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Pension actuaries are certified professionals who use mathematics and financial theory to manage pension plans. Their responsibilities include risk management, pension compliance, calculating plan funding, and determining appropriate contributions.
For employers with a pension plan, a pension actuary is both legally required and essential to the operation of their retirement benefits. In this article, we examine a few frequently asked questions around an actuary's role and the calculations involved in supporting a pension plan.
Pension actuaries use present value calculations to value a pension by determining how much future benefit payments are worth today, based on assumptions about investment returns, inflation, salary growth, and other factors. This helps the actuary determine how much money is needed today to fund a specified benefit at a future date.
The factors that influence a present value calculation, such as interest rates, salary growth, and retirement timing, are called actuarial assumptions. Because these are estimates about the future, there is always uncertainty and risk that actual outcomes will differ from what was assumed.
Actuarial reduction in pension planning in general can be compared to taking Social Security early. You will still receive monthly payments, but they will be reduced to adjust for the additional time.
To calculate this, actuaries use the plan’s normal retirement age (NRA), which is plan-specific, and apply reduction factors for early retirement. These factors are designed using principles from Actuarial Science and aim to satisfy the neutrality principle, meaning the expected present value of benefits is roughly the same regardless of when benefits begin, based on assumptions such as life expectancy and interest rates.
In general, actuaries provide greater accuracy to insurance companies, which in turn can reduce or increase prices. This is similar for pension actuaries, who help reduce plan risk and increase clarity to deliver a more efficient price to plan sponsors when an insurance company is involved, such as in the purchasing of an annuity or other risk transfers.
There are a variety of cases where an organization or individual may call on an independent actuary for services. In general, actuaries often provide services to Defined Benefit plan sponsors, legal professionals, and insurance companies.
For Defined Benefit plan sponsors, working with an actuary is a legal requirement under ERISA and IRS regulations to certify plan funding status and calculate annual funding valuations.
Pension actuaries are the backbone of Defined Benefit designs, including Cash Balance plans. Our seasoned, credentialed actuaries, including three former presidents of the Conference of Consulting Actuaries, provide comprehensive actuarial services around a variety of plan issues. Click here to contact our team and to learn more about our actuarial services.