RD228 - Joint Legislative Audit and Review Commission 2017 Quadrennial Actuarial Audit of the Virginia529 Prepaid Tuition Program
In accordance with the Virginia College Savings Plan Oversight Act (§ 30-330 – § 30-335 of the Code of Virginia), Gabriel, Roeder, Smith & Company (“GRS”) was hired to conduct the 2017 Quadrennial Actuarial Audit of the Virginia529 Prepaid529 Program (“Prepaid529”).
The purpose of this audit is to provide the General Assembly with a comprehensive overview of the actuarial soundness of the Prepaid529. This audit consisted of a non-replication actuarial audit of the actuarial policy and practices of the Prepaid529.
Based on the results of our audit, we believe that:
• Prepaid529 is actuarially sound (i.e., the Fund has sufficient assets (including the value of future installment payments due under current contracts) to cover the actuarially estimated value of the tuition obligations under those contracts (including any administrative costs associated with those contracts), and
• the primary actuarial assumptions (including the investment return assumption of 6.25 percent and the tuition increase assumption of 5.00 percent for the first two years and 6.50 percent thereafter) are reasonable.
Although this audit report contains a number of recommendations which we believe will improve the measurement and communication of the actuarial valuation results, we do not expect that any of these recommendations would have a material impact on the actuarial valuation results.
Following is a high level summary of the areas addressed in the audit and our associated findings:
1. Reasonableness of the funding results and conclusions of the June 30, 2016, actuarial valuation of the Prepaid529 as produced by Milliman, the Virginia529 actuary. This assessment includes a validation of the reasonableness of the liabilities by investigating individual test cases and using actuarial estimation techniques to approximate aggregate results that are used to compare the liabilities documented in the report.
• GRS was able to independently replicate the present value of future obligations payable from the Prepaid529 and the present value of future installment contract payments due to the Prepaid529 within 2 percent for the majority of the test lives. The differences in the present value of future obligations and present value of future installment contract payments that were larger than 2 percent were due to lower frequency situations. Although we have recommended changes in the actuarial valuation methodology for these situations, these changes would not be expected to have a material change on the overall actuarial valuation results.
2. The degree to which the beneficiary data is sufficient to support the conclusions of the June 30, 2016, actuarial valuation and the use and appropriateness of any assumptions made by Milliman regarding the data.
• We performed consistency checks between the original data produced by the Virginia529 and the retained actuary’s “scrubbed” data file. We found the “scrubbed” data to be consistent with the original data and therefore, we concluded that the retained actuary’s “scrubbed” data file is a reasonable representation of the original data provided by the Virginia529. Overall, we also found the data used in the actuarial valuation to be reasonable and appropriate.
3. Whether the June 30, 2016, actuarial valuation performed by Milliman was conducted in accordance with generally accepted best practices for actuaries, as well as the principles and practices prescribed by the Actuarial Standards Board.
• In general, we find that Milliman followed the appropriate Actuarial Standards of Practice (ASOPs) that are the most applicable for a prepaid tuition program.
4. The content, detail, format, clarity and scope of the June 30, 2016, actuarial valuation report prepared by Milliman.
• We reviewed the June 30, 2016, actuarial valuation report prepared by Milliman and find that the report is generally complete and contains the appropriate information.
5. The reasonableness and appropriateness of the actuarial assumptions and methods used by Milliman in the June 30, 2016, actuarial valuation.
• In general, we find that the economic and demographic actuarial assumptions employed by Milliman in their June 30, 2016, actuarial valuation are reasonable.
6. Whether Prepaid529 is presently being funded on an actuarially sound basis and will likely be in the future based on the results of the June 30, 2016, actuarial valuation. The assessment also considers a) whether the funded status of the Prepaid529 program is appropriate, and b) potential considerations regarding the actuarial valuation and funded status of the program that could result from changes that Virginia529 intends to propose to modify the benefit structure of the program to an enrollment-weighted average tuition (WAT) payout model.
• Milliman concluded that Prepaid529 was actuarially sound because the Fund has sufficient assets (including the value of future installment payments due under current contracts) to cover the actuarially estimated value of the tuition obligations under those contracts (including any administrative costs associated with those contracts). We agree with this conclusion.
• Based on the current funding level (129 percent with a 96 percent probability of Prepaid529 funds exceeding obligations) and the average load of about 11 percent on contract prices to increase the actuarial reserve of the program, we believe the pricing methodology is actuarially sound.
