Complaining About Public Plan Actuaries

“This session is not being recorded but you may be quoted in John Bury’s blog”

Lance Weiss kicking off Session 704 – Public Employee Retirement Systems Workshop – today at the  Enrolled Actuaries meeting at which this interesting tidbit came out.

 

As of September 30, 2013 the Actuarial Board for Counseling and Discipline (ABCD) which counsels and disciplines all types of actuaries (life, health, casualty, and pension) had 23 outstanding complaints.  Of those 18 involved pension actuaries and, of those 18, 10 involved public plan actuaries.  Of the 11 newest complaints going to the ABCD, 9 were on public plan issues.  Supposedly the breakdown among actuarial disciplines had historically been equal.  I suggested that the next complaint could continue the trend.

The pulse of the room was that it was media attention that was driving these complaints but I said (including parts I would have said if I had thought of it at the time):

“It is frustration that is driving these complaints.  If someone has a problem with a Life or Casualty actuary there is an outlet (in theory) with state Insurance Departments.  For pension actuaries in the private sector problems sometimes get resolved by going (or threatening to go) to the IRS, PBGC, or DOL .  With public plan actuaries even a lawsuit is inadequate in that you would be suing within the state or jurisdiction that likely encouraged/benefited from the perceived malfeasance.  For example when public plan actuaries ignore a provision of Chapter 78, Public Law 2011 at the behest of the governor of that state, what good does it do to sue the actuaries?  This doesn’t speak badly of public plan actuaries.  It speaks badly of the system.”

Any comments? Remember this is a workshop.  More quotes from this session later.

 

 

32 responses to this post.

  1. Posted by Sarah on March 26, 2014 at 8:35 pm

    I don’t agree with that assessment of the pulse of the room. There were several declarations dealing with the lack of taking over the work of another actuary who isn’t at your firm in other industries as well as an increase in changes in both benefits and methodologies in the last few years making issues more likely.

    Reply

    • Posted by Tough Love on March 26, 2014 at 9:01 pm

      ???????????

      Reply

      • That was speculation since ABCD procedures are confidential and we can’t know how they came about. I don’t buy that reasoning in part because there doesn’t seem to be a lot of takeover cases. In New Jersey Buck and Milliman have been around for decades though someone told me they switched assignments. That is, Milliman used to do 6 of the plans and Buck did the Teachers and now it’s reversed.

        Reply

  2. Posted by Sarah on March 26, 2014 at 9:04 pm

    !!!!!!!

    Is this a punctuation exchange?

    Reply

    • Posted by Sarah on March 26, 2014 at 9:36 pm

      How many consulting actuaries doing public pension work would you say there are?

      Reply

      • Based on the Joint Board session there are only 3,500 active Enrolled Actuaries these days. Based on attendance at these public plan sessions I would extrapolate and guess maybe 500 specialize in public plans which would include maybe 400 at the big shops (Buck, Milliman, GRS, Segal,….) and another 100 in the small plan market (all those Pennsylvania plans and smaller ones across the country) with a few more working for the governments themselves.

        Reply

        • Posted by Sarah on March 27, 2014 at 6:43 am

          And ballpark, how many do you think are under 50?

          http://www.actuarialstandardsboard.org/pdf/survey/survey.pdf

          This was back in 2009, but the only practice area older than pension was “other,” and I’m fairly certain public pension is the oldest group of public/SE/ME.

          I am NOT saying that older actuaries are the cause, but at both the small plan level and the statewides, the worst “sins” I have seen have been done by older actuaries who either feel entitled to more or less be the funds god or justify it saying it is what they’ve always done.

          Reply

        • Posted by Anonymous on March 27, 2014 at 7:13 am

          There’s something I’ve wanted to do for a couple years and haven’t ever gotten around to it and seems like something that would be up your sleeve.

          Use the public funds survey as a start and make a spreadsheet of the signing actuaries for each fund and their firms.

          There’s an old file on the actuarial outpost of locations of statewides (http://www.actuarialoutpost.com/actuarial_discussion_forum/attachment.php?attachmentid=19552&d=1285274615), but I’d be interested in the actual signing actuaries of record.

          Reply

  3. Look, those of us who aren’t consultants generally don’t get called in front of the ABCD….we just get fired.

    That said, consultants would be lucky if they only get called in front of the ABCD in public pension cases. The third party torts are gonna be a real bitch as plans fail.

