Bucking ASOPs

The Actuarial Standards Board has six Actuarial Standards Of Practice (ASOP) for pensions.

In his cover letter to the June 30, 2015 actuarial reports for the New Jersey retirement system Aaron Shapiro, FSA, EA, MAAA of Buck Consultants (which does all except the Teachers’ Plan) asserted (emphasis added):

The valuation reflects economic assumptions which include a rate of investment return of 7.90% per annum and assumed future salary increases of 2.50% per annum through fiscal year ending 2021 and 3.50% per annum for fiscal years ending 2022 and thereafter. These assumptions will remain in effect for valuation purposes until such time the State House Commission or the Treasurer recommends revised assumptions. In my opinion, the actuarial assumptions used are appropriate for purposes of the valuation and are reasonably related to the experience of the System and to reasonable long-term expectations. These assumptions were selected in accordance with applicable Actuarial Standards of Practice published by the Actuarial Standards Board.

and noted for all their plans (JRS example below) that:

The valuation reflects actual fiscal year 2015 State contributions of $16,506,000, which have been reduced from the recommended pension contribution of $44,334,504. In addition, the fiscal year 2016 recommended pension contribution of $46,502,819 has been reduced to $12,929,472. This amount reflects the State’s planned fiscal year 2016 contribution of $13,950,900, 30% of the recommended employer contribution, discounted to the valuation date. This amount may be subject to change per the requirements of the State’s fiscal year 2016 spending plan.

So where is the ASOP that says you select your discount rate based on what politicians who have an undisguised incentive to understate liabilities tell you to use and that slicing contributions by an arbitrary percentage are acceptable actuarial practices?

ASOP 27 Selection of Economic Assumptions for Measuring Pension Obligations provides the cover:


The actuary should disclose the information and analysis used in selecting each economic assumption that has a significant effect on the measurement. The disclosure may be brief but should be pertinent to the plan’s circumstances. For example, the actuary may disclose any specific approaches used, sources of external advice, and how past experience and future expectations were considered. The disclosure may reference any actuarial experience report or study performed, including the date of the report or study. This section is not applicable to prescribed assumptions or methods set by another party nor is it applicable to prescribed assumptions or methods set by law.

Obviously a 7.9% discount rate for valuing liabilities is ridiculous for a plan with so few assets (as compared to liabilities) as the New Jersey retirement system has and no self-respecting actuary can offer any sort of justification (beyond the truth) for using it but, thanks to ASOP 27 4.1.2, as long as it is an arbitrary assumption selected by another party who is not an actuary (and thus without any relevant background to make the selection and not subject to ASOPs) you do not need to justify assumptions that you should know will bankrupt the plan you are the actuary for.

5 responses to this post.

  1. Posted by Eric on April 20, 2016 at 4:24 pm

    This is insanity.


    • Completely agree but I did not have the time to spell it out more clearly.

      This is a professional organization saying it’s OK to for laypeople to tell you what to do and you don’t have to disclose anything about their reasons. Would anyone trust doctors, architects,….. if they operated this way?


  2. Posted by Eric on April 20, 2016 at 5:36 pm

    As a former engineer, perhaps Trenton can tell me “mathematically” that a bridge will not collapse due to the lack of funds in the Transportation Trust Fund which overrides any analysis.
    There is no shame at all in NJ. It is gone!


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