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An actuary is a professional trained to measure certain financial arrangements that carry risk and uncertainty. Examples of these arrangements are the obligations created by insurance or pension plans. Actuaries have asset management, liability management, and valuation skills. The field of actuarial science requires a high aptitude for mathematics.

Actuaries are generally trained in one area of practice. The main practice areas are life, health, retirement, and casualty. Within those there are many sub-specialties. If you are looking for an actuary to value a pension plan, you will want to find a retirement actuary who has experience with your type of plan.

A credentialed actuary will be a member of one of the professional actuarial societies. The largest of the professional groups is the Society of Actuaries (SOA), the organization for actuaries working in life and health insurance, employee benefits, and pensions. The Casualty Actuarial Society (CAS) is the organization for actuaries working in automobile, fire, and liability insurance and workers' compensation.

The American Academy of Actuaries sets qualification, practice, and professional standards for actuaries credentialed by one or more of the five U.S.-based actuarial organizations in the United States. Actuaries who are members of the Academy must adhere to these professional standards.

A pension plan is an arrangement whereby a sponsor, typically an employer or group of employers, promises to provide employees with a lifetime income upon retirement. The amount of the benefit is often based on an employee’s years of service and pay. The monthly income is called an “annuity” and is paid for the employee’s life. Pension plans may also provide disability benefits as well as benefits to the survivors of employees. Most pension plans are funded arrangements with contributions from both employers and employees. Social Security is an example of a pension plan. Pension plans are also referred to as “defined benefit plans”.

A pension plan promises to pay a defined dollar amount at retirement (or death prior to retirement), in the form of an annuity. Lump sums may be offered but are equal to the actuarial equivalent of the annuity. A 401(k) plan’s normal form of payment is a lump sum equal to the accumulated contributions plus investment earnings at the time of payment. Because the 401(k) benefit is a lump sum, there is  no guarantee that it will provide an income for life.

A cash balance plan, or “hybrid” plan, has characteristics of both pension and 401(k) plans. The benefit in a cash balance plan is defined in the form of a hypothetical or notional account. The account is credited with annual additions equal to a percentage of pay or a fixed dollar amount. The account is also credited with interest that is often a fixed rate or tied to some outside index. Most benefits from cash balance plans are distributed as lump sums equal to the hypothetical account balance, but there is a legal requirement to offer an equivalent life annuity. For funding purposes, the IRS treats these plans as pension plans requiring annual certifications by an enrolled actuary.

GASB stands for the Governmental Accounting Standards Board. GASB is a private, non-governmental organization tasked with establishing generally accepted accounting principles (GAAP) for use by state and local governments in the U.S.

GASB Statement No. 68 covers the accounting and financial reporting requirements for state and local government employers who have established pension plans that are administered through a trust. Actuarial valuations to measure total pension liability are required at least every two years. The valuation provides the employer with net pension liability, changes in net pension liability since the last valuation, and pension expense for the reporting period. Differences between expected and actual experience are recorded as deferred inflows or outflows and recognized in pension expense on an amortized basis.

OPEB refers to Other Postemployment Benefits. These are benefits payable at retirement other than pension benefits. One example would be medical benefits paid to retirees. Accounting and financial reporting for OPEB plans of state and local governments is covered by GASB Statement 75. Accounting and financial reporting for OPEB plans of private employers is covered by FASB Accounting Standards Codification 715 or “ASC 715”.

An actuarial valuation of a pension plan is a snapshot look at a plan’s liabilities and funding as of a specific date. A pension projection projects a plan’s liabilities and assets at valuation dates in the future. Projections are based on a set of assumptions regarding future economic and demographic experience. They are useful tools for testing the impact of various scenarios on plan metrics.

The difference lies in the way future economic and demographic experience is assumed to play out. In a deterministic projection, future experience is expressed in discrete parameter values. For example, future inflation might be assumed to follow a fixed set of annual rates input by the modeler. In a stochastic projection, the factors impacting future experience are modeled as random variables or distributions rather than by a single value. For example, future inflation might be assumed to be a normally distributed variable with expected value x and variance y. Thus, each stochastic projection provides a unique result. Running multiple stochastic projections yields a set of equally likely solutions. These sets can be used to evaluate the inherent uncertainty of the plan being modeled.