Milliman Actuarial Magic

The New Jersey Policy Perspective (NJPP) is a left-leaning think tank that put up a blog when an  experiecne study of the Teachers Pension Plan came out where the NJPP noted:

The governor put New Jersey’s pension obligations front and center in his budget address, sounding the alarm about a “crisis” that the pension (and health benefit and debt) payments are creating for the state’s fiscal health. But close budget observers may have noticed an odd tidbit: the proposed budget includes only $2.25 billion in pension payments, not the $2.4 billion announced earlier.

They pointed to five pages of that study wherein the actuary (Milliman) analyzed the Rate of Postretirement Mortality referencing in part Actuarial Standards of Practice No. 35:

“The actuary should consider the effect of mortality improvement both prior to and subsequent to the measurement date”

They considered it and it looks like they found mortality improvement (people living longer than expected) so….

“As requested by the Administration, we have presented two options for incorporating future mortality improvements in the actuarial valuation process.”


After reviewing these two options, the Administration has chosen the second option, which results in a slight decrease in the Actuarial Accrued Liability as of July 1, 2013 of 0.4%.

That’s right.  An experience study determines that retirees will be living longer so what happens?  Their Actuarial Accrued Pension Liability goes DOWN from $51.4046 billion to $51.1941 billion and the statutory contribution DROPS from $938.4 million to $925 million.

Of course there were other factors that were analyzed and the salary scale assumption was lowered but how that would have a greater impact on accrued liabilities than improved mortality escapes me.  The investment return assumption was also analyzed and Milliman suggested:

Based on TPAF’s actual investment allocation as of November 30, 2012, our best  estimate (50th percentile) return assumption is 7% and our reasonable range is 6.10% -7.85% (25th to 75th percentiles). The reasonable range is defined as the range where actual results compounded over the measurement period are more likely than not to fall.  The current assumption of 7.9% is outside our reasonable range.

This factor was not incorporated in the changes to the liability and contribution amounts and no word as to whether the ‘Administration’ was given any choices.

One response to this post.

  1. Posted by Tough Love on March 11, 2014 at 7:35 pm

    Warren Buffet’s commentary about actuaries in his 1975 letter to Mrs. Graham (head of the Washington Post) discussing pension Plan risks and investments in general, is very telling …..

    “Consulting actuaries are very good at making calculations. They are frequently terrible at making the assumptions upon which the calculations are based. In fact, they well may be particularly ill-equipped to make the most important assumptions if the world is one of economic discontinuities. They are trained to be conventional. Their self interest in obtaining and retaining business would be ill-served if they were to become more than mildly unconventional. And being conventional on the critical assumptions basically means accepting historical experience adjusted by a moderate nudge from current events. This works fine in forecasting such factors as mortality and morbidity, works reasonably well on items such as employee turnover, and can be a disaster in estimating the two most important elements of the pension cost equation, which are fund earnings and salary escalation.”


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