The Myth of Actuarial Independence

I spoke with a Reuters reporter on Monday about the Detroit pension-funded-status imbroglio but didn’t feel I sufficiently got across my opinion of the real role of public plan actuaries.  Perhaps Milliman, Inc. (Milliman) will do it for me as they go rogue on the profession.

Private plan pension actuaries aren’t any better but at least we have the IRS to dictate to us how to do our job.  That ability to select funding assumptions was reined in through laws like TEFRA and RPA, and finally taken away with PPA.  For government plan actuaries their masters are politicians and unions who want to believe that generous benefits can be paid for by either low-ball contributions or future taxpayers.  To that end we have gimmicks, rough estimates, and outright deception, all cloaked in jargon, strewn throughout practically every public pension plan valuation.

Nobody wants to see an honest valuation placed on these benefits so actuaries oblige.  However in the case of Detroit the need was to put a higher number on the liabilities for bankruptcy purposes.  Milliman obliged but it’s not something they are particularly eager to share with anyone who might understand what they’re doing.

Bloomberg reported today on a ‘secret database’ which Milliman used to develop their numbers and “Bill Nowling, a spokesman for Orr, said the database mostly contains about 56,000 pages of pension data, including personal information about the city’s 21,000 retirees that must be protected.”  The story continues:

Since Orr arrived, several creditors have criticized the city’s decision to prevent access to some information. The city did not release an analysis on Detroit’s unfunded pension liabilities that was generated by accounting firm Milliman until the Free Press received the report on Friday through a Freedom of Information Act request.

“The fact that Milliman requires people to sign a release before you can access their work in the data room speaks volumes about Milliman’s unwillingness to stand behind of any of these models that are being offered to the press as ‘independent pension studies,” said Bruce Babiarz, spokesman for the city’s two Retirement Systems.

What Milliman is trying to avoid is the question:

If you do it this way for Detroit then why not for New Jersey or any of the other public pension plans for which you serve as actuaries?

The only answer:

That’s what we were paid to do.

If only that Reuters reporter (and the rest of you not With It*) could only see that.

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* This is a reference to a 1948 Donald O’Connor movie (Are You With It?) which might be the only movie starring an actuary (I don’t count ‘About Schmidt’ since Nicholson could have been in any soul-destroying profession).  I saw it decades ago and have been searching all over for it ever since.  Enjoy but if you must skip around (which would be a mistake) make sure you hit the 13:50 mark:
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13 responses to this post.

  1. Posted by skip3house on August 21, 2013 at 6:58 pm

    ‘Whore,……misplaced decimal,…. that’s what we were paid to do……’
    About sums up the average citizen’s understanding while the eyes glaze over.

    Reply

    • Posted by skip3house on August 21, 2013 at 7:11 pm

      That’s way above my head, Skip. I’ll never see that, and by the time it comes time for me to, it will already be a thing of the past. Way past.

      Above comment by your common man

      Reply

  2. Big picture: Genertion Greed. It isn’t just pension actuaries. Accountants, bond raters, executive pay consultants, etc etc etc.

    Nobody’s gonna pay you to tell the truth.

    Reply

  3. Posted by Robert Mitchell on August 22, 2013 at 1:52 pm

    John, some of this is about protecting the business process that Milliman uses, some is about confidentiality of employee records, and some is the boring details of actuarial valuation. Why the flaming blog post over doing their professional duty? Or maybe, this is just Bloomberg & Reuters trying to get actuarial details for free.

    Reply

    • I think it’s all about Milliman not feeling comfortable with having their Detroit work challenged in light of all the valuations they have out there for other public plans (most easily available on the internet) where they do pretty much what they are criticizing GRS for doing.

      Not sure if it’s the same in Detroit but in New Jersey the public gets to know salaries,ages, and dates of hire for all public employees. Basically anything you would need to do a valuation.

      I get the feeling that public plan actuaries aren’t used to having

      Reply

  4. Posted by eatingdogfood on August 23, 2013 at 9:42 am

    Yeah; My Union Boss down at the Town Hall emailed me yesterday and Told me that this article was hitting the Papers today, and He told Me to make it Look like I was Working till this Blows Over in a week. I know the routine !!! In a week, I’ll be back to my usual activity of Collecting A Paycheck for Doing Nothing !!! Hey, Private Sector Workers; You really gotta Pony Up more Taxes !!! I need at least a 10 % raise !!! My Cabin Cruiser at the Dock behind my Vacation House in Florida needs a New Engine. My wife has been after me for a new car. She wants a BMW X6 G-Power Typhoon S !!! I told her I can’t afford that car. So then she says she will accept a Mercedes-Benz CL-Class and Nothing else !!! I also got Private School Tuition of $ 40,000.00 due in September. I got Credit Card Expenses coming out my AXX !!! That new 3000 sq ft extension on my house raised my property taxes $ 15,000. The maid and the housekeeper want raises. The gardener also wants a raise. You see Bunky; It ain’t easy in the Public Sector !!! So come on Private Sector Worker; Pony Up and Pay More Taxes so I can afford to live here !!! You See; Life Is Not Fair, and the DemoRats will take care of Everything !!! HAPPY DAYS ARE HERE AGAIN !!!

    Reply

  5. Posted by Eric on August 23, 2013 at 9:55 am

    It seems as though the legacy costs have remained in the US while highly paid jobs have been outsourced to other countries. Some no longer exist due to technological advancements. There never will be a recovery. It is a food stamp nation forever.
    Since wages, even on lowly paid jobs, are stagnant, and the liabilities remain, the problem of pension funding, along with other legacy cost funding, have emerged as a national problem. There is no economic growth to offset these nagging costs. Zero.
    Let us watch Chicago. The collapse should be breathtaking!
    Eric
    PS This is not a democrat or a republican problem. Both parties are equally corrupt.

    Reply

    • Posted by skip3house on August 23, 2013 at 5:51 pm

      ‘Legacy costs’, perfect definition!
      Add to corrupt….stupid, greedy, ignorant, thickheaded, lazy, too trusting, crazy, bought and paid for,….

      Reply

  6. Posted by Eric on August 24, 2013 at 12:11 am

    skip3house:
    Stupid and lazy are great words in defining today’s politicians. How can they vote for bills in Congress that they have never read, outlined, and studied? They are told how to vote, and are trained like Pavlov’s dog salivating as a bell is rung prior to having the food powder blown into their noses.
    They are beyond corrupt and moronic. What a sheer embarrassment they all are!
    Eric
    PS Take care of yourself by hard work, preparation and study, and never rely upon another’s word or promise. It will be broken even if that person is not a loathsome politician.

    Reply

  7. Posted by George on August 25, 2013 at 4:40 pm

    Why are employee details of a public plan private?

    One possible future for local government sponsored projects:

    Scranton Parking Authority: a year after receivership
    http://thetimes-tribune.com/news/scranton-parking-authority-a-year-after-receivership-1.1541637

    Reply

  8. With the government printing money hand over fist, actuarial double-speak could be the least of our worries. Massive inflation, or possibly deflation may blow all our pension plans out of the water.

    Reply

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