This article originally appeared on the CIA COVID-19 Hub.
By Jared M. Mickall, FCIA, Chair of the Committee on Pension Plan Financial Reporting
This article reflects the opinion of the author and does not represent official guidance of the CIA. The author welcomes feedback on this article and suggestions for future articles, and invites CIA members to to regularly visit the CIA COVID-19 Hub for thought leadership.
Pension plan sponsors are focusing on the safety of their people and the continuation – and, in some cases, survival – of their operations. Pension regulators across the country have implemented various measures in response to these events. Administrators and trustees of defined benefit plans are digesting the updates by pension regulators and are monitoring the evolution of the funded status of their defined benefit plans on solvency and going concern bases. Further, many are:
- managing short-term liquidity needs;
- understanding the valuation of assets, in particular those of illiquid investments;
- reviewing the policy of rebalancing of invested assets during periods of significant volatility;
- going to file an off-cycle valuation to establish a new level of minimum funding requirements; and
- restricting or adhering to a moratorium of transfers in light of regulatory requirements.
The long-term impact of COVID-19 on the life expectancy of pension plan members will be unknown for some time and the potential future impact on life expectancy, in terms of direction or magnitude, is difficult to assess. Actuaries are encouraged to consider emerging data on longevity.
The Committee on Pension Plan Financial Reporting (PPFRC), along with other CIA councils and committees, have had many discussions on how actuaries might respond and react to the emerging changes to the economy. The result of some of these discussions have been presented in various CIA Town Halls on COVID-19. The all-practice Town Hall held on April 3 touched on the high-level impact and considerations, and the Pension Town Hall held on May 1 dove more into pension-specific details. There have also been frequent updates on the CIA COVID-19 Hub covering different topics. The PPFRC may issue further updates through the Hub later in the year.
Events occurring after the calculation date of an actuarial opinion for a pension plan and COVID-19
Many pension plan administrators and trustees may be considering filing an off-cycle actuarial valuation for funding purposes as at December 31, 2019, or January 1, 2020. I provide the following comments on the COVID-19 event relating to the preparation of valuation reports under Section 3000 of the Standards of Practice (SOP) with calculation dates before February 15, 2020,1 in the absence of any requirements of applicable legislation.
For valuation reports with calculation dates before February 15, 2020, where the report date is after the COVID-19 event, the COVID-19 event is a subsequent event, as that term is defined in the SOP. Further, the actuary will need to determine whether the COVID-19 event:
- creates a new situation that makes the entity different on or after February 15, 2020;
- provides additional information about the entity as it was before February 15, 2020.
My view, and that of many actuaries, is that the COVID-19 event creates a new situation that makes the entity (i.e., the pension plan in this context), different on or after February 15, 2020.
If the actuary concludes that the COVID-19 event creates a new situation that makes the entity different on or after February 15, 2020, then for valuation reports with calculation dates before February 15, 2020:
- If the purpose of such reports is to report on the pension plan as it was on the calculation date, the actuary should report the COVID-19 event but should not take the COVID-19 event into account in the work.2 Further, as per paragraph 1430.14, either because the actuary considers it appropriate or the terms of the work require it, the actuary may report as an alternative the calculation that takes the subsequent event into account when the main calculation does not.
- If the purpose of such reports is to report on the pension plan as it will be as a result of the event, the actuary should reflect the COVID-19 event in the work.
Further, the requirement to follow application legislation is embedded within the SOP. Application of the SOP is not necessarily negated where applicable legislation requires a particular approach.
This article is part of a series of practice-specific articles under the Actuarial Guidance Council. Read the next article on P&C insurance by Houston Cheng.
1 It is not clear when the COVID-19 event would be a subsequent event for this purpose. While the World Health Organization declared COVID-19 a global pandemic on March 11, 2020, the decline in equity markets started after mid-February. The date at which the market decline is considered extraordinary is unclear. I have used February 15, 2020, as a date for the purpose of this article and an actuary may determine another date to be appropriate for this purpose.
2 As per paragraph 1430.03.