EA3: Pensionmania

406 – Current Events in Public Plan Funding Policy
April 04, 2017 11:00 AM – 12:30 PM

The Conference of Consulting Actuaries’ (CCA’s) Public Plans Community’s white paper “Actuarial Funding Policies and Practices for Public Pension Plans” has been a resource for actuaries for over two years. Many public sector retirement systems have implemented new funding policies based on actuarial principles similar to those in the white paper. Alternatively, an interpretation of financial economics on funding may look much more like private sector plan funding. Speakers discuss these different approaches, as well as how they may or may not align with the objectives of the plan sponsors.

In one corner, from parts unknown, it was Ed Bartholomew of Building Better Pensions espousing the Financial Economics position and his tag-team partner Bob North, former chief actuary for New York City where he pioneered the inclusion of  alternate liability values (MVABO) in NYC actuarial reports and CAFRs.

Opposing them are the Actuarial Realists who are working public plan actuaries: Paul Angelo from California and Sherry Chan, the current New York City chief actuary who took Bob North’s MVABO numbers out of the NYC actuarial reports.

Let’s get ready to rumble:

Paul Angelo kicked off with the 2014 CCA white paper on funding policies as the way to go decrying FE  as “insufficient to reflect the policy objectives of public plans.”

Ed Bartholomew hit back with a 2016 working paper on FE principles and saw AR methods as ‘seriously flawed” as they “ignore the cost of risk.”

Bob North did want to put market based numbers into his NYC actuarial reports and he did which led some in the media to jump to the conclusion that there were two sets of books. Sherry Chan took MVABO numbers out citing precept 8 of the Code of Professional Conduct:

An Actuary who performs Actuarial Services shall take reasonable steps to ensure that such services are not used to mislead other parties.

Paul Angelo noted that “we can illustrate but it is not in the purview of the actuary to assess what employers can afford” which seemed to contradict his criticism of FE as not reflecting “policy objectives of public plans.”

Everyone in that room understood what the policy objectives of public plan trustees are (and one even said it though “off-the-record”): “minimization of contributions.” And it is the AR people who give it to them which is why they get hired.

Bob North finished up wth the comment that he is “disappointed that actuaries do not lead these discussions.” So am I but we can only do that if we go beyond holding them only at actuarial conferences in paranoid fear of media attention. Not that we should rent Madison Square Garden and see if Undertaker is interested in an undercard comeback but there must be a middle ground. Besides, Paul Angelo would probably start getting too used to these types of entrances and the EA conference committee just does not have the funds:
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11 responses to this post.

  1. Posted by NY on April 5, 2017 at 11:17 pm

    crunching popcorn, very entertaining and informative dispatches from EA; thank you very much John

    Reply

    • Thank you and there are several more to come once I get my notes together – including EA4 coming up later this morning which will be short (two charts and an response to a question) but was a game-changer for me on funding interest rates.

      Reply

  2. Posted by anonymous on April 6, 2017 at 8:41 am

    Which sessions did you go to for the eight tracks?

    Reply

    • Posted by dentss dunnigan on April 6, 2017 at 12:05 pm

      Yep …been saying this for years ….youngsters at some point will start refusing to pay for political promises that they never intended to be paid now can’t possibility be paid .Some politicians are starting to get it hence the Tax change for retirees is just like a fish hook to keep them here …notice the dwindling income tax receipts in the state but rising population ….unsustainably at best .

      Reply

    • Posted by Anonymous on April 6, 2017 at 2:08 pm

      Javagold,

      Your linked article from ZEROHEDGE, “The Unavoidable Pension Crisis” is right on the money (as to how things will likely shake out), but even this well-informed author stops his analysis short of the pension mess’s ROOT CAUSE, by saying ….”By over-estimating returns, it has artificially inflated future pension values and reduced the required contribution amounts by individuals and governments paying into the pension system.”… and thereby suggesting the the “cause” of the problem is the lack of full funding.

      Balony, the amount of money necessary to fully fund a promised level of pension benefits is directly proportional to the Plan’s “generosity”, and a VERY generous Plan will be VERY costly, and hence VERY difficult to fully fund.

      The lack of full funding is NOT the “cause” of the pension mess most States and Cities find themselves in today, but is a “consequence” of the true ROOT CAUSE …. grossly excessive pension generosity.
      ***************************

      There are ZERO “solutions” that don’t include as just the FIRST step, (because it only stop digging the financial hole deeper w/o addressing the existing unfunded liability for PAST service accruals) a hard freeze of all Public Sector DB pensions, or if that’s not possible, a reduction of AT LEAST 50% in the pension accrual rate for the future service of all CURRENT workers.

      It’s a MATH problem !

      Reply

  3. Posted by Anonymous on April 6, 2017 at 10:09 am

    Sherry Chan”s justification to take MVABO numbers out of NYC’s Actuarial Reports out of concern that …. “An Actuary who performs Actuarial Services shall take reasonable steps to ensure that such services are not used to mislead other parties.” …. is bogus.

    How hard is it to explain the necessity to discount expected future payouts to determine a Plan liability and provide commentary on the material impact of using different rates of interest in doing so?

    She’s obviously part of the “problem”.

    Reply

  4. Posted by George on April 6, 2017 at 1:54 pm

    Perhaps off topic but since you brought up NYC, legend has it the NY and several other states have fully funded pensions. Is that true or is there a gimmick?

    How Well Funded Are Pension Plans in Your State?
    https://taxfoundation.org/state-pensions-funding-2017/

    Reply

    • Posted by NY on April 6, 2017 at 1:55 pm

      I’m not certain, but I believe that the “NY state” plans cover “all-NYS-except-NYC”…

      Reply

    • Posted by Anonymous on April 6, 2017 at 2:16 pm

      Studies show “NY” (not sure if NYC is not included) is indeed funded over 90% using the inflated “official” valuation assumptions , which likely means it’s closer to 70-75% using Private Sector liability discount rates, pretty lousy, but much better than most other States and Cities.

      From what I’ve read, (and especially for NYC) the problem seems to be that projections show a huge and unsustainable increase in contributions needed in future years to keep their Plans from blowing up.

      Of course NYC’s future is tied to it’s Financial Sector. If it leaves, NYC is “toast”. Taxes from that sector support the entire City.

      Reply

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