• As a result of the actuarial soundness, funding level, and average load on contract pricing, we recommend two options to be considered going forward:
i. Based on the funding level of the program, VA529 could decrease the pricing reserve on Prepaid529 contracts.
ii. Prepaid529 could consider an asset allocation that further reduces risk in order to maintain a surplus position if there is adverse future investment experience. A change in asset allocation would likely require a change in the investment return assumption used in the actuarial valuation.
• We would not expect any adverse impact on the funded status or actuarial valuation of the current program as a result of implementing an enrollment-weighted average tuition (WAT) payout model for new contracts, assuming the following:
i. Prepaid529 continues to operate as a single program with two different benefit structures (the current benefit structure for current contracts and the proposed WAT payment structure for new contracts)
ii. All program assets are invested together (allowing the program to maintain the current target asset allocation to support the current investment return assumption)
iii. Appropriate changes in assumptions and valuation methods are made to reflect the change to an enrollment-weighted average tuition (WAT) payout model for new contracts
iv. Contract prices continue to contain a similar reserve/load (about 11% for the 2016-2017 prices) or a lower reserve/load if deemed appropriate and equitable
v. The level of contract sales is maintained or increases from its current levels
• We recommend that prior to implementation of an enrollment-weighted average tuition (WAT) payout model for new contracts, a full actuarial study be performed with projections in order to understand the short and long-term implications of the change based on actuarial assumptions agreed upon by the actuary and Virginia529.
7. Comment on whether Virginia529 has satisfactorily addressed considerations and recommendations offered by GRS in the 2013 Quadrennial Actuarial Audit of the Virginia529 Prepaid529 program.
• Changes in assumptions were made since the 2012 actuarial valuation and reflected in the 2016 actuarial valuation that were consistent with the recommendations that GRS made as part of the 2013 Quadrennial Actuarial Audit of Prepaid529.
• There were no changes made with respect to the minor considerations that GRS included in the 2013 audit. However, Milliman did provide the following information:
i. Disclosure in the actuarial valuation report that the expense assumptions were developed from a cost analysis by Virginia529 Plan staff
ii. Additional pricing assumptions for 2016 as requested by GRS for the 2017 audit
• We are repeating our recommendation (from the 2013 Quadrennial Actuarial Audit that we completed) that additional disclosure on pricing assumptions and expenses be included to increase transparency to contract purchasers and other interested parties
This report also contains a series of relatively minor recommendations for the Virginia529 and Milliman. A summary of these recommendations follows:
• Although the footnote on the exhibit in Appendix B indicates “Table only includes contracts with at least one semester of tuition remaining”, the counts appear to include all contracts with remaining tuition benefits (including contracts currently with unpurchased tuition benefits if there are installment contract payments remaining).
o We recommend that the footnotes in the report exhibits be reviewed to ensure consistency with the information that is shown. We agree that excluding contracts which have a very small amount of tuition units remaining increases the usefulness of the exhibit and it is something that GRS does with our prepaid tuition plan clients.
o Virginia529 may want to review these contracts and make updates to the contract data or follow up with contract holders, as needed.
• There are contracts that currently have or are projected to have remaining contract installment payments at the projected matriculated date
o We recommend that Virginia529 and Milliman discuss whether changes will be made to the underlying raw data or if assumptions should be made in the actuarial valuation to address this.
• We recommend that the assumption for tuition increases continue to be reviewed annually to confirm that the ultimate assumption of 6.5 percent continues to be reasonable, and that the assumption be adjusted as appropriate.
• We recommend that more disclosure be added to the actuarial assumptions section of the actuarial valuation report with respect to certain assumptions.
• We recommend reviewing the assumption that once contract beneficiaries begin utilizing their contract benefits (first matriculate), they will redeem two semesters each year until benefits are fully used.
• We recommend that Milliman and Virginia529 review (1) the data underlying the 5 percent assumption for rollovers/cancellations beginning in the year of assumed matriculation and (2) the application of this assumption in the actuarial valuation to ensure that the assumption is consistent with the actual experience of the Prepaid529.
• We recommend reviewing the consistency of how contract payments were classified for purposes of developing both the cancellation/rollover assumption beginning in the year of assumed matriculation and the bias load assumption (in particular for contract beneficiaries for whom their account balance was higher than the tuition at their school).