How To Speak Public Pensions

John Lanchester provides a useful service in his new book How to Speak Money – What the Money People Say And What It Really Means introducing his topic by noting:

There’s a huge gap between the people who understand money and economics and the rest of us.  Some of the gap was created deliberately, with the use of secrecy and obfuscation; but more of it, I think, is to do with the fact that it was just easier this way, easier for both sides.  The money people didn’t have to explain what they were up to, and got to write their own rules, and did very well out of the arrangement; and for the rest of us, the brilliant thing was, we never had to think about economics. (page xiv)

The details of modern money are often complicated, but the principles underlying those details aren’t (page xv)

“There was a fear that if it was made understandable, it wouldn’t seem important” Grayson Perry on art world terminology (page 5)

My theory is that the jargon was developed to mask really stupid concepts (usually benefiting the jargon-user in some way) that, were they to be explained honestly, would be laughed out of use.

For example, the California Institute for Local Government (CILG) offers a Guide to Pension Terminology where they seek to define some terms that I believe could have been defined better.

Asset Smoothing
CILG: This is the practice of spreading a pension system’s investment gains and losses over a period of time in order to minimize year-to-year contribution rate fluctuations. This is done by assigning a market-related value to a plan’s assets in order to determine contribution requirements. This assigned value is called the actuarial value of assets (sometimes referred to by the acronym AVA) or the “smoothed value” of assets.
BURY: Gimmick where you can pretend you have 20% more money in the plan than you actually do for the sole purpose of lowering the contribution requirement

Contribution Holiday
CILG: A practice of not requiring contributions from employers or employees (or both) during years when investment returns are sufficiently high to enable an agency to meet its projected pension obligations without additional contributions, based on actuary calculations. In other words, those contributing to the pension fund get a “holiday” from making contributions to the fund. There has been advisement against the use of contribution holidays,
BURY: Not putting in money when you don’t feel like it (aka business as usual in New Jersey).

Entry-Age Normal Funding Method
CILG: A method for prefunding pension benefits performed by allocating the cost of each member’s pension on a level percent of payroll between the time employment begins (entry age) and the member’s assumed retirement date. This method is designed to help produce stable employer contributions that increase over time at the same rate as the employer’s payroll.
BURY: Funding method long out of use in the private sector (at IRS insistence) that yields the lowest current contribution amount – which is why public plans have embraced it.

Pay‐As‐You‐Go Benefits
CILG: A situation in which agencies pay for the cost of benefits as those costs are incurred, as opposed to pre-funding such benefits (also known as the “current disbursement cost method”). Agencies sometimes use this approach for paying for other postemployment retirement benefits.
BURY: Not paying for future benefit promises which practically all governments are using for OPEBs and many (New Jersey, Illinois) for pensions with the existence of any trust fund pure happenstance.

Pension Obligation Bonds
CILG: When a public agency has an unfunded liability, it normally reduces that liability over time as part of its annual required pension contribution. Some agencies, however, have elected to incur debt through the issuance of pension obligation bonds in an effort to reduce their unfunded actuarial liability as a part of the overall strategy for managing pension costs. Finance professionals counsel caution in using this approach.
BURY: Getting future generations to pay (maybe) for liabilities you incur which public employees unions agree to on the theory that bonds are hard to default on.

CILG: This is a condition existing when the actuarial value of assets exceeds the present value of benefits. When this condition exists on a given valuation date for a given plan, employee/employer contributions for the rate year covered by that valuation may be waived. A pension trust fund is considered to be “super-funded” when assets exceed the amounts necessary to meet the anticipated current and future demands on the fund.
BURY: How does this exceedingly rare term rate a definition while Open Amortization, universally used to artificially lower contributions, gets left out by CILG? And if contributions can get waived in a super-funded plan then why wouldn’t full contributions be required in an under-funded plan? Just some questions that would arise if these terms were defined to be understood.

2 responses to this post.

  1. Posted by Anonymous on November 11, 2014 at 2:23 pm

    John there is never any mention of the absolute fact, that if the pension funds or any other fund were full funded, politicians would no doubt steal the money. So what is the use of fully funding? They will put their hands in the cookie jar and empty it rapidly.
    That is what needs to be addressed before anything else. Agreed?


    • Posted by Tough Love on November 11, 2014 at 6:05 pm

      No, what CLEARLY belongs at the top of such a list is materially reducing (by AT LEAST 50%) the grossly excessive pensions and benefits promised all CURRENT current Public Sector workers.


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