Peace of Mind Is Just an Actuarial Audit Away

OCTOBER 26, 2021

Have you been putting off an actuarial audit of your governmental pension plan? Why postpone peace of mind?

Actuarial audits of government retirement plans are considered a best practice by the Government Finance Officers Association (GFOA) and should be conducted at least once every five years (more often if there have been significant unexpected changes in assets or liabilities). An independent review can enhance trust – for both the fiduciary and the public – that the pension plan is being governed properly.

Monitor the Plan

For government entities, an independent review of the defined benefit pension plan is likely long overdue. Many municipalities, school districts, state governments and other sponsors of governmental retirement plans do not routinely conduct actuarial audits.

The review should be considered preventive maintenance for a retirement plan because it can assure the plan sponsor of the quality of services and issues which may need to be addressed with the current actuarial consultant. The ultimate goal of the review is to make sure the liabilities of the plan are appropriately measured, and the level of funding is sufficient to sustain the plan for the benefit of employees.

Plan sponsors have a responsibility to monitor the quality of the services provided to their pension plans, and for governmental agencies that prefer to keep auditing services separate from their actuarial services, hiring an independent firm to perform the review is a sound decision.

USI Consulting Group offers a variety of actuarial audit services including:

  • High level review of actuarial methods and assumptions for reasonableness and internal consistency,
  • Mid-level review that replicates valuation results for a sampling of participants and beneficiaries, or
  • Comprehensive audit that includes gathering all participant and beneficiary data used for the valuation and fully replicating the actuarial valuation results.

Fresh Eyes Can Yield New Findings

Audits provide a fresh set of eyes on government plans that often have complex funding arrangements – and an outside actuarial audit team is ideal for validating the current actuary’s findings for the plan or catching errors such as misvalued liabilities.

In some instances, a plan sponsor may sense that something is awry and seek a “second opinion”. If issues exist, the audit can identify them; and if not, a clean report can increase the plan sponsor’s confidence that the plan is being measured appropriately.

At USI Consulting Group, upon the completion of an actuarial audit, the plan sponsor will receive a report summarizing our findings. Based on the level of review, the contents include:

  • Review of the economic and demographic assumptions for reasonableness and internal consistency, with comparison to national survey averages.
    • Economic assumptions include salary increases, investment return on assets, discount rate, cost of living adjustments, and economic assumptions associated with Social Security.
    • Demographic assumptions include mortality, projected mortality improvements, disability, termination, and retirement.
  • Review of the reasonableness and appropriateness of funding methods, including comparison to recommended funding practices issues by such groups as Society of ActuariesConference of Consulting Actuaries, GFOA, and various national associations representing state and local governments, and benchmark comparisons to national averages.
  • Summary of the plan provisions in the current actuary’s report will be compared to the plan document or law provisions to ensure that the valuation is accurately described and performed based on the actual plan provisions.
  • The actuarial results in the report will be reviewed for consistency and reasonableness. If USI Consulting Group is engaged to reproduce the results on either a sampling of data or full reproduction of the results – the findings from the sampling or full replication of valuation results will also be disclosed in the report.

This information is provided solely for educational purposes and is not to be construed as investment, legal or tax advice. Prior to acting on this information, we recommend that you seek independent advice specific to your situation from a qualified investment/legal/tax professional.