Recent developments have increased the focus of pension actuaries on embedded options in retirement plans. A number of factors have contributed to this situation. First, the extraordinary market conditions experienced in the past two years have caused fluctuation levels in assets, liabilities, etc., that few would have predicted. Second, growing familiarity with financial economics and ERM has provided the impetus to model a range of outcomes in addition to determining the cost of the plan based on the most likely or average expected rates of return. Finally, in the United States recent IRS regulations are requiring embedded options in certain situations such as guaranteeing principal in cash balance plans.

Examples of Embedded Options include:

• Indexed Cash Balance Plans with Caps or Floors on Crediting Rates
• Variable Annuity Plans that guarantee that the value of an annuity is not less than the initial amount.
• Retirement Plans that provide cost–of–living increases if market returns exceed a certain level
• Floor offset plans

Note: In some cases actuaries may be valuing these options through the use of implicit assumptions. While this approach may be still be appropriate in certain situations, often this was done because actuarial tools and software to explicitly value the options were not yet available. It is also possible, in some instances, that these options are not valued at all due to a lack of commonly accepted or understood methods to price them.

The Society of Actuaries' Pension Section Research Team is seeking proposals for research on embedded options in retirement plans that will, at a minimum:

1. Compile a list of as many embedded options as possible.
2. Catalog and/or develop approaches to value and model embedded options. A range of approaches should be considered including more rigorous approaches that could be applied when extensive data and resources are available, and less rigorous approaches that might entail less effort for valuing embedded options in smaller plans or less valuable options in large plans. In addition, researchers should consider the challenges actuaries might face in communicating their results to plan sponsors and other stakeholders, and in making sure that plan stakeholders have and understand all of the information they need to understand the ramification of variation in market returns.

Ideally the research will also cover the following topics; however, these items are not required for proposals under this RFP:

1. A survey of the prevalence of embedded options in pension plans using publicly available documents.
2. An investigation of how actuaries currently value and account for embedded options.
3. A discussion of issues and factors that actuaries need to consider for plans with these features. For example, the administrative cost of a rigorous approach to valuing embedded options; difficulties in communicating the full range of possible outcomes to plan sponsors and participants; whether perceived best practices conflict with any actuarial standards of practice; and stress testing.

To facilitate the evaluation of proposals, the following information should be submitted:

1. Resumes of the authors, including any graduate student(s) expected to participate, indicating how their background, education, and experience bear on their qualifications to undertake the research. If more than one author is involved for each report, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the authors as well as for the firm or institution on whose behalf the proposal is submitted.
2. An outline of the approach to be used. Details should be given regarding the manner in which appropriate published material will be identified and evaluated, search techniques to be used, collateral material to be consulted, and possible limitations of the review and analysis. Suggestions for survey revisions or expansions should be included.
3. Cost estimates for the research, including computer time, salaries, report preparation, research costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
4. A schedule for completion of the research, identifying key dates or time frames for research completion and report submission.
5. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

The Pension Section Research Team is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals may also be sought, but the Pension Section Research Team will make the final decision. The SOA's Research Actuary will provide staff actuarial support. A Project Oversight Group (POG) will be appointed to oversee the project upon selection of the proposal.

Any questions regarding this RFP should be directed by fax, or e–mail to:
Steven Siegel, SOA Research Actuary
ph: 847.706.3578
f: 847.273.8578
e–mail: ssiegal@soa.org.

If you intend to submit a proposal, please e–mail written notification by November 15, 2009 to:
Barbara Scott, Society of Actuaries
475 N. Martingale Road
Suite 600, Schaumburg, IL 60173–2226
ph: 847.706.3592
f: 847.273.3592
e–mail: bscott@soa.org

Please e–mail a copy of the proposal to: Barbara Scott at bscott@soa.org@soa.org.

Proposals must be received no later than December 1, 2009. It is anticipated that all proposers will be informed of the status of their proposal in January 2010.

Note: Proposals are considered confidential and proprietary.

The Pension Section Research Team reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available. The Pension Section Research Team also reserves the right to redirect the project as is deemed advisable.

The Pension Section Research Team intends to copyright and publish the results of this research. The research will be considered work–for–hire and all rights thereto belong to the Pension Section. However, appropriate credit will be given to the researcher(s).