    Reply

    • Posted by Tough Love on March 26, 2014 at 10:53 pm

      What’s so off in Public Sector tort cases is that the impacted Plan’s seek “damages” equal to the calculation error rather than actual losses … and often they (or more likely their insurer) settles to avoid the possibility of a significant judgement …. no matter how unjustified.

      The Legal system is a wacky as the Public Sector pension system.

      Reply

  4. Posted by Anonymous on March 26, 2014 at 11:17 pm

    insurance companies suck the life out the citizens of this country worse than public pensions. you never submit a claim but they insist on sucking you dry in order to make record profits! Insurance companies are the scum of the earth.

    Reply

    • Posted by Sarah on March 26, 2014 at 11:20 pm

      Life is pretty damn good if the worst thing you are facing is ANY actuary.

      Reply

    • Posted by Tough Love on March 26, 2014 at 11:26 pm

      Sounds like scapegoating for the real problems…….. Floods/storms causing property damage, poor/drunk drivers, high cost of medical procedures/providers, Lawyers looking for deep pockets to sue, etc.

      Reply

  5. Posted by Anonymous on March 27, 2014 at 6:59 am

    insurance companies suck the life out of citizens who never ever submit a claim. they pay through the nose for premiums and never submit a claim. Why should I bear the cost of those who submit claims so these greedy companies can get richer and richer, some of the richest companies in the world and they never go bankrupt, either do the oil companies, because these companies have not restraints or conscience when it comes to ripping the citizens of this country off. Again they are far worst than public pensions. Maintenance fees are mainly fees paid to insurance companies Citizen cannot even afford to have home owner in some cases. The government needs to put restraints on these extremely greedy companies which are ruining the economy aong with the oil companies. Their unbridled greed must be stopped!

    Reply

    • Posted by Tough Love on March 27, 2014 at 10:29 am

      Let’s not divert from the problem being addressed…. Public Sector pension Plans,

      And while actuaries may be part of the problem. I see grossly excessive Plan generosity as the ROOT CAUSE of it. Funding problems ARISE “from” that (along with all the issues that actuaries put into the mix).

      Fix* the excessive generosity issue for the future service of all CURRENT workers and given some time, most cities can work through their problems.

      * “Fix” means either a 50+% reduction in future service pension accrual rates or better yet, a hard freeze on all current DB Plans with a switch to a DC Plan with a taxpayer match comparable to what Private Sector workers typically get from their employers … 3-5% of pay.

      Reply

      • Posted by Jomama on March 27, 2014 at 10:49 am

        Aside from your post being an opinion with no research to support it, the problem with your plan is that then the state would actually have to pay for pensions, while currently they have only funded less than 25%. If you froze the plan for all current employees, there would be no funds to pay retirees and then taxes would have to cover it out of the current budget. As far as the match goes–you realize the lack of matching funds from the state, compounded for 20 years is how we got in this mess.

        That’s not politically feasible, nor practical. You may have your opinion on the cause of the problem, but even IF you were correct, it would offer no solution to the problem, which is the issue the Gov compounded by cutting the payment.

        Reply

        • Posted by Tough Love on March 27, 2014 at 11:42 am

          From you past comments, it’s clear you (or a family member) are or will be receiving a Public Sector pension, so it’s understandable that you want to protect and have continue the grossly excessive pensions now granted Public Sector workers just about everywhere.

          And 2 thoughts on your comment:

          (1) Your Plans are already doomed if they can only survive via continued contributions from current workers (immediately going out the door as payments to current retirees) because the contributions of these workers are sufficient to fund only 10-20% of THEIR OWN pension costs, NO PART really being available to fund the payment to current retirees. Paying retirees with THEIR contributions is the essence of a Ponzi scheme and simply a theft of their contributions. Switching to a DC Plan for CURRENT workers has no impact on the employer/taxpayer funding of past service accruals …. and stops digging the financial hole we are in even deeper.

          (2) while my comment that public Sector Plans are “grossly excessive” may be my “opinion”, I have posted numerous mathematical demonstrations that support that “opinion” quite well. The FOLLOWING (while applicable to California Safety worker pensions which are more generous than most) is the last such “demonstration”. If you disagree with my conclusions, please state why:
          —————————————————————————–

          In California the typical recent Pubic Safety retiree’s pension starts at just about $100,000 and is COLA adjusted thereafter. By looking at a table of life annuity factors, such a single life immediate annuity has a value or cost upon retirement of just about $1.8 Million (18 times the annual pension). One way to judge if that is reasonable (or “appropriate and fair”) is to answer the question … What would be the necessary INCOME LEVEL (or Final Average Salary … FAS) of a Private Sector worker with the TYPICAL Private Sector DB pension (for the few Private Sector workers lucky enough to still be covered by such a pensions) to obtain a pension from his/her employer with the SAME $1.8 Million “value” upon retirement ?

