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MC, Inc.
OPEB: A Closer Look at the Present and Future
GASB Statements No. 43 & No. 45
MC, Inc.
Menard Consulting, Inc. Actuaries & Consultants
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MC, Inc.
• Overview
• The Actuarial Calculation
• Accounting
• GASB OPEB Accounting Exposure Draft
• Actuarial Secrets
Agenda
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MC, Inc.
Overview
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MC, Inc.
• Plan sponsors have accounted for Other Post
Employment Benefits (“OPEB”) on a pay-as-you-go
basis
• GASB 43/45 changes it to Accrual Basis Accounting – Future benefits promised to all employees including
actives are reflected in addition to retirees
Overview
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MC, Inc.
Types of OPEB • Retiree healthcare benefits (medical, prescription drugs, dental,
vision)
• Other Benefits (life insurance, disability, long-term care; when
provided separately from a pension plan)
Not OPEB • Sick Leave, Special Termination Benefits, Vacation, Early
Retirement Incentives
Overview
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MC, Inc.
GASB 43
Financial reporting for OPEB plans pre-funded or
administered through a trust
– i.e., if Funding the liability
GASB 45
Financial reporting for OPEB plan sponsors
– i.e., Not Funding the liability
Overview
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MC, Inc.
Frequency of Valuation
• 200 or more total members = At least every 2 years
• 200 members or fewer = At least every 3 years
• A valuation must be performed in a year that a change occurs
which significantly affects costs (subjective)
Overview
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MC, Inc.
The Actuarial Calculation
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MC, Inc.
Required Data & Information
• Plan Provisions
• Participant Data (Census)
• Health Care Costs
• Economic & Demographic Assumptions
The Actuarial Calculation
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MC, Inc.
Plan Provisions
• Eligibility criteria
• Retiree benefit plan specifics
• Retiree contribution schedules
The Actuarial Calculation
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MC, Inc.
Participant Data (Census)
• Individual-specific field of information
• For actives, retirees, and their spouses
The Actuarial Calculation
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MC, Inc.
Health Care Costs
• Fully Insured – Premiums for last 3 years
• Self Insured – Paid claim experience for the last 3 years
– Enrollment by month for the last 3 years
– Large claim information
– Stop-loss premiums and recoveries
The Actuarial Calculation
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MC, Inc.
Economic & Demographic Assumptions • Discount Rate
• Per Capita Claim Costs
• Healthcare Cost Trend Rate
• Mortality Rates
• Termination Rates
• Retirement Rates
• Participation Rates
• Percent Married
The Actuarial Calculation
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MC, Inc.
Implicit Rate Subsidy
“When an employer provides benefits to both active employees
and retirees through the same plan, the benefits to retirees should
be segregated and measured independently for actuarial
measurement purposes. The projection of future retiree benefits
should be based on claims costs, or age-adjusted premiums
approximating claims costs, for retirees, in accordance with
actuarial standards issued by the Actuarial Standards Board.”
The Actuarial Calculation
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MC, Inc.
Implicit Rate Subsidy (real words)
• Situation where actives and pre-Medicare retirees are charged
the same premium.
• That premium rate cannot be used as the basis of starting per
capita costs in the valuation.
• The actuary must estimate the premium that would be charged
if pre-Medicare retirees were viewed independently.
• The premium is much higher since costs increase with age.
Range = 150% - 200% of the charged premium
The Actuarial Calculation
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MC, Inc.
Accounting
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MC, Inc.
Actuarial Accrued Liability (“AAL”) The AAL is the actuarial present value of future benefits
based on employees’ service rendered to the measurement
data using the selected actuarial cost method. It is that
portion of the Actuarial Present Value of plan benefits and
expenses allocated to prior years of employment.
Accounting
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MC, Inc.
