Professionalism Update: Comments on the Proposed Risk and Modeling ASOPs

ACOPA continues to have a good reputation among the other actuarial organizations. While those relationships have been fostered by our leaders, both prior and current, it is also due to the level of professionalism that is exhibited in the work of our members every day. However, with all the changes in the industry, ACOPA Leadership felt it was important to create a Professionalism Committee to be responsible for developing comments on proposed Actuarial Standards of Practice (ASOPs) and increase the awareness of professionalism issues among our members.

ACOPA commented on two proposed ASOPs back in October 2016. The first was the Second Exposure Draft of the Proposed Actuarial Standard of Practice on Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions (“Risk ASOP”). ACOPA submitted comments on the two prior Exposure Drafts. Upon review we felt our concerns were addressed in the Second Exposure Draft and so did not recommend any additional changes. 

The second comment letter was on the Third Exposure Draft of the Proposed Actuarial Standard of Practice on Modeling (“Modeling ASOP”). The comment letter on the Modeling ASOP raised concerns regarding the scope of the proposed standard. Section 3.1 of the proposed Modeling ASOP applies only if the model is not a “simple model” and “in the actuary’s professional judgment” the results are “heavily relied on by the intended user” and have a “material financial effect.” While the ASOP added the concept of a “Simple Model” being exempt from the proposed Modeling ASOP, the definition of a Simple Model remains unclear. 

It is also unclear what the standard is for “heavy reliance.” The example cited in the letter is for a non-governmental plan, where we certify one number — the minimum required contribution under IRC 430. Since there is only one number, does that mean reliance is heavy? The actuary may not know if there is a material financial effect. ASOP 1 section 2.6 states that materiality is based on whether or not “omission or misstatement could influence a decision of an intended user,” and goes on to say that in some situations, “materiality will be determined by an external user, such as an auditor, based on information not known to the actuary.” 

The letter also proposed changes to address the issues we highlighted. To help provide clarity on the scope of the ASOP, we suggested providing examples of models that were intended to be covered or not covered by the ASOP. Examples we felt that were not intended to be covered would be individual benefit calculations, individual benefit estimates and nondiscrimination testing of benefit plans. 

We also expressed a concern with the coordination of provisions of this ASOP with other applicable ASOPs. Section 3.9 of the proposed Modeling ASOP states that if another applicable ASOP includes “specific” guidance that conflicts with guidance in the proposed Modeling ASOP, the guidance of the other ASOP governs. We suggested clarifications to conform the proposed Modeling ASOP to other ASOPs applicable to pension work without changing the intent of the guidance, specifically to Assumptions Prescribed by Law, Future Expectations in Setting Assumptions and Confidentiality. You can find the Modeling ASOP comment letter and other ACOPA comment letters here. 

As new proposed ASOPs are released, the Professionalism Committee will be responsible for preparing the comment letters. There is a new proposed ASOP on Setting Assumptions that we will be reviewing in the next couple of months and formulating comments on.