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Experience Studies 101. Presented by Daniel Wade, FSA, EA, MAAA June 23, 2010. Overview. What is an Actuarial Valuation? What is studied during an Experience Study? How are actuarial assumptions developed? When is an Experience Study performed? Analysis of individual assumptions.

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Experience studies 101

Experience Studies 101

Presented by Daniel Wade, FSA, EA, MAAAJune 23, 2010


What is an Actuarial Valuation?

What is studied during an Experience Study?

How are actuarial assumptions developed?

When is an Experience Study performed?

Analysis of individual assumptions

What is an actuarial valuation
What is an Actuarial Valuation?

  • It is a measurement at a point in time - the valuation date - of the cash flows that are expected to come in and go out in the future.

  • Present Value of Benefits (PVB) calculated by discounting the cash flows at the investment return assumption (discount rate).

Funding a retirement program





C = Contributions

I = Investment Income

B = Benefits

E = Expenses

Funding a Retirement Program

Actuarial cost method
Actuarial Cost Method

  • The actuarial cost method allocates the financing of benefits to periods:

    • before the valuation date (Actuarial Accrued Liability, AAL)

    • after the valuation date (Present Value of Future Normal Costs, PVFNC)

    • PVB = AAL + PVFNC

    • Normal Cost is for costs allocated to the current year

  • SBCERS uses Entry Age Normal Cost method, which allocates based upon a level percentage of pay throughout each employee’s career from entry to exit.

  • Entry Age Normal Cost method keeps Normal Costs fairly level as a percentage of payroll over time.

Pvb exceeds assets and future normal costs




A = AVA , Actuarial Value of Assets

PVFNC = present value of Future

Normal Cost Contributions

PVB = Present Value of Benefits

PVB Exceeds Assets and Future Normal Costs

Uaal brings equation into balance





PVFNC = Future Normal Cost Contributions

UAAL = Unfunded Actuarial Accrued Liability

PVB = Future Benefits

A = Current Assets

UAAL Brings Equation into Balance

How are contributions determined
How are contributions determined?

  • Unfunded Actuarial Accrued Liability (UAAL) is determined by subtracting smoothed value of assets from AAL.

  • UAAL = AAL – Assets  Assets + UAAL = AAL

  • UAAL is amortized over 17 years per the Board Funding Policy.

  • Contribution = Normal Cost plus Amortization of UAAL.

What is studied during an experience study
What is studied during an Experience Study?

  • All Actuarial Assumptions that are used in the Actuarial Valuation

  • Two Types of Actuarial Assumptions

    • Economic

      • Governed by Actuarial Standards of Practice (ASOP) No. 27

    • Noneconomic (demographic)

      • Governed by ASOP No. 35

Actuarial economic assumptions
Actuarial Economic Assumptions

  • Investment Rate of Return(discount rate on value of money)

  • General Wage Increase(general economic increases over time)

  • Price Inflation – (Consumer Price Index, CPI)

  • Growth in size of work force

    • not acceptable for Governmental Accounting Standards Board (GASB) purposes

Noneconomic assumptions
Noneconomic Assumptions

  • Promotional Salary Increases (occurs during an individual’s working career)

  • Retirement

  • Disability

  • Mortality

    • Active/Retired

  • Termination of Employment

    • Refunds of contributions

    • Vested Terminations

Noneconomic assumptions continued
Noneconomic Assumptions (continued)

  • Terminal Pay Assumption

    • Previously no terminal pay assumed; will review this assumption with 2010 Experience Study

  • Miscellaneous Assumptions

    • Probability of Eligible Survivor

    • Beneficiary Age

    • Retirement Age for Vested Terminated Members

    • Reciprocity

    • Health Plan Participation Percentage (for OPEB valuation)

Trends in actuarial assumptions arrows reflect financial impact
Trends in Actuarial Assumptions(Arrows reflect financial impact)

  • Termination of Employment ()

  • Net Rate of Investment Returns ()

  • Price Inflation ( )

  • Salaries (merit) ()

  • Mortality ()

  • Refunds ()

  • Retirements ( )

Decreases in assumption rates

Actuarial risk
Actuarial Risk

  • If actuarial results overestimate ultimate costs

    • justified contribution reductions may be inappropriately denied

  • If actuarial results underestimate ultimate costs

    • inappropriate benefit increases may be approved or future taxpayers may bear the burden of benefits earned today

  • We only know the ultimate cost after the last person dies.

How are actuarial assumptions developed
How are actuarial assumptions developed?

  • Estimates for Future Results are based on a mixture of:

    • Past Experience

    • Future Expectations

    • Professional Judgment

  • Economic Assumptions

    • ASOP 27 explicitly advises against giving undue weight to recent experience

  • Demographic Assumptions

    • Based primarily on recent experience

    • As with economic assumptions, past performance is no guarantee of future results. However, it is the best tool we have for predicting demographic experience.

