Setting actuarial equivalence

[Johnny B]

Newbie public sector actuary here

The Law in my state defines actuarial equivalent as follows: "Any benefit of equal value when computed upon the basis of a mortality table to be selected by the actuary and an interest rate determined by the actuary." So clearly, the actuary has quite some latitude.

Currently, the basis used is the RP-2000 mortality table (50/50 male/female) and a 7% interest rate. (I'm pretty sure it's a combined mortality table, but not positive.) This basis was set in 2004. We'd be looking to update this in the next few years.

What are other public sector actuaries currently using as the mortality and interest rate bases for their actuarial equivalence and how did they reach these bases? Is it set statutorily or does the actuary have input? How often does the basis change?

Any and all insight is greatly appreciated.

[KernelMustard]

If it's up to the plan actuary then why not use valuation assumptions for AE?

[Kenny]

What state is this? Is it a statewide plan or is it a local plan? Approximately how man plans are in the state? Have you looked at the valuations for other plans in your state to see what they are using (that is likely to get you more data than asking here)?

[sail648]

Be careful with this. I assume you are setting this assumption for use by the plan in converting amounts for the various optional forms and potentially determining the amounts of lump sums and service buy-backs.

As such you are making a determination of what is a fair basis for converting between uncertain benefits. The easiest one to think about is the lump sum.

If you were going to trade an annuity over your own lifetime for a single pot of cash, what assumptions would you think are "fair" or reasonable?

If the current assumption is 7% and RP-2000, that is saying that you think longevity measured for US private sector workers back on 2000 (18 years ago) is a good guess for longevity now for the group covered by this plan and that a consistent 7% return year in and year out for the rest of your life is fine.

I would be worried that longevity rates are better now and will get better in the future and that 7% expected return is too high a hurdle year in and year out.

Other factors will be important as well. Is a change of assumptions a big deal/high cost change? If so, you will want to pick something that will be ok for a while and not require annual adjustments.

There is a new public sector table coming out from the SoA in the next year or so. You may want to wait for that.