          Assume the CA safety worker has the typical 3% of final average pay per-year-of-service pension factor, had a final average salary of $111,111, 30 years of service and retired at age 55… resulting in the starting pension of $111,111 x .03 x 30 = $100,000. Next, let’s assume the Private Sector worker’s DB pension formula is 1.25% per year of service (a quite typical formula), is NOT COLA adjusted (routine in PRIVATE Sector Plans), and has a full unreduced retirement age of 62 (with a 4% reduction in pension payout for each year of age that you retire begin collecting your pension before age 62).

          For a given Final Average Salary (FAS), this Private Sector worker’s annual pension (P) is given by the formula P = (FAS x 30 x .0125)x (1-((62-55)x.04)), with the latter part of that formula being the adjustment for early retirement at age 55. Shortening that formula, we have P = (FAS x 30 x .0125) x 0.72.

          From above, we saw that the Safety worker’s pension (being COLA-increased) has a lump sum “value” of 18 times the annual STARTING pension. With no COLA increases, the lump sum “value” is only 13 times the annual pension. Therefore the Lump Sum “value” of the Private Sector worker’s pension is given by 13 x P, and since we are SETTING that value equal to the $1.8 Million value of the safety worker’s pension we have $1,800,000 = 13 x P, and solving for P, we have P= $1,800,000/13 = $138,462. This Private Sector non-COLA-increased annual pension of $138,462 can be looked at as being mathematically equivalent to an otherwise identical pension starting at $100,000 that includes 3% annual COLA increases (i.e., the Safety worker’s pension).

          Now since we know the annual Private Sector worker’s annual pension “P”, we can plug it into my above formula of P = (FAS x 30 x .0125) x 0.72 to solve for FAS. Doing so we have, $138,462 = (FAS x 30 x .0125) x 0.72, from which

          FAS = $138,462/(30 x 0.0125 x 0.72) = $512,822

          What this shows is that a Private Sector worker (with a TYPICAL DB pension formula and provisions) would need to have a final average salary of $512,812 to generate a pension from his/her employer with the SAME $1.8 Million “value” as the TYPICAL Safety worker pension …. or $512,822/$111,111 = 4.62 times the Safety worker’s salary.

          And for the skeptics that say …. this can’t be correct …. we can just reverse the order of calculations and SHOW that this $512,822 PRIVATE Sector salary is indeed necessary to generate a pension with a “value” equal to that (the $1.8 Million) of the Public Sector Safety worker … as follows:

          (a) Private Sector worker’s Annual (non-COLA-increased) pension = $512,822 x 30 x 0.0125 x .72 = $138,462
          (b) Lump sum value (using the 13 times life annuity factor applicable to non-COLA-increased pensions) = $138.462 x 13 = $1.8 Million

          While most reasonable people would suggest that (give the nature of the occupations) Safety workers should receive pensions equivalent to Private Sector workers with salaries say 10% or 25% or 50% greater than they, I find it incredulous to believe that ANYONE would feel it appropriate to provide the TYPICAL CA Safety worker retiree with a pension equivalent to that of the Private Sector worker making over $500,000 annually. Taxpayers (who pay for all but the 10-20% of Total Coat Public Sector pensions typically paid for by the worker’s own contributions and the investment earnings thereon) simply cannot afford anything even remotely close to this level of generosity.

          Reply

          • Posted by Jack on March 27, 2014 at 6:56 pm

            First of all, that’s California, I’m sure you don’t want to compare property values in NJ vs. California, that would be ridiculous again. Communities that don’t support their police, fire, and teachers are not communities in which people want to live. You can lower your property taxes significantly by moving to an Abbott district.

            As for research, what you cite is completely meaningless. I would at least expect some conservative flawed research to be cited. You can go to the Economic Policy Institute–they have a research document that compares compensation nationwide—you should read it.

            Yes I will be receiving a pension. There is no way that it will not be paid. It cannot be discharged. One that I’ve paid in over $100,000 into. That doesn’t include any interest or appreciation. Now if that was matched and compounded over 25 years, I’d be rich. As it is, in addition to my pension, I pay 1/3 of my health insurance, and receive no other benefits. How about you? Company car, matching 401k payment, free life insurance, bonus, flex-time, home office, company phone, corporate trips, entertainment expenses, disability plan, food/beverages at work, car insurance paid by the company. Average wall street bonus was over $160k this year….

