Posts Tagged ‘actuarial’

Milliman on Mortality: Hope You Die


The Milliman report criticizing assumptions used by Detroit’s erstwhile actuaries Gabriel Roeder Smith & Company (GRS), whose reports showed Detroit’s plans to be among the healthier public plans in the nation, kicked off with a scathing indictment of mortality assumptions used by GRS which Milliman characterizes as too ‘optimistic’.

You tell a layman that mortality assumptions are ‘optimistic’ and the assumption would be that people are living longer but in the perverted world of public pension funding an optimistic assumption (and they’re all optimistic) is one that lowers costs and having retirees die sooner is good news.  Having all 20,000 Detroit retirees contract the plague would, in the world of big benefits and low costs, be cause for unbridled celebration by all concerned (except of course the 20,000 decedents).

Quoting from the Milliman report:

While we have not received experience data to perform any tabulation, the assumptions indicate to us that the mortality rates of Detroit public employees are significantly worse than national averages.  While it is possible that the current assumptions are appropriate, as a VRPG for item D in the table above, the liability has been increased by 10% as an adjustment to reflect unbiased mortality rates.

In general for all actuarial assumptions, the more optimistic the current assumption is, the higher the likelihood that the assumption will not be met, leading to higher costs later as actuarial losses accumulate.

The mortality assumption used by GRS in their June 30, 2011 General Retirement System report (page E-1) that Milliman found so objectionable:

The mortality table used to measure retired life mortality was 110% of the RP-2000 Combined Table for males and 110% of the RP-2000 Combined Table set back 2 years for females. These tables provide a margin for mortality improvements of approximately 15%.

The mortality assumption used by Milliman in their June 30, 2012 valuation of the New Jersey Teachers’ Pension and Annuity Fund (page 61):

Rates of mortality vary by age, gender and type of retirement. A generational approach is applied using Scale AA to apply for future mortality improvement for non-disabled annuitants. The base year is 2000 for males and 2003 for females.

Notice much difference?  What if you do a VRPG of the retiree populations in each report.

In the Detroit General Retirement System there are 11,555 retirees getting $219 million in annual payouts which GRS values at $1.984 billion which comes out to an average annuity factor of 9.06.

In the New Jersey Teachers Pension and Annuity Fund there are 89,308 retirees getting $3.46 billion which Milliman values at $32.4 billion which comes out to an average annuity factor of 9.36.

Bumping up that GRS factor by 10% would bring it to 9.97, far above what Milliman actuaries are assuming for at least one public plan in their regular day jobs.

Detroit’s Hidden Pension Shortfall


The June 30, 2012 valuation for the Detroit Police and Fire Retirement System is out* and it claims that the system is 96.1% funded with $3,675,459,604 in assets to cover $3,822,676,002 in liabilities, an enviable ratio for most public pension plans these days.  So why the need for cuts?  What’s the problem?

Basically that the valuation is a joke.  It doesn’t honestly value the pension liabilities it recognizes while ignoring others and  pretends to have more money than it reports is in the plan.  What they try to hide:

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Don’t Frighten the Children (about Illinois Pensions)


Illinois public pension plans are in critical financial condition and were benefits valued using reasonable assumptions the picture would be even worse.  So what is Illinois doing about this?  Last summer the state hired an outside actuarial firm to “review assumptions and valuations prepared by actuaries retained by the boards of trustees of the State-funded retirement systems….and…recommend changes.”

Recently released was their work product, all 190 pages, though only these three pages are likely to be read and only this line likely to be publicized:

“Cheiron reviewed the actuarial assumptions used in each of the five systems’ actuarial valuations and concluded that they were reasonable.”

Which is what they were paid to conclude. However though Cheiron avers that “the interest rate assumptions for each of the five systems were reasonable at this time…..for three of the systems (TRS, SURS, and SERS), Cheiron recommended that the Boards consider lowering the interest rate assumption in the future.”

Those interest rates are: TRS – 8%; SURS – 7.75%; SERS: 7.75%;
The others: JRS: 7%; GARS: 7%

Though most people aren’t qualified (or inclined) to read through the report and argue actuarial concepts, there are some obvious questions that would give even a child* pause:

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Actuarial Error Has Wider Implications


An actuarial firm miscalculated optional forms of benefit in a bunch of California public pension plans by disregarding cost-of-living-adjustments (COLAs) in their calculations.  According to the article where it was reported:

For example, consider someone retiring at age 57 who designates a 27-year-old beneficiary. According to Angelo, the pension payments to both are 12 percent higher than if the cost-of-living adjustments had been factored in. The younger the surviving beneficiary, the greater the overpayment.

