Lies, Damned Lies, and Actuarial Valuations

Thanks to James B. Allen, Secretary of the Pennsylvania Municipal Retirement System (PMRS), I received a copy of their January 1, 2011 valuation report and it offers a glimpse into the actuary’s role in developing the public pension funding crisis that some people are waking up to.

The report was signed by Kenneth A. Kent, FSA, FCA who is familiar to me from (a) interviewing for my first real job with his firm* and (b) his being the defendant’s expert in a case where the NJEA sued New Jersey to get them to make their pension contributions.  In that latter instance he testified:

Defendants’ expert, Kenneth Kent, calculated the amount of the unfunded accrued liability at $2 billion, not $2.6 billion, because the use of BEF funds for the normal contribution was permissible.   In any event, due to the remarkable 17.06% rate of return on TPAF’s assets in 2007 – 8.81% higher than the 8.25% interest assumption set by the Treasurer – TPAF’s value, in market terms, grew by an extra $2.3 billion above its assumed growth, an amount virtually equivalent to the funding gap of FY 2004-2007.   But even if the unfunded accrued liability had not been redressed by the 2007 investment returns, and was instead “carried” indefinitely from one year to the next, Kent’s financial models showed that the funded ratio of TPAF assets versus obligations 7 would improve as long as appropriations equal to TPAF’s annual obligations for benefits were resumed or phased in reasonably soon.   The expert’s models showed such results for the next thirty years, which he asserted as the longest period for reliable projection.   Based on these assumptions, Kent concluded that the TPAF will continue to have enough assets to pay all retirement benefits for at least the next thirty years, despite the funding gap of FY 2004-2007.   He also noted that the State had a wide range of options to effect future funding of TPAF, including but not limited to changes to employee contributions and retirement age.

So what did someone who believed that the New Jersey TPAF has at least 30 years to live and that the State has a “wide range of options” certify to in Pennsylvania as of January 1, 2011?

  1. Trust assets were $1,713,752,000 on an actuarial basis when the market value was $1,542,288,000.
  2. The cover letter to the report warns: “In preparing our report, we relied without audit, on information (some oral and some written) supplied by the System.  This information includes, but is not limited to, the plan provisions, employee data, and financial information.”  In a classic case of ‘garbage in/garbage out’ liabilities were calculated from data provided by municipalities, some of whom report funded ratios in the thousands.
  3. Without plan provisions or participant detail (which would seem to be the least you would need to do a valuation) the only number susceptible to verification is the liability for retiree benefits.  4,184 retirees, average age 71,  get $55 million in annual payouts which were valued at $587 million.  When I used RP200 mortality, J&25%S normal form of benefit, 6% interest, and a 3% COLA that ratio of payouts to values is not unreasonable but what about the assumptions themselves?  A 6% interest rate is more in line with reality than the 8% most states are using but still rosier than the current segment rates that private sector defined benefit plans must use.  And why not use the AMT table with a set-forward for a population that has lifetime health benefits?

The PMRS is not a disaster in the New Jersey/Illinois sense.  Contributions are coming in to replace payouts.  The benefits are modest (about $13,000 per retiree) and there is a chance that it will survive for at least the next thirty years.  However, the data has to be a mess, the actuarial assumptions are suspect, and, in spite of the fancy charts and reassuring tone, the actuarial report is little more than an educated guess by people paid to guess a certain way.



* It’s a convoluted story of coincidences where I interviewed with his partner, Jeffrey Schreiber, when their offices were in the same city I lived in (and where I now have my offices) and I was supposed to get over my college transcript but I messed up the procedure and he cooled.  I came back though in response to another ad with someone else but they already had some record of the prior interview so I didn’t get it.  This was 1979 right after ERISA and pension companies were hiring any warm body (who would work for $11,000) so I landed with another one (The Becker Company).  Though 6 years later Jeff Schreiber did hire me at a place he latched onto after there was a falling out between him and Ken Kent regarding succession to their business (Actuarial Services, Inc.) which is a story for a future footnote.

6 responses to this post.

  1. Posted by Tough Love on August 9, 2012 at 10:25 pm

    I find it interesting that the actuary can waive off even a cursory examination of information key to a Pension valuation … the specifics of the Plan population and the Plan benefit structure as it applies to each group.

    I doubt if the cover letter “warning” meets the AAA’s ASOP requirements regarding data review and reasonableness..



      page iv:
      “2. When data are supplied by others, section 3.3 clarifies that the actuary should follow the guidance of section 3.5, Review of Data, before relying on such data. This means that the actuary should review the data for reasonableness and consistency unless, in the actuary’s professional judgment, such a review is not necessary or not practical.”

      Well I can definitely see where it’s impractical, given the number of covered plans and level of data.


      • Posted by Tough Love on August 14, 2012 at 10:35 pm

        Per John’s #2 above, ” …liabilities were calculated from data provided by municipalities, some of whom report funded ratios in the thousands.”

        Clearly such data is likely incorrect, and vertainly in need of review.

        So where does that leave the actuary (with respect to compliance) when the last words from that ASOP are “…such a review is not necessary or not practical.””.

        Note the word “or”. So what is the actuary to do when, while the data review is indeed “not practical”, but is certainly “necessary” ?


  2. Posted by Not The Pier Shops at Caesars on August 10, 2012 at 8:25 am

    Some news about asset valuations in the state of NJ.

    Atlantic City Mall Sparks ‘Macabre Fascination’ in CMBS Market

    incurring the first principal loss ever on a so- called AJ class of bond

    final bid was $25 million, compared with an appraisal of $56.6 million in January 2011, according to Nomura Holdings Inc. The property was estimated to be worth $210 million in 2007

    “Most people in the CMBS market have gotten the sense that this asset really is near worthless”


  3. Posted by Anonymous on August 10, 2012 at 1:49 pm

    you know the reality but can you do anything about it but complain, probably not


  4. I’m still not understanding how some of those plans are getting funded ratios of 100s and 1000s of percents… have they been over-contributing? over-valuing assets? no clue.


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