When are experience studies performed
When are Experience Studies performed?

  • Periodic Experience Studies are the norm for public sector pension plans.

  • Rarely done for corporate pension plans.

  • Section 31453 of 1937 Act implies Experience Studies at least once every three years.

  • SBCERS performs one every three years.

  • Next one is set for June 30, 2010 and will cover the period from July 1, 2007 through June 30, 2010.

  • Will be completed before the June 30, 2010 Actuarial Valuation. Will serve as basis for the Actuarial Valuation.

Consumer price index cpi
Consumer Price Index (CPI)

  • Used as a component of investment return assumption, general wage increases and the payroll increase assumption.

  • Current Assumption is 3.50% per year.

  • Long-term historical data is considered.

  • US Treasury issues Treasury Inflation-Protected Securities (TIPS).

    • Implicit market expectations can be determined from TIPS yields.

  • Forecasts Considered:

    • SBCERS investment consultant – Pension Consulting Alliance (PCA).

    • Milliman investment consultants.

    • Trustees Report for Social Security Administration

  • Will likely recommend that this assumption be lowered this year.

Investment return assumption discount rate
Investment Return Assumption (Discount Rate)

  • Capital market assumptions are made for expected real return and volatility of each asset class. Correlations between asset classes are also required.

  • Capital market assumptions from PCA and Milliman.

  • Based upon capital market assumptions and target asset allocations, expected real rates of return are determined, along with variance.

  • Real returns added to CPI assumption.

  • Historical returns given little weight.

  • If Excess Earnings are expected to be used for non-valuation benefits in the future, the assumption should be lowered.

  • Current assumption is 8.16%. Likely to recommend lower rate this year regardless of Excess Earnings issue.

Wage growth
Wage Growth

Future Salary Increases made up of two components:

1. General Wage Increases

2. Individual Increases due to promotion and longevity

General Wage Increases made up of two components:

1. Consumer Price Index

2. Real Wage Inflation

Current Assumption is 4.00%, 3.50% for CPI and 0.50% for Real Wage Inflation.

Long-term historical data is considered.

Trustees Report for Social Security Administration considered.

We may recommend Real Wage Inflation increase this year, while CPI will likely decrease. Not clear what net impact will be.

Promotional salary increases
Promotional Salary Increases

  • Generally decrease as length of service increases.

  • Sometimes based upon age, but service is a better predictor.

  • Split by General (including APCD) vs. Safety.

  • First calculate general wage growth.

  • Determine promotional increase by removing general wage growth from total wage increase.

  • Higher rates mean higher liabilities.

Service retirement
Service Retirement

  • Generally increases with age

    • Can be spikes at first eligibility

    • Can also be spikes at ages 62 and 65 due to Social Security and Medicare eligibility

    • Can also be spikes when benefits maximize at 100% of Salary

  • Patterns can vary by sex

  • Patterns will vary by General vs. Safety

  • Patterns will likely vary by Safety Plan 4 vs. Safety Plan 6 as different benefit structures affect behavior

Disability retirement
Disability Retirement

  • Generally increases with age

  • Safety has higher rates

  • Split by Service-Connected and Non-Service-Connected

    • General Service-Connected is infrequent; can be hard to study

  • Can vary by sex

  • Higher rates will mean higher liabilities as benefits are greater than service retirement benefits.

Terminations refund of contributions and vested terminations
Terminations(Refund of Contributions and Vested Terminations)

  • Rates generally decrease when service increases

  • Sometimes based upon age, but service is a better predictor

  • Sex distinct patterns are common

  • General rates differ from Safety rates

  • Usually study the total terminations, then develop separate, service-based assumption for likelihood of taking a refund by withdrawing contributions

Terminal pay assumption
Terminal Pay Assumption

  • Additional pay can be received during final pay period for vacation cashouts and other items

  • Final Average Earnings can be increased as a result

  • Do not currently reflect in the valuation assumptions

  • Will study during upcoming Experience Study

  • May result in higher contribution rates


  • Separate assumptions for disabled vs. service retirees

  • Higher rates for males

  • Higher rates for disabled

  • General Approach is to take standard mortality table and make adjustments for System’s experience

    • Currently use RP-2000, setback 3 years for Males

    • RP-2000, setback 2 years for Females

  • To reflect future improvements in mortality, a margin is used

    • The actual deaths for the study period should be greater than those implied by the assumption table

  • Over time, margins will fade as longevity continues to increase

Mortality continued
Mortality (continued)

Caveats and disclaimers
Caveats and Disclaimers

Milliman's work product was prepared exclusively for SBCERS for a specific and limited purpose. It is a complex, technical analysis that assumes a high level of knowledge concerning SBCERS’s operations. It is not for the use or benefit of any third party for any purpose. Any third party recipient of Milliman's work product who desires professional guidance should not rely upon Milliman's work product, but should engage qualified professionals for advice appropriate to its own specific needs.