What does this mean to those retirees and, more importantly, to states like New Jersey who are eliminating COLAs? Continue reading

Pension Funding Flaws


Public pensions are collapsing in part because of flawed actuarial methods.

Ivory tower concepts like believing the sponsor will be put in what they’re told to put in don’t work in states like New Jersey.   But, beyond that, presuming that you will earn 8% on phantom assets could require you to earn 16.67% on what you actually have.  Taking the most basic example:

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Real Number on New Jersey Pensions – 6/30/11 update*


The June 30, 2011 valuation reports are out.

You might be seeing numbers tossed at you regarding deficits in the state pension of $40 billion and a funded ratio of 67%.  They’re way off.  Based on actuarial reports for the three largest plans I put the real deficit now at $162 billion and the real current funded ratio at 30%. Let’s take this in stages as we replace official figures with real-world ones for the three largest plans.

OFFICIAL NUMBERS @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Actuarial Assets………32.2…………29.1………23.2……………..84.5
Liabilities……………….49.9…………43.3……….30.9…………..124.1
Deficit………………….-17.7…………-14.2……….-7.7……………-39.6
Funded Ratio………..64.5%………67.2%…….75.1%………….68.1%

The funds did not really have $84.5 billion in assets at June 30, 2011. The ‘actuarial value’ in this case means an average of the the asset values over the last five years which in the private sector is used to ‘smooth’ valuations but in the public sector is used to distort. Just because the plan held Lehman stock that was worth something in three of the last five years they get to pretend they really have more money now. Here are the figures when we use market value of assets:

OFFICIAL NUMBERS WITH ASSETS AT MARKET @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Liabilities……………….49.9…………43.3……….30.9…………..124.1
Deficit………………….-22.5…………-17.6…….. -9.6……………-49.7
Funded Ratio………..54.9%………59.4%…….68.9%………….60.0%

Next, we turn to the liability side of the ledger. As I detailed previously on TPAF the underlying assumptions upon which the value of these promised benefits are based (primarily the 8.25% interest assumption in a plan that now demands liquidity) understate the true benefit costs. Here are the figures using realistic liability valuations:

BURY NUMBERS WITH MARKET VALUE @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Bury Liabilities…………75.0…………65.0……….46.0…………..186.0
Deficit………………….-47.6…………-39.3……. -24.7…………..-111.6
Funded Ratio………..36.5%………39.5%…….46.3%………….40.0%

Next we turn to the COLA theft.  2010 liability numbers were adjusted for the plans to take into account the elimination of all future Cost-of-living adjustments that public employees were promised - in writing.  Were that reinstated the respective adjustments that artificially lowered liabilities will need to be reinstated to the tune of 17% (TPAF), 12% (PERS), and 16% (PFRS) giving us:

BURY NUMBERS WITH MARKET VALUE AND COLA (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Bury/COLA Liab………87.7…………72.8……….53.4…………..213.9
Deficit………………….-60.3…………-47.1……. -32.1…………..-139.5
Funded Ratio………..31.2%………35.3%…….39.9%………….34.8%

Now remember these numbers were as of June 30, 2011. The latest report from the Division of Investments shows assets at $69.6 billion and we can add another year of accruals to the liability side:

BURY/COLA WITH MARKET VALUE @ NOW (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………25.6…………24.0………20.0……………..69.6
Bury/COLA Liab………95.0…………79.0……….58.0…………..232.0
Deficit………………….-69.4…………-55.0……. -38.0…………..-162.4
Funded Ratio………..26.9%………30.4%…….34.5%………….30.0%

For the year ended June 30, 2011 there was about $7.6 billion paid out in benefits from these three funds. With early retirement incentives, the return of cost-of-living adjustments, longer life expectancies, and baby-boomer retirements this payout number should exceed $10 billion in three years by which time the fund will be depleted (after returning the interest-adjusted contributions made by employees) unless, of course, New Jersey politicians step up and do the honorable thing. There’s a debate as to whether you can put a number on that happening.

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* This is an update of pieces I did on April, 2009 and February, 2010 , and February, 2011 with minor changes in the text.

Detroit: A pension fantasyland


Headlines blare: “Detroit Avoids Fiscal Collapse With Landmark Pension Overhaul

The reality is quite the opposite.  As in New Jersey, Detroit has assured fiscal collapse by passing weak reforms that artificially reduce contribution ‘requirements’ while leaving the unsustainable benefit structure in place and even crowing about their accomplishments.

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