Actuary Certification Pension Valuation 2 — Questions and Answers
Question 1: Under the Entry Age Normal (EAN) cost method, the normal cost represents which of the following?
- The level percentage of pay needed from entry age to fund the projected benefit (Correct answer)
- The actuarial present value of benefits accrued during the current year only
- The unfunded actuarial accrued liability amortized over remaining service
- The expected benefit payments for the upcoming plan year
Correct answer: The level percentage of pay needed from entry age to fund the projected benefit
EAN spreads the cost of projected benefits as a level percentage of pay from entry age to expected retirement.
Question 2: A pension plan's actuarial accrued liability (AAL) exceeds the plan assets by $5 million. This $5 million is called the:
- Normal cost
- Unfunded actuarial accrued liability (UAAL) (Correct answer)
- Actuarial gain
- Experience refund
Correct answer: Unfunded actuarial accrued liability (UAAL)
The UAAL is the excess of the AAL over the market or actuarial value of plan assets.
Question 3: Which mortality table is required under IRS regulations for minimum funding purposes for single-employer defined benefit plans after 2007?
- UP-84 mortality table
- GAM-83 mortality table
- RP-2000 projected with Scale AA
- Mortality tables prescribed under IRC Section 430 (Correct answer)
Correct answer: Mortality tables prescribed under IRC Section 430
IRC Section 430 requires use of mortality tables prescribed by the IRS, updated periodically to reflect current mortality experience.
Question 4: In pension valuation, the 'projected benefit obligation' (PBO) differs from the 'accumulated benefit obligation' (ABO) because the PBO:
- Uses current salary levels while ABO uses projected salary at retirement
- Includes future salary increases while ABO does not (Correct answer)
- Excludes vested benefits while ABO includes them
- Discounts at a higher rate than the ABO
Correct answer: Includes future salary increases while ABO does not
PBO incorporates projected future compensation increases in the benefit formula, whereas ABO uses only current compensation levels.
Question 5: Under ASOP No. 4, when must an actuary disclose a significant assumption change in a pension valuation report?
- Only when required by the plan sponsor
- Whenever a change materially affects the results (Correct answer)
- Only when changing from one cost method to another
- Disclosure is optional unless the change increases costs
Correct answer: Whenever a change materially affects the results
ASOP No. 4 requires disclosure of any assumption change that could materially affect the measurement results.
Question 6: The asset smoothing method in pension valuation is primarily used to:
- Increase plan assets on the balance sheet
- Reduce year-to-year volatility in contribution requirements (Correct answer)
- Calculate the market value of illiquid assets
- Determine the cost-of-living adjustment for retirees
Correct answer: Reduce year-to-year volatility in contribution requirements
Asset smoothing spreads investment gains and losses over multiple years to stabilize employer contribution requirements.
Question 7: A plan uses the Unit Credit cost method. An employee earns one benefit unit per year of service. This year's normal cost equals:
- The present value of all units earned to date
- The present value of the one unit earned during the current year only (Correct answer)
- The total projected benefit divided by years to retirement
- The employer contribution required to avoid benefit restrictions
Correct answer: The present value of the one unit earned during the current year only
Under Unit Credit, the normal cost is the present value of the single benefit unit attributed to the current year of service.
Actuary Certification Pension Valuation 2
Under the Entry Age Normal (EAN) cost method, the normal cost represents which of the following?