Annual Required Contribution (“ARC”) The ARC is the “required” cash contribution to the plan in
order to keep up with benefit accruals and payments. It is an
amount that would be expected to provide sufficient
resources to fund both the normal cost for each year and the
amortized unfunded liability if paid on an ongoing basis.
Accounting
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MC, Inc.
Net OPEB Obligation (“NOO”) [ Balance Sheet Item ]
The NOO is the cumulative difference between past amounts
expensed and past amounts actually contributed.
Accounting
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MC, Inc.
Annual OPEB Cost (Expense) [ Income Statement Item ]
The Annual OPEB Cost is an accrual-basis measure of the
periodic cost of an employer’s participation in a defined
benefit OPEB plan. It is the annual charge to the Income
Statement.
Accounting
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MC, Inc.
Other Required Information • Footnote Disclosures
– Includes plan description, funding policy and limitations,
OPEB cost and contributions made, funded status of the
plan, and actuarial methods and assumptions
• Required Supplementary Information
– Includes 3 year schedule of funding progress, 3 year
schedule of employer contributions vs. the ARC, and
significant changes in the plan, methods or assumptions
over the last 3 years
Accounting
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MC, Inc.
GASB OPEB Accounting
Exposure Draft
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MC, Inc.
Most of the GASB 67/68 pension changes are carrying over to OPEB
• Net OPEB Liability (i.e., the entire unfunded liability) goes on
the face of the financial statements. Major change from the
incremental Net OPEB Obligation currently used as the Balance
Sheet liability.
• Discount Rate will be based on a projection of whether the
current assets plus projected contributions are expected to cover
current plan members’ future benefit payments.
• Enhanced disclosures of historical contributions, funded status,
and the basis for selecting actuarial assumptions.
GASB OPEB Accounting Exposure Draft
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MC, Inc.
Most of the GASB 67/68 pension changes are carrying over to OPEB
• Accelerated recognition of liability changes in OPEB expense.
(no more 30 year open amortizations)
• Funding and accounting are officially separated (i.e., no more
ARC).
GASB OPEB Accounting Exposure Draft
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MC, Inc.
• The Community-Rating exception to the Implicit Subsidy liability
will no longer apply.
• The Entry Age Normal (level percent of pay) actuarial method to
allocate liabilities between past and future service periods will be
mandatory.
• Disclosure of the Net OPEB Liability’s sensitivity to changes in
Medical Trend (+/- 1%), Discount Rate (+/- 1%), and combinations
thereof.
• Actuarial valuations are required at least biennially. The triennial
option for employers with fewer than 200 members will be
eliminated.
GASB OPEB Accounting Exposure Draft
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MC, Inc.
Actuarial Secrets
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MC, Inc.
Item #1
If you engage a new actuary, their first step should
be to match the results from the last valuation.
• This is common practice in private sector actuarial work
• Coding intricacies not provided in the last report may emerge
Actuarial Secrets
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MC, Inc.
Item #2
Absolutely, positively do not get tricked on fees!
• Do not agree to a “fee range” – will typically (and
coincidentally?) result in you paying the high-end point
• Demand a fixed fee to avoid “backdoor billing”
Actuarial Secrets
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MC, Inc.
Item #3
Be wary of the term “Industry Standard”
• In health care, there are few Industry Standards due to its
complexity and plan sponsor-specific nature
• May be a sign that the actuary “punted”
Actuarial Secrets
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MC, Inc.
Item #4
Doing the valuation a second time takes less time
and effort than doing it the first time
• The modeling already exists
• The provisions are already identified
• Fee decrease?
Actuarial Secrets
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MC, Inc.
Item #5
Very little, if any, additional work is required by
the actuary in the “interim years”
• Results are based on the last full valuation performed
• Amounts determined by formula
• Typically performed by the auditor
Actuarial Secrets
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MC, Inc.
Menard Consulting, Inc. 1690 W. Lake Street, Suite F
Addison, IL 60101
www.MenardConsult.com
John Ritchie, ASA, MAAA President
(630) 228-0676
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