GASB 45 requires the measurement of public employers’ retiree health liabilities and many plan sponsors are now entering their second cycle of GASB 45 actuarial valuations. These calculations are highly dependent upon the actuarial assumptions selected by the plan sponsor. Therefore, it’s a good idea to review these assumptions at each valuation cycle.
Many times, the assumptions used in the first GASB 45 valuation are rough estimates of a plan’s expectations for certain demographic events such as future retirees’ expected retirement age and the likelihood that a retiree will elect to enroll in the employer’s health plan. Once the initial GASB 45 actuarial valuation is complete, however, public employers should start monitoring their plan’s experience to ensure that their assumptions are consistent with what is actually happening. This post discusses some of the important demographic assumptions that should be monitored.
1. Retiree participation rates. This is the likelihood that a retiree will actually enroll in the employer’s health plan. If the plan only provides coverage and the retiree pays the entire premium, then it is likely that the participation rate is less than 100%. Plan sponsors should monitor their retirees each year and note how many actually elect coverage. This assumption is particularly powerful: if you decrease your participation assumption by 50% then your liabilities (at least for active employees) will decrease by 50% also.
2. Coverage elections. If a retiree elects to stay on the health plan, are they electing single or family coverage? A common assumption is that active employees choose the same coverage level in retirement that they had while actively employed. For many this is family coverage.
However, we often have clients where the retiree population has predominantly chosen single coverage (usually because spouse coverage is very expensive or the spouse gets coverage from their own employer). So, the coverage elections of current retirees should be considered when setting the coverage election assumption for future retirees.
3. Expected retirement age. For most “full” GASB 45 actuarial valuations (as opposed to the simplified Alternative Measurement Method [AMM]), a table of retirement rates is used to estimate when employees will decide to retire in the future. For example, there may be a 20% likelihood at age 55, 40% at age 60, and 100% at age 65. For AMM valuations, generally a single expected retirement age is used (e.g., 100% of employees retire at age 62).
This assumption should be compared to actual plan experience and also be reviewed in light of potentially changing retirement patterns as workers trend toward older retirement ages. If your plan only offers pre-65 coverage for retirees, then there will be a significant effect on your liabilities if employees are expected to retire at age 60 (and receive benefits for 5 years) instead of retiring at age 55 (and receiving benefits for 10 years).
4. Other demographic assumptions. The following short list of demographic assumptions should also be reviewed each valuation cycle to ensure that they are still reasonable and appropriate.
- Plan selection. If new plan options are introduced, how will that affect future retiree plan decisions?
- Duration of coverage. How long are retirees staying on the health plan? A simple assumption is to assume coverage for life, but if retiree premiums are high or plan benefits low then life coverage may not be appropriate.
- Withdrawal, disability and mortality rates. While these assumptions are more difficult to measure for most plan sponsors, they should at least be reasonable and relatively current.
Overall, a GASB 45 actuarial assumption set has a powerful effect on a plan’s total liabilities. The assumptions will never be exactly correct. However, they should be reasonable and plan sponsors should take the time to ensure that they are making educated choices when selecting the assumptions. Until you start reviewing your plan’s demographic experience, you won’t know whether you are potentially overestimating your GASB 45 actuarial liabilities.
