After the ARC

I attended the Enrolled Actuaries’ conference this week and never has the gulf between private and public plan actuaries been so wide.

In the private sector we have no discretion and only rules, sillier than ever*, to regurgitate onto valuation reports.  For funding, we are told what method and mortality table to use and have a severely limited choice of interest rates.

Public plan actuaries, on the other hand, will soon have no funding rules other than the ones they come up with and the Society of Actuaries is asking for suggestions.

Paul Angelo and David Kausch gave a presentation at the Public Plans Seminar entitled “Funding Policies After the ARC” that included these PowerPoint slides which basically ask “Who will replace GASB’s role defining, monitoring and enforcing acceptable funding practices?”

Consider that in 32 years, from ERISA to PPA, private plan actuaries have messed up so badly that all discretion as to funding assumptions has been stripped from them and a Rube Goldberg collection of hoops through which to jump has been imposed.  Now public plan actuaries take their crack with the field wide open.  Any suggestions?

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* Did you know that the Plan Sponsor (even for one-participant plans) needs to request an AFTAP certification?  Presumably, if a big plan sponsor wants to freeze benefit accruals without bothering plan participants, all that is needed is to forget to request an AFTAP certification.

8 responses to this post.

  1. Posted by Tough Love on April 1, 2012 at 12:32 am

    John, The rules governing Private Sector Plans (especially the prescribed mortality table and interest rate basis) are there to prevent exactly what has happened in Public Sector Plans.

    If Public sector Plans were not able to play so fast and loose with HONEST valuations, the growth in benefit levels (especially the retroactively granted ones that are decimating State/County/City services) would never have occurred … as the huge costs couldn’t have been ignored.

    Bravo for those rules … they have protected many tens of thousands of Private Plan participants. And the Plans that have terminated as a result of these rules to adequately fund the Plan, likely would have folded anyway.

    I was unaware the GASB Was considering “discretionary” funding rules. A bad idea … as are all Principal-Based valuations. It serves nobody to increase the management opportunity to tell the professions “it’s my way or the highway”.

    Reply

    • I completely agree that reasonable rules are indispensable for funding DB plans and though PPA simplified and strengthened many of them, there are cases (one-participant sponsor-only plans) where there’s overkill.

      I was also unaware that GASB in their revisions of 25 and 27 were abdicating responsibility for propagating funding standards (though they’ll keep ARC for reporting). It smacks of surrender as they see public plans falling aside and their ARC being ignored.

      Reply

      • Posted by Tough Love on April 1, 2012 at 2:16 pm

        Of course I agree for one-participant sponsor-only plans. If (say) a doctor doesn’t appropriately fund his own personal DB Plan, who’s he screwing but himself.

        Reply

  2. Posted by Larry Littlefield on April 1, 2012 at 7:52 am

    Basically, did they just agree that they could go along with whatever whoever paid and consider it doing their job? It sounds like legalized fraud.

    Reply

    • It looks that way. I wonder if the actuary who comes up with the methodologies (100-year amortization of unfunded; 10% long-term funding rate) that result in the lowest contribution requirements will get much work.

      Reply

      • Posted by Anonymous on April 1, 2012 at 3:56 pm

        I think NJ should start using a new ROI of 10%+ or so which, if coupled with the UNCOLA and the higher contribution rates, would make the plans virtually self-funding in perpetuity overnight. That would eliminate the need for any future ARC’s, and the Legislature could then scrub the 1/7th, 2/7th, …… etc. contribution gig in the future. Problem solved – TP’s don’t have to cough up any future funding, a state crisis is avoided, and the publics have ‘healthy’ plans again. WIN,WIN,WIN!!

        Reply

  3. […] not for funding.  At the last Enrolled Actuaries meeting the public pension sessions were all on what actuaries would do now that GASB was abnegating responsibility for setting funding recommendati….  There won’t be any more ARC required for funding as GASB has washed its hands of setting […]

    Reply

  4. […] There is no more ARC for funding.  What’s to keep a state from hiring an actuary who, for the right price, sees 20% investment earnings and a plague component in the mortality table as reasonable? […]

    Reply

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