AAA Punts

It seems every actuarial report prepared for a public pension plan is by an actuary claiming as their qualification for providing such report membership in the American Academy of Actuaries (AAA). So when the AAA came out with an issue brief titled “Objectives and Principles for Funding Public Sector Pension Plans” one would expect it would have some influence……except when it’s this lame.

Ranging from the bleeding obvious (put in what you’re told) to the fairly obvious that routinely gets ignored:

“it is important to acknowledge, identify, and manage situations when stakeholders might seek to influence contribution amounts in the short-term to achieve competing goals (e.g., public policy funding for other public needs, immediate fiscal deficits, etc.) to the detriment of achieving the funding objectives for the pension plan. “

What acknowledgement, identification, or management was there when New Jersey flat-out refused to make their pension contribution or when they legislated that 1/7th of the ARC was sufficient?

Even when the AAA brief seems to be making common sense statements:

“The key factors that determine the security of the pension promise are the legal obligation of a plan sponsor to provide the benefit, the level of assets in the pension plan, the manner in which those assets are invested, and the financial resources of the sponsor to make any necessary additional contributions if and when those contributions come due.”

The next line completely contradicts that position:

“The policies established to fund the pension plan should be premised on the assumption that the obligation to provide the promised benefits must be met.”

If we work under the assumption that promised benefits will be met:

  • that then is the obligation
  • the level of assets would not matter since even with no money in the trust the obligation exists and pay-as-you-go is still an acceptable funding method for public plans and likewise the manner of investment would be immaterial
  • what government entity anywhere will have the financial resources to transition (as New Jersey likely will have to around 2019) from making mini-contributions of $2 billion annually to $15 billion to retirees when the trust fund runs dry?

The AAA may have a role to play in other actuarial fields but dealing with the public pension mess that some of their members colluded in creating and exacerbating will take a lot franker talk than they seem capable of mustering.

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PS: If this Issue Brief is supposed to be taken seriously by members of the AAA performing public plan valuations then wouldn’t the “assumption that the obligation to provide the promised benefits must be met” preclude the use of a Welch Factor, however appropriate?*

 

* Orr may propose different levels of cuts for different pensioners, potentially depending on their age or the size of their pensions.

3 responses to this post.

  1. Posted by Tough Love on February 21, 2014 at 12:45 am

    In fairness to the AAA, the AAA didn’t create the absurd Public Sector pension accounting and funding rules … or should I say, the No-Requirement-To-Fund with No Consequence Rules.

    All of the colluding self-interested parties wanted it this way. While many have benefited mightily (the politicians, the Unions, and those with big overstuffed pensions paid out for a long time and who have since, or will soon, die), while the cohorts who follow them will be left to pick up the pieces of this failed policy.

    Reply

  2. Posted by Tough Love on February 22, 2014 at 12:45 am

    New AAA Issue Brief … “Objectives and Principles for Funding
    Public Sector Pension Plans”

    http://www.actuary.org/files/Public-Plans_IB-Funding-Policy_02-18-2014.pdf

    Reply

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