GASB 45 - Chapter 7: Reviewing and responding to a draft of the report
To begin with, not all actuarial firms will allow you to review a draft of the report. There are solid ethical and business reasons for taking such an approach. For example, allowing a review of the draft can cause long delays as the parties involved fall into extended discussions over the details of the report. To make matters worse, there is the danger (from the actuary's standpoint) that the report will be disseminated to outside parties as final, leaked to newspapers, presented to employee representatives, to list just some of the dangers.
It is DF&A's belief, through long experience, that the advantages of providing a draft report outweigh the disadvantages, but only if the draft review process is managed properly by both client and consultant.
Reviewing the draft - what to look for:
(1) Has the actuary properly understood the provisions of the benefit plan(s) we offer, including such items as the cost-sharing provisions, limitations or caps, and different eligibility requirements and duration of benefits among the bargaining units?
(2) Do the short-term costs in the cash flow section of the report tie in reasonably well with our budget? Do the number of employees and retirees shown in the data summary jibe with our own records? Is the value of trust assets, if any, properly reflected? Are the actuarial assumptions in accordance with our understanding of the consensus we reached earlier in the project?
(3) Has the scope of services promised in the proposal been entirely satisfied?
(4) Are there any items here that, after two or three readings, we simply can't fathom?
(5) Are there any sections of the text that appear unnecessarily contentious or bring up sore spots that do not add value to the report, and could be omitted?
Don't sweat the small stuff
While considering these questions, bear in mind that an actuarial valuation is an estimate only, and projects numbers far into the future. So, don't sweat the small stuff. If your census records show 1,150 employees and the report shows 1,140, you may assume that the actuary has correctly identified 10 people to exclude based on eligibility requirements and it's not worth asking about. On the other hand, if your records show 1,150 and the report shows 800, it's worth asking about. Materiality is the key here.
Honey or vinegar?
One other thing to be aware of: if you are going to question the actuary's judgment, best to do it gently - after all, we're only human (though some would argue otherwise.) DF&A has had the experience of a board member calling, without warning, and saying "This 6% interest assumption you're using in the draft report is way out of line with what we'll ever be able to earn. I'm going to recommend that we ignore this report and have you rerun the numbers based on a 4% assumption." When presented with such a statement, it's tough not to go on the defensive. A better approach might be to say something like: "We're concerned that the 6% you're using in the draft might be tough for us to achieve over the long haul. Can you tell us how you selected the 6%, and would you be willing to run us the numbers at 4% as a separate scenario, so we can judge for ourselves the effect of such a change?" Most actuaries would be happy to comply with such a request.
Conclusion
If there is more than just one person reviewing the draft, it helps to assign a point person to gather the feedback and present it to the consultant in one piece of correspondence, if possible. The consultant should address your questions and concerns in a thorough, courteous, and timely fashion. Don't agree to accept the report as final until all your concerns have been satisfied.
