It turns out that Calpers, which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the “market value” of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money.
The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.
For those involved with multemployer (union) plans this is nothing new since when a participating employer looks to leave a union plan they have to cope with another surprise – withdrawal liability – which is calculated using actuarial assumptions that inflate benefit values (rather than those used for funding which are designed to accommodate what is available to deposit) so as to squeeze as much money as possible from those leaving.
However it is the naming of these two methods that is confusing. Both are ‘actuarial’ as they involve interest rates and mortality tables and both involve ‘market’ principles as it suits their purposes.
So I propose more appropriate names for low-ball and high-ball estimates of pension liabilities…..
Political: as in politicians who always want lower liability values that generate lower contributions so they can promise phantom benefits without fully funding them and divert that tax money for purposes more in line with their immediate objectives.
Fewl: A new word combining the principal uses of this approach – Financial Economics and Withdrawal Liability – though there may be a more memorable mnemonic device* for this acronym.
The real liability value falls between the Political and Fewl numbers, as experience will bear out, depending on the funded status of the particular plan. But these days there is not much of a constituency for accuracy when your client has their mind made up about what number they expect to see and it is the actuary’s job to provide it.
* Fuck ‘Em When [they] Leave comes to mind.