If you have ever seen your OPEB liability fluctuate dramatically from one valuation to the next, then it’s likely due to one of the following reasons: 1) changes in your OPEB plan design, 2) changes in the actuary’s assumptions, or 3) differences between expected and actual experience. The first and second are pretty self-explanatory in that they are a byproduct of intentional decisions made by you or the actuary, respectively. Though, the third – differences between expected and actual experience – is the most inevitable and common source of change that occurs with each valuation.
“Differences between expected and actual experience” may not seem very clear at first glance. Essentially, any economic or demographic change you have experienced since the prior actuarial valuation that does not exactly match the actuary’s assumptions will result in a change because the actual experience is different from what was expected. Below are a couple of common differences between expected and actual experience:
- Trend – This could be trend (increases/decreases) related to any type of benefit plan included in your OPEB valuation, such as health, dental, or vision. If your premium rates increase/decrease at a rate different from the trend assumed in your most recent valuation, then your current and future obligations will not equal what was valued and projected by the actuary, and as a result there is a difference between expected and actual experience.
- Retirements – As is evident in the name, OPEB pertains to post-employment benefits. Therefore, the OPEB liability heavily depends on when eligible employees are assumed to retire. For example, if you have 10 eligible employees retire since the prior actuarial valuation but only 2 eligible employees were expected to have retired based on the actuary’s retirement assumptions, then the actual experience is different from what was expected and the resulting change in the liability will be calculated in the next valuation.
These are only two of the many differences between expected and actual experience that may occur from valuation to valuation. For a better understanding of what may be contributing to the differences between expected and actual experience that you may be seeing in your actuarial valuations, reach out to your actuary for further clarification.