            Public employees get none of it. Salary, pension, and 2/3 of health insurance.
            I took at $60,000 hit when I quit my job and began teaching at a salary of 21,000. Now’s your chance buddy step up to the plate–jump on the gravy train.

          • Posted by Tough Love on March 27, 2014 at 7:20 pm

            Jack, if you re-read my comment carefully (w/o the entitlement mindset of a Public Sector worker), you’ll see that I didn’t “cite” anything….. but gave a VERY clear mathematical “demonstration” of the grossly excessive benefit level granted CA Safety workers…..easily reproduced for the Formula/Provisions in NJ or anywhere else. If you can find anything wrong with that demonstration, point it out … be specific, and we can debate it.

            I hope you have been saving OUTSIDE that pension, as the likelihood of it being fully paid (or even close) is quite slim.

            Cuts to your retiree healthcare promises will likely come first, and quite soon.

          • Posted by Jomama on March 31, 2014 at 11:12 am

            Ha–that mentality is EXACTLY why I will keep a mortgage on my home during retirement. If the state finds some way to cut my pension, I will declare bankruptcy and stick the bank with the loss. My retirement savings and my home are protected. Now multiply that times the number of retirees and you get a NJ financial calamity! I’ll take my hit when the whole state goes up in flames, but so will you brother!

            As for your post–you can’t relate the dollars as excessive without looking at the property values of the communities in which they work.

            The state is about to get a rude awakening as to what can be cut when they lose the COLA case. Cuts are not an option, funding mechanisms are.

          • Posted by Tough Love on March 31, 2014 at 11:18 am

            Jomama, You just keep showing how uninformed you are (clearly one of NJ “best and brightest”).

            If you have a mortgage on your home and don’t pay, bankruptcy will not let you keep the house …the bank get’s it.

          • Posted by Anonymous on March 31, 2014 at 8:51 pm

            Ha–I can assure you that I am correct in the bankruptcy. After all I will be driven to Fla. Go ahead, research it–I already did. Of course, I only have 4 college degrees! I was only a regional manager in business pulling in 150k 20 years ago. I’m sure you’re much smarter. You do realize that the appeal on the cola is based on the 1997 law than an employee “has a right to receive the pension that was in existence at the time the employee attained 5 years of service in the system…this benefit cannot be reduced by future legislative action, adn the cola is part of the benefit protected by that law.” As is the whole pension.

            Pay now, pay later, but make no doubt you will pay. Of course, you can always hope that the state could eventually declare bankruptcy and default on all it’s obligations!!!

  6. Posted by Anonymous on March 27, 2014 at 12:47 pm

    Lets address the real problem of why honest hard working citizens are being bled dry. Unbridled greed by insurance companies and oil companies supported by the politicians. Remember this in order to protect her gravy train TL will always draw the focus away from this truth. She is a part of the problem she works for an insurance company They have no problem with brutally overcharging the citizens of this country regardless of the fact they enjoy record profits. At one time Prudential was the richest company in the country, maybe now only surpassed by an oil company.

    Reply

    • Posted by Tough Love on March 27, 2014 at 6:53 pm

      As I said earlier, this post is a discussion of Public Sector pension issues. Changing the subject to OTHER issues (real or imagined) won’t lesson to need to very MATERIALLY address THIS problem … Excessive Public Sector pensions.

      Reply

      • Posted by Anonymous on March 27, 2014 at 7:02 pm

        Excessive pensions really don’t seem to be the problem. The two biggest problems I see are:
        1. Structures that are not intentional in their balancing and assigning or risk and reward
        2. Governance problems
        3. Agency risk

        Reply

        • Posted by Tough Love on March 27, 2014 at 9:09 pm

          Quoting …”Excessive pensions really don’t seem to be the problem.”

          Why not? With Public Sector “cash pay” now no less than their Private Sector counterparts, what could possibly justify the CURRENT structure which grants PUBLIC Sector workers pensions 2, 4, even 6 times greater in value at retirement than their Private Sector counterparts?

          Reply

  7. “With public plan actuaries even a lawsuit is inadequate in that you would be suing within the state or jurisdiction that likely encouraged/benefited from the perceived malfeasance.”

    I have been involved in virtually every large public plan suit against actuaries in this century.

    A number of these cases end up in federal court despite seeming to be a local matter.

