CareerCast.com ranked the actuarial profession first in their annual best jobs report for 2015. Actuaries have topped the list for the last few years with other related professions like statistician and mathematician also in the top five. The ranking is based on factors like income potential, hiring outlook, work environment, and stressfulness of the occupation. But just what does an actuary do?

Actuaries are highly skilled mathematicians who help pension plans, insurance companies, and other financial organizations plan for the future based on historical and anticipated demographic, trend, and financial data. The Society of Actuaries describes an actuary as “a business professional who analyzes the financial consequences of risk.” Actuaries use a plethora of mathematical tools from probability and statistics to financial theory in order to calculate various risks that an organization such as a pension plan could encounter in its business operations.

An actuary usually has a bachelor’s degree in actuarial science, mathematics, statistics, finance, or economics, and is trained in probability, compound interest, business, and finance. Beyond education, the actuary designation requires passage of a series of exams that usually takes six to 10 years to complete, and practicing actuaries are typically affiliated with professional organizations that hold the actuary and the profession to high standards of practice.

Actuaries work in any industry where risk must be analyzed, including insurance, investment management, corporate finance and banking, as well as for colleges and universities, public accounting firms, labor unions, rating bureaus, and pension plans.

What does an actuary do for a retirement system?

A retirement system could not function without actuaries. Actuaries develop the underlying actuarial assumptions that determine everything from funding status and contribution requirements to expectations surrounding membership and benefit payouts. Additionally they assess risk, cost, and the likelihood of various future scenarios based on changes to membership demographics, investments, plan structure, and legislative or policy changes. Actuarial assumptions are the heart of pension administration.

What is an actuarial assumption?

An actuarial assumption is an estimate of the value of a variable in a financial model. Pension plan assumptions fall into two categories: demographic assumptions and economic assumptions. Demographic assumptions attempt to accurately anticipate events that occur over the lifetime of plan participants and influence the amount and timing of benefits. For instance:

• Life expectancy (how long will plan participants live?)
• Rates of retirement (when will plan participants retire?)
• Mortality before retirement/mortality after retirement (how many participants will die before/after receiving a benefit?)
• Rates of salary increase (how quickly and by how much will salaries change for different groups of employees?)

Economic assumptions attempt to anticipate financial aspects, which may impact the cost of future benefits and the rate at which they are funded, such as:

• Price inflation (what will be the rate of consumer inflation in the future?)
• Investment rate of return (how much will a particular fund or asset base return in the financial market place?)
• Wage inflation (how will wages rise compared to rising prices?)

Mortality assumptions and the investment assumption rate are two critical actuarial assumptions for any pension plan. The first are based on life expectancies for various demographic groups, a necessary tool to predict how long benefits need to be paid out after a person retires. The investment assumption rate is another critical piece for pension planning. This assumption looks at the asset allocation of a plan’s investments (stocks, bonds, real estate, private equity, commodities, cash), and through detailed modelling and historical analysis, predicts the rate of return that the plan’s assets should expect to make over a very long time horizon. View the Funding of Colorado PERA webpage for more information. For Colorado PERA, that horizon is 30 to 60 years. This prediction is important because between 60 and 80 percent of a plan’s assets come from investment returns (versus employer and employee contributions), so in order to calculate the correct contribution rate to fund the plan’s liabilities, actuaries must be able to predict how much money will come from returns on the investments. Over the last 25 years, approximately 64 percent of the total dollars in the PERA trusts came from investment income, with the remaining 36 percent coming from employers and employees (18 percent each).

When discussing actuarial assumptions, it is important to understand who “owns” the responsibility of those assumptions. The actuary typically is a consultant who makes recommendations to the plan’s governing body. Per Colorado statute, all actuarial assumptions recommended by the actuary are subject to approval by the Colorado PERA Board of Trustees. Actuaries make recommendations to the Board, and the Board adopts them or requests further analysis and revised recommendations to be considered later. In addition, on a regular basis, the Board hires outside actuaries to audit the retained actuary’s work. Occasionally the current actuary is replaced in order to bring fresh eyes to the analysis and to maintain financial integrity and an independent outlook.

Annual Actuarial Valuations

Actuaries conduct comprehensive studies known as annual actuarial valuations to evaluate funding progress and the impact of year-to-year changes on a pension plan’s funding progress. A valuation provides a summary of the plan’s funded status, funding period and recommended contribution rates, and often includes accounting information as required under the Governmental Accounting Standards Board (GASB) statements for public pension plans. In order to perform the valuation and provide this information, the actuary takes into consideration contributions, investment returns, demographic changes, retirements, withdrawals, economic factors, deaths, hires, and other system data.

Any pension plan strives to achieve a long-term equilibrium where the money coming in (contributions and investment returns) equals the money going out (benefits and expenses). It’s a simple formula based on the underlying “actuarial balance” of a plan:

Benefits Paid + Expenses = Contributions + Investment Returns

The annual actuarial valuation is a key factor in monitoring and planning for changes to preserve that equilibrium; in addition it is the backbone of the Comprehensive Annual Financial Report (CAFR), a pension plan’s required public report of financial health.

Experience Analysis

The experience study is an investigation of the economic and demographic experience over a certain length of time; its purpose is to assess the reasonability of actuarial assumptions that support the administration of the pension plan. It compares the actual experience of the plan to the predictions made by the plan assumptions, including rates of death, retirement, separation from service, disability and salary increases. The comparison of actual results to predicted results demonstrates to actuaries which assumptions need to be revised to more accurately reflect true demographic and economic conditions. The experience analysis is the foundation for the annual actuarial valuation in that it determines the appropriate assumptions to be applied within the annual actuarial valuation.

Special Studies

In addition to the pension plan’s annual actuarial valuation and periodic experience analyses, an actuary also performs special studies as needed and/or required by law. For instance, if proposed state legislation will be making changes to benefit provisions, an actuarial analysis of the proposed change would be necessary to determine the financial effect of the change. Numerous special studies were conducted during the creation and adoption of Senate Bill 10-001 in 2010, which made changes to many of Colorado PERA’s benefit provisions. These special studies gave trustees and legislators the cost saving predictions for the proposed changes.

According to the Web site BeAnActuary.org, actuaries are “part super-hero, part fortune-teller, part trusted advisor.” Maybe that’s why their profession is consistently ranked so highly.