Role of Actuary
The actuary is responsible for gathering data and making calculations that determine defined benefit pension plan funding. The actuary works with the pension policy and objectives established by trustees, the contribution level provided in the collective bargaining agreement, the statistical data on participants and the funding standards required by law. An actuary has a legal duty to use his or her best judgment in making assumptions and calculations concerning plan funding.
The actuary must annually submit an actuarial report to trustees. Parts of the report must be included with Form 5500, which is filed each year with the Department of Labor, Internal Revenue Service and the Pension Benefit Guaranty Corporation. The report includes an actuarial valuation which is a snapshot of the plan's funding status. More specifically it provides calculations for:
- Minimum required employer contributions under ERISA
- Maximum allowable deductible contribution employers may make under the Internal Revenue Code
- Present value of vested benefits needed for employer withdrawal liability purposes
- Present value of accumulated benefits (whether vested or not) for assessing a plan's current funding status
The actuarial valuation permits trustees to see once a year whether current funding is meeting retirement benefit liabilities and what the plan will have one, five, ten, 20 and 40 years in the future.
To make all the necessary calculations, the actuary uses financial and participant data supplied by the plan and must also make several assumptions about future data that affects the plan's funding levels.
The funding status of a defined benefit pension plan is identified by zones as follows:
- Safe/Green – a funded percentage of at least 80%
- Seriously Endangered/Orange
- Critical and Declining
If an employer chooses to withdraw from a multiemployer pension plan, it must pay its share of any unfunded vested liability. When a withdrawal occurs, trustees are responsible for calculating the amount of withdrawal liability (using the fund's actuary) and assessing and collecting the withdrawal liability amount.
Key Legislation Post ERISA
Multiemployer Pension Plan Amendments Act of 1980 (MPPAA)
- Clarified definition of multiemployer plans
- Established withdrawal liability process
Pension Protection Act of 2006 (PPA)
- Established new minimum funding requirements for pension plans
- Created zone statuses to reflect funding situations of multiemployer plans
- Allowed pension plans in critical and declining status to suspend/reduce pension benefits for active workers and retirees
- Increased PBGC premiums for multiemployer pension plans
- Allowed PBGC to facilitate multiemployer pension plan mergers and partitions (In a plan partition, the PBGC can remove troubled liabilities from a plan to keep the plan solvent.)