    Those in state court often involve the state and/or the plan suing the actuaries. If anything, the vested interests of the plaintiffs and the judges is served by large awards or settlements. I am not saying the judges are biased. In my experience they are fair. I am saying that John’s supposition that I quoted above is incorrect.

    The suits do not ask for a rollback of benefits. They ask for the actuaries to make good on the shortfall.

    Although I have served both plaintiffs and defendants, one thing is very clear to me: actuarial defendants always lose. This explains why the biggest actuarial firms have abandoned the business to GRS and Segal, in some cases selling the business to them. It also explains the addition of tort limits (typically one or two years fees) in engagement documents.

    Reply

    • Posted by Anonymous on March 27, 2014 at 6:54 pm

      I think the danger is in those who do not listen and are basically ostriches with their heads in the sand. It was Nevada that basically said if you believe there is such a think as MVL, you need not apply, right?

      There are some public actuaries who are not only open to considering ideas from all along the spectrum, but are actively wanting to improve the model and find new answers. But there’s a fair number of actuaries who seem to just be focused on perpetuating the status quo as long as possible. They are not serving any of the stakeholders.

      Like at the Academy’s public pension subcommittee and the CCA’s subcommittee. Count the number of white males over fifty. Then count the number deviating from even ONE of those three characteristics.

      Reply

      • Posted by Anonymous on March 27, 2014 at 6:56 pm

        CCA

        Public Plans Community Steering Committee

        This Committee is charged to advance the sound actuarial and governance practice in the public sector pension and employee benefits arena.

        Reports To:
        John H. Lowell

        Chair:
        Paul Angelo

        Vice Chair:
        Thomas B. Lowman

        Thomas J. Cavanaugh
        David L. Driscoll
        William B. Fornia
        Edward H. Friend
        William R. Hallmark
        Robert M. May
        Stephen T. McElhaney
        Alan W. Milligan
        Brian B. Murphy
        Mark Olleman
        James J. Rizzo
        David H. Slishinsky
        Lance J. Weiss
        Staff Liaison:
        Keith G. Stewart

        From: http://www.ccactuaries.org/governance/committees.cfm

        Reply

      • Posted by Anonymous on March 27, 2014 at 6:59 pm

        AAA

        The subcommittee’s mission is to bring to the public and the United States actuarial profession expertise regarding retirement plans for state and local government employees. Within the scope of this mission, the subcommittee:

        Provides independent and objective analysis, advice, and education to stakeholders of state and local government employee benefit plans with respect to:
        Funding
        Financial reporting, in conjunction with Pension Accounting Committee
        Managing financial risks
        Plan design
        Develops issue briefs and practice notes for the membership.
        Comments on actuarial standards of practice related to public plans.
        Staff liaison:David Goldfarb

        Chairperson: Bill Hallmark
        Vice Chairman: Brad Armstrong

        The subcommittee’s mission is to bring to the public and the United States actuarial profession expertise regarding retirement plans for state and local government employees. Within the scope of this mission, the subcommittee:

        Provides independent and objective analysis, advice, and education to stakeholders of state and local government employee benefit plans with respect to:
        Funding
        Financial reporting, in conjunction with Pension Accounting Committee
        Managing financial risks
        Plan design
        Develops issue briefs and practice notes for the membership.
        Comments on actuarial standards of practice related to public plans.
        Staff liaison:David Goldfarb

        Chairperson: Bill Hallmark
        Vice Chairman: Brad Armstrong

        Melissa Algayer
        Paul Angelo
        Brent Banister
        David Kausch
        Larry Langer
        Matthew Larrabee
        Alan Milligan
        Kim Nicholl
        Mark Olleman
        James Rizzo
        Brian Septon
        David Stimpson
        Gregory Stump

        Reply

    • My reference to lawsuits was not so much about money awards. That’s the legal system lottery we have where you can’t win it if you’re not in it.

      I was thinking in terms of getting actuaries to admit what they already know about the chicanery behind the assumptions they are essentially told to use. Appealing to a court which is often an extension of the the government system that abetted the fraud these actuaries are perpetuating seems to me less likely to achieve your ends (unless you are doing it for the money) than seeking counsel and/or discipline from an organization tasked with keeping actuaries honest and focused on the participant.

      Reply

  8. Posted by Legislative and Judicial follower on March 27, 2014 at 7:59 pm

    Just stumbled across this: https://www.youtube.com/watch?v=eLpZrtAf3Mc

    This is the face of public pension actuaries?

    Reply

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