Actuary Certification Pension Valuation 3 — Questions and Answers
Question 1: Under PPA 2006, what is the consequence if a single-employer plan's funding shortfall triggers the 'at-risk' status?
- The plan must immediately convert to a defined contribution plan
- Higher minimum required contributions using at-risk actuarial assumptions apply (Correct answer)
- The PBGC takes over plan administration immediately
- The plan sponsor receives a tax credit for additional contributions
Correct answer: Higher minimum required contributions using at-risk actuarial assumptions apply
At-risk plans must use prescribed at-risk assumptions that increase the funding target and potentially the minimum required contribution.
Question 2: For GASB 67/68 reporting, the discount rate used to measure the total pension liability is:
- Always the long-term expected rate of return on plan assets
- Always a 20-year high-quality municipal bond index rate
- A blend of expected return on funded benefits and a bond rate for unfunded benefits (Correct answer)
- The IRS segment rates applicable for the plan year
Correct answer: A blend of expected return on funded benefits and a bond rate for unfunded benefits
GASB 67/68 uses a blended discount rate—the long-term return for projected funded benefits and a municipal bond rate for the unfunded portion.
Question 3: An actuarial gain occurs in a pension plan when:
- Actual experience is more favorable than assumed experience (Correct answer)
- The plan sponsor makes a contribution larger than the minimum required
- The plan's investment return exceeds the risk-free rate
- Benefit payments exceed projections
Correct answer: Actual experience is more favorable than assumed experience
An actuarial gain results when actual experience (mortality, turnover, salary, investment returns) is more favorable than what the actuarial assumptions predicted.
Question 4: Which of the following best describes the 'spot rate' approach for determining pension liability discount rates under ASC 715?
- Using a single AA corporate bond rate for all future cash flows
- Applying individual zero-coupon bond rates matched to each expected benefit payment period (Correct answer)
- Averaging the 24-month segment rates under IRC 430
- Using the pension plan's actual long-term investment return assumption
Correct answer: Applying individual zero-coupon bond rates matched to each expected benefit payment period
The spot rate approach applies individual zero-coupon yield curve rates to each period's expected benefit payment rather than a single composite rate.
Question 5: In a traditional defined benefit plan valuation, the selection of a lower discount rate will generally:
- Decrease the actuarial accrued liability
- Increase the actuarial accrued liability (Correct answer)
- Have no effect on the actuarial accrued liability
- Decrease the normal cost while increasing the AAL
Correct answer: Increase the actuarial accrued liability
A lower discount rate increases the present value of future benefit payments, thereby increasing the actuarial accrued liability.
Question 6: The 'funded ratio' of a pension plan is defined as:
- Normal cost divided by employer payroll
- Market value of assets divided by actuarial accrued liability (Correct answer)
- Actuarial accrued liability divided by plan assets
- Annual benefit payments divided by total contributions
Correct answer: Market value of assets divided by actuarial accrued liability
The funded ratio equals plan assets (market or actuarial value) divided by the actuarial accrued liability, expressed as a percentage.
Question 7: Under ERISA Section 4044, when a defined benefit plan terminates in a distress termination, which category of benefits receives priority in asset allocation?
- Disability benefits payable as of termination date
- Benefits guaranteed by the PBGC
- Participant voluntary contributions with interest (Correct answer)
- Employer discretionary contributions made in the last 5 years
Correct answer: Participant voluntary contributions with interest
ERISA Section 4044 Priority Category 1 covers participant voluntary contributions plus interest, which receive the highest priority in asset allocation.
Actuary Certification Pension Valuation 3
Under PPA 2006, what is the consequence if a single-employer plan's funding shortfall triggers the 'at-risk' status?