Trends & Developments - June 2013 - Actuarial Services – Pension Actuaries: A Primer

According to CareerCast's 2013 ranking of "200 Best–to-Worst Jobs" in America, actuary comes in at number one. Okay—so what is an actuary?  

Actuarial Profession in General 

It is pretty difficult to describe what an actuary does in simple terms. The definition given by Wikipedia is that an actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, mathematics, and mechanisms.

Actuaries mathematically evaluate the probability of events and quantify the contingent outcomes in order to minimize financial losses associated with uncertain and undesirable events. Since many events, such as death or illness, cannot be avoided, it is helpful to take measures to minimize their financial impact when they do occur.

As with other professions, such as medicine, there are different specialties and specific focus areas that actuaries work in. Actuarial disciplines include life; health; pensions, annuities, and asset management; social welfare programs; property; casualty; general insurance; and reinsurance.

Life, health, and pension actuaries deal with mortality risk, morbidity, and consumer choice regarding the ongoing utilization of drugs and medical service risk, and investment risk. Casualty actuaries, also known as non-life, deal with risks that can occur to people or property other than the risks related to the life or health of a person. Products prominent in their work include auto insurance, homeowners insurance, commercial property insurance, malpractice insurance, products liability insurance, environmental and marine insurance and lastly terrorism insurance.

My simplified definition of actuaries: We are professionals trained to put a price tag on risk. We gather information from many sources, add judgment, and help make more enlightened better optimized business decisions for our clients.

Pension Actuaries 

For the purposes of this article, let's focus on pension actuaries, who use statistical analysis to determine what kind of retirement plans meet their company's needs and how these plans will be funded. A pension actuary's goal is to keep the plan sponsor's retirement program solvent--balancing the incoming payments with the outgoing payments while also keeping it attractive for new employees.

Pension actuaries work with other specialists such as ERISA attorneys and plan administrators to help different pension plans meet the needs of trustees, employers and, most importantly, plan participants. Pension plans are affected by investment market risk, changing legislation, and regulation risk. An actuary is on hand to provide specialist advice and quantify this risk as a dollar amount, so the plan sponsor can better understand the financial risks as well as the benefits associated with employer sponsored pension plans.

The typical work a pension actuary undertakes includes advising the pension plans sponsors on:

  • Plan funding -- the funds needed to be held with respect to the plan's current benefits as well as the benefits needed to be paid in the future.
  • Investments -- strategies for selecting the most suitable mix of assets for the funds held in the plan's trust to meet future payment obligations.
  • Various plan designs -- the level and form of benefits to be provided to the participants
  • Accounting for pensions -- determining the impact the pension plan has on the company's financial statements.
  • Managing risk -- strategies for managing and mitigating the risks associated with providing pension benefits which impacts the trustees, the company and the participants.
  • Corporate transactions -- advising on the pensions liability aspects of sales, mergers and acquisitions, which can have a significant impact on company's financials and, therefore, a material impact on the transaction price.
  • Individual benefits -- advising trustees, companies, and often plan participants on complicated options related to the participants benefits.
  • Calculations -- Review pension-audit-related accounting and funding calculations performed by other actuaries

Actuaries are the necessary risk professionals. With their understanding of the nature of uncertainty, they can add value to any business enterprise.

Andrzej (Andrew) Tyminski is an enrolled actuary, a fellow of the Conference of Consulting Actuaries, and a member of the American Academy of Actuaries and the Society of Pension Actuaries. He's also manager of EisnerAmper Actuarial Services LLC.

Trends & Developments - June 2013 Issue

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