Please Don’t Sue Us

The July 1, 2012 actuarial valuations for the New Jersey public retirement system are out and they provide a useful compendium of basic data on the plans from which an independent observer can deduce that they are going broke.  However, from an actuarial funding perspective they are a train wreck.  Liabilities and contributions are grossly understated while the ‘actuarial’ value of assets is pure fiction.  So how’s an actuary to avoid getting sued?  Here’s how Milliman and Buck are coping.

Only Following Orders

In compliance with New Jersey statute, this actuarial valuation is based on an investment return assumption of 7.90%.  The investment return assumption is specified by the State Treasurer.  Based on our most recent analysis, this assumption is outside our reasonable range.  If the investment return was lowered, the actuarial accrued liability and statutory contributions would increase and the funded ratio would decrease.  Determining results at an alternative investment return assumption is outside the scope of our assignment.  Milliman – TPAF cover letter, page 3

We don’t think New Jersey will sue us but we’re not so sure about anyone else who might take our values seriously

This work product was prepared solely for the State of NJ and may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. Milliman – TPAF, bottom of every page of report; first appearing in the 7/1/06 report

We warned you – if you can find and interpret it 

As of June 30, 2012, the ratio of market value of assets to the prior year’s benefit payments is 7.5, which is significantly less than the ratio of 8.4 from the prior year.  This is a simplistic measure of the number of years that the assets can cover benefit payments, excluding: investment income, State and member contributions, and future increases in those payments.  If ASF assets are excluded, since they represent accumulated contributions from active and inactive members, the ratio is 4.8.  The ratio for the prior year is 5.7.  Milliman TPAF comments – page 15

As of June 30, 2012, the ratio of market value of assets to the prior year’s benefit payment is 6.8.  This is a simplistic measure of the number of years that the assets can cover benefit payments, excluding future State and member contributions, and investment income.  This ratio decreased by 16.0% from the previous year’s ratio of 8.1.  If ASF assets are excluded, since they represent accumulated contributions from active and inactive members, the ratio is 3.1.  Buck – PERS State part, page 21

How are we supposed to know?

Future actuarial measurements may differ significantly from the current measurements presented in this analysis due to actual plan experience deviating from the actuarial assumptions, and changes in plan provisions, actuarial assumptions, and applicable law.  An assessment of the potential range and cost effect of such differences is beyond the scope of this analysis.  Milliman – TPAF Comments page 26

Milliman had far more CYA language in their TPAF report than Buck had in the others (though experience may change that in the future) and whether all this will work is up to the lawyers but, for me, honesty in a disclaimer still works best and I would suggest the following blurb on the top of each report page in bold letters as suitable:

Without significant cash infusions the benefits promised under this plan are unsupportable and the forced liquidation of assets to pay escalating benefits will mean imminent bankruptcy.  Assuming no significant benefit changes the Annual Required Contribution for the system should be at least $15 billion for 2012 but we can’t tell you that in this report because we would get fired.

11 responses to this post.

  1. Posted by Tough Love on March 21, 2013 at 1:26 pm

    While the 1-st quote is somewhat unique to Public Sector actuarial valuations, the 2-nd quote is a standard disclaimer found in the work product reports of virtually all professional service contracts…………. and it’s quite appropriate to be there.

    And John, I love you final suggestion …. what a hoot !


  2. Posted by muni-man on March 21, 2013 at 1:57 pm

    Wonder if they’ll use anything approaching the new guidelines coming out next month for the 7/1/13 valuation report. If so, that should drive liabilities up by 40%-50% and generate some spirited debate down in the Trenton puzzle palace. It’s theatre of the absurd.


  3. Posted by Elaine on March 21, 2013 at 2:35 pm

    And the actuarial firms like Watson Wyatt that create spin offs for unions and publics in the company. The new companies keeps very little capital so nothing to get in a lawsuit.

    took this off wiki:

    Also during 2007, Watson Wyatt announced that it would spin off its multiemployer retirement practices in the United States and Canada.[5] (A multiemployer retirement plan is set up under the terms of collective bargaining agreements involving more than one unrelated employer, generally in the same industry.) Watson Wyatt will not own any portion of the new companies — Horizon Actuarial Services in the U.S. and PBI Actuarial Consultants in Canada — but it will receive a portion of the new firms’ revenue for the next five years.[6]
    [edit]2007 Iron Workers pension fund settlement

    The lawsuit that I think got the internal wheels spinning for the new company:

    On 23 March 2007, Watson Wyatt settled a lawsuit by the pension fund trustees of the Iron Workers, Local No. 25, of Michigan. The lawsuit alleged that the pension plan was underfunded as a result of the company’s actuarial work. Under the settlement, Watson Wyatt paid $110 million but did not admit any wrongdoing.[7]


    • Posted by Tough Love on March 21, 2013 at 2:38 pm

      This happens (Corporate greed), but it has nothing to do with PUBLIC Sector pension Plans.


      • Posted by Elaine on March 21, 2013 at 9:32 pm

        I’m not sure what you mean. This particular company that spun off only has union plans…both public and private.


  4. Posted by Rich Berger on March 21, 2013 at 3:05 pm

    If one lawsuit can destroy your company, what would you do? Mr. Bury, do you put any disclaimers or caveats in the reports that you prepare for your clients?


    • Private sector DB work is a different animal. We’re told what mortality table and interest rate to use so if they don’t pan out the client can try to sue the IRS.


      • Posted by Tough Love on March 21, 2013 at 4:56 pm

        There is still plenty of wiggle room.

        E.g. how many Plan Actuaries have jiggled their assumptions to get the AFTAP to 80% so as not to embarrass the Corporate Plan sponsors (bad PR) by having to restrict Lumps Sum withdrawals ? An actuary doing that could be sued subsequent to a Plan failure by Participants (over the PBGC cap) getting lower pensions because Plan assets were unfairly drawn down by100% Lump Sum payouts that should have been limited to 50%..


  5. It seems simplistic to assume that there is a “right” answer when estimating the current value of future uncertain payment streams. No one has any idea what the “real” present value of any pension plan is – these are all estimates with a range of reasonable results. Focusing on a single amount provides a false sense of accuracy in an amount that is fundamentally uncertain.


    • Posted by Tough Love on March 22, 2013 at 11:38 am

      Absolutely correct, and with everything computerized, re-running an actuarial valuation with a different discount rate is VERY simply and should not be costly. But the Plan administrators generally don’t want to see results at lower discounts. Even thought very valuable, those in power who almost always support the status quo of excessive pensions do not want to present results (at lower, more reasonable discount rates) that might support the call for pension reform.


  6. Posted by George on March 25, 2013 at 6:06 am

    Searching on pension and sue I found an interesting scam.

    2 towns in RI will benefit from Google money for pensions
    Two Rhode Island communities will be allowed to use about $70 million forfeited by Google Inc. to fix their police pension shortfalls.

    Read more here:

    Apparently google was allowing Canadian pharmacies to advertise to Americans. For convoluted reasons police departments in bankrupt Rhode Island towns are used and are sharing in the windfall. So money from Google shareholders is being transferred to busted public pension plans. I guess you could also say Americans who will not benefit from the advertising and the Canadian Pharmacies are also being screwed.

    So expect to see more of these schemes.


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