk measure does is it's just telling you, "Well, what would it cost if you invested with no default risk or very low default risk?" But that's not what plans are actually doing. So, if you wanna get a true picture of investment risk in your plan, you probably need to look at some kind of measurements that actually take into account what you are actually invested in. What is the riskiness of your investments? That's not going to be told to you by just looking at this LDROM measure. So, I think one of the concerns is that this is being pointed out as the one true measure that tells you everything you need to know. And clearly I think it does not. It's not even necessarily the best measurement for looking at the risk of your individual plan.}

_{0:34:49.9 GS: I would point out that in terms of where this number is going to show up in a lot of val reports, when this new ASOP 51 went into place about assessing risk, a lot of actuaries added sections to their val reports that started talking about different assessments of risk. So, I think this is probably a natural home for it in terms of valuation reports. So, you'll probably, in your conversations with actuaries, you'll probably hear them suggest that this might be one place that you put it, and it's a place that you can put the correct context around it. You're actually explaining what does it mean in terms of our outlook on risk and how it affects our plan.}

_{0:35:27.6 AD: Thank you for that context. Really good session to both of you. Thank you, Graham. Thank you, Todd, for your time. I learned a lot, and I hope our listeners do too when they listen to this podcast. And thank you to our listeners for joining us for this episode of Public Pensions & Investments Briefings. For additional information on this topic or other public pension issues, please visit our website at nossaman.com. And don't forget to subscribe to Public Pensions & Investment Briefings wherever you listen to podcasts, so you don't miss an episode. Until next time.}

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_{0:36:02.3 Speaker 2: Public Pensions & Investments Briefings is presented by Nossaman LLP, and cannot be copied or rebroadcast without consent. Content reflects the personal views and opinions of the participants. The information provided in this podcast is for informational purposes only, is not intended as legal advice and does not create an attorney-client relationship. Listeners should not act solely upon the information without seeking professional legal counsel.}