Changes Coming to Your Public Retirement Valuation Report

Bottom Line Up Front

• The Actuarial Standards Board updated ASOP 4 (“Actuarial Standards Practice No. 4”) which will go into effect on February 15, 2023
• One interesting and most likely controversial change is the new required disclosure of a Low Default Risk Obligation Measure (“LDROM”)
• LDROM will require an actuary to calculate and disclose your public retirement plan’s liabilities based on something like the 20-year municipal bond index rate regardless of your funding or investment policy

If you’re the sponsor of a public pension plan (and likely your OPEB plan), you will soon see a new disclosure on your annual valuation reports. The Actuarial Standards Board (“ASB”) has updated its Actuarial Standard of Practice No. 4: (“ASOP 4”) effective February 15, 2023.

While ASOP 4 clarifies the disclosures an actuary must make when utilizing assumptions that they did not select, a more interesting and potentially controversial change will be the requirement to disclose a Low Default Risk Obligation Measure (“LDROM”). 

What is the LDROM? 

Hopefully, I haven’t lost you yet. This may sound like a bunch of actuarial hoopla, but the LDROM will require an actuary to calculate and disclose your plan’s liabilities based on something like the 20-year municipal bond index rate (there are other similar measures) regardless of any funding or investment policy. 

How will it impact my funding requirements?

The LDROM disclosure will not change any funding schedules or required appropriations. However, as many public pension plans use discount rates of 6.50% to 7.50%, this LDROM liability is likely to be 200% to 300% higher than the liability shown on the entity’s governmental audit. 

Why is this happening? 

The main rationale for this new LDROM disclosure is to bring greater transparency to the liabilities of the plan sponsor (similar to those of private plans under FASB accounting). Rating agencies and other stakeholders may use these LDROM disclosures as another data point in evaluating the long-term viability of these plans and the entity’s ability to maintain them. 

How will this affect my audited financial statements?

As of this date, GASB has not required that this new disclosure be included in any audited financial statements. The auditors will have the figure and it will ultimately be their decision as to whether or not to include such a disclosure in their work based on their definition of materiality. 

What’s next?

For any valuation issues on or after February 15, 2023, they will include this new LDROM disclosure. If you have any questions on how this will impact your entity or how to communicate this to stakeholders in